Chemical maker LyondellBasell's (LYB.N) plan to buy back nearly $2.8 billion in debt and pay a special dividend nearly the same size is a bullish bet that demand for commodity chemicals will recover from a recent soft patch and rally the rest of the decade.

The company, which exited Chapter 11 bankruptcy protection last year, said late on Thursday it would launch a tender offer for $1.47 billion of 8 percent notes due in 2017 and $1.32 billion of 11 percent notes due in 2018.

News of the buyback and dividend were widely applauded on Wall Street, where shares of LyondellBasell were up 10 percent at $30.13 in midday Friday trading.

Paying off the debt years ahead of schedule -- and not keeping cash around for a rainy day -- could be seen as a risky move, especially given the potential for another recession in the United States or Europe, the company's two largest markets.

But given low interest rates, it just makes sense to slash the debt now, said Ed Mally, a chemical industry analyst with Imperial Capital.

Taking out this very expensive debt is not only a positive sign on their view about their prospects, but also a positive sign on their earnings and cash flow, Mally said.

The company, which is technically based in the Netherlands but is run out of Houston, has been generating oodles of cash in the past year, with roughly $4.69 billion in the bank.

Revenue jumped 34 percent in the second quarter from the same period last year.

The buyback will push the company's long-term debt down to roughly $2.8 billion. It should also cut LyondellBasell's annual interest costs by 32 cents a share, a big boost for the company's earnings, Jefferies analyst Laurence Alexander said.

There isn't a comparable earnings per share figure for 2010 -- the company had just exited bankruptcy -- but in the second quarter LyondellBasell earned $1.49 per share, excluding one-time items.

LyondellBasell also said it will issue a $2.6 billion special dividend -- roughly $4.50 per share -- soon, depending on market conditions, using cash and new debt. The company already pays a 20-cent quarterly dividend.

As we are facing these uncertain economic times, the fact that a company comes out and announces a $2.6 billion special dividend just tells you how confident it is in its cash flow generating abilities, said Hassan Ahmed, a chemical industry analyst with Alembic Global Advisors.

BULLISH FORECAST

Prices for ethylene, one of LyondellBasell's main products and a key building block for more complex chemicals, have softened in the past three months partly due to economic fears.

Ethylene and other commodity chemicals are closely tied to economic health.

In good times, people buy more clothes, toys, cars and other goods made with the chemicals.

But in bad times, even the largest companies can be brought to their knees. Dow Chemical (DOW.N), for instance, was burned by a drop in commodity chemical demand three years ago and has quickly been moving into specialty chemicals.

Indeed, in early 2009 LyondellBasell entered bankruptcy precisely because demand evaporated as the financial crisis collapse roiled the globe.

Chief Executive Jim Gallogly, who joined the company just after the bankruptcy filing, wants to stay in -- and dominate -- the commodity chemical business, which tends to ebb and flow every five or six years.

The cycle hit a bottom in 2009, and many in the chemical industry expect it to peak in 2014 or 2015.

Part of Gallogly's exuberance has to do with expanded production from North American shale formations, which has made the price of natural gas much cheaper then elsewhere in the world. That has given LyondellBasell a cost advantage over global rivals and strong cash flow.

Europe has not developed its natural gas shale formations, partly because of regulatory and environmental resistance, effectively handing U.S. chemical producers a global advantage.

Most of Europe's chemical producers use crude oil-derived naphtha to make the building blocks for common plastics.

Chemical prices are set globally by naphtha-based producers. That lets LyondellBasell and its peers charge the higher industry price and bank the margins from using cheap natural gas.

But Dow, Shell (RDSa.L) and other rivals are building new chemical plants, known as crackers, in the United States to process more shale gas.

It remains to be seen what effect, if any, they will have on LyondellBasell when they come online later this decade.

There's a lot of drilling, a lot of gas processing plants, and we think ultimately that's all good for the U.S. chemical business, Gallogly told Reuters earlier this year. That's one of the reasons I decided to come to LyondellBasell.

The company is set to report quarterly earnings on Friday, October 28.

(Reporting by Ernest Scheyder, editing by Dave Zimmerman)

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