LyondellBasell Industries N.V. — Q1 2016 Form 10-Q
Business context and period: Global chemicals and polymers manufacturer, crude-oil refiner, and technology licensor. This unaudited filing covers the three months ended March 31, 2016; comparisons are with Q1 2015 unless noted. Amounts are in U.S. dollars; financial statement amounts are in millions except per-share data.
Financial results and liquidity
| Metric | Q1 2016 | Q1 2015 | Change |
|---|---|---|---|
| Revenue | $6,743 | $8,185 | Down 18% |
| Operating income | $1,360 | $1,575 | Down 14% |
| Operating margin | 20.2% | 19.2% | Up about 1.0 percentage point |
| Net income attributable to shareholders | $1,030 | $1,166 | Down 12% |
| Diluted EPS | $2.37 | $2.41 | Down 2% |
| Segment EBITDA | $1,807 | $1,952 | Down 7% |
| Cash provided by operating activities | $1,300 | $1,468 | Down 11% |
| Capital expenditures | $527 | $306 | Up $221 |
- Revenue declined primarily because of lower average selling prices linked to crude-oil and feedstock prices; lower volumes and unfavorable currency translation also contributed. Cost of sales fell 19%, faster than revenue, supporting the higher reported operating margin.
- Cash and cash equivalents were $1,318 at March 31, 2016, and short-term investments were $1,332. Management reported $2,650 of unrestricted cash and short-term investments, plus $302 in repurchase agreements.
- Total debt, including current maturities, was $9,102. Cash and short-term investments therefore exceeded reported total debt by approximately $1,452, before considering other liquidity needs. Current assets were $10,324 and current liabilities $4,441.
- Unused availability under credit facilities was $2,187. The company had $500 of commercial paper outstanding and reported compliance with its revolving-credit leverage covenant.
- Financing activities included $986 of cash paid for share repurchases and $336 of dividends. The quarterly dividend was $0.78 per share.
Material changes and segment performance
- O&P-Americas EBITDA fell to $878 from $1,031, mainly on lower olefins margins, partly offset by higher polypropylene margins and a $57 gain on the Argentine subsidiary sale.
- O&P-EAI EBITDA rose to $509 from $357 as lower feedstock costs improved European olefins and polyolefins margins. Results included a $40 non-cash inventory valuation charge and a $21 gain on the subsidiary sale.
- I&D EBITDA was $326 versus $337. Lower margins, including pressure in gasoline-related products and increased industry supply, were largely offset by higher volumes and a smaller inventory charge than in the prior year.
- Refining EBITDA dropped to $14 from $149. Lower refining margins and planned and unplanned Houston refinery downtime reduced heavy-crude processing rates to 186,000 barrels per day from 241,000.
- Technology EBITDA increased to $83 from $76, primarily on higher licensing and services revenue.
- The Argentine subsidiary sale generated $184 in gross proceeds, $137 in net cash proceeds, and a $78 gain. Q1 2016 also included $68 of non-cash lower-of-cost-or-market inventory charges; Q1 2015 included $92 of such charges and $35 of expired-emissions-credit amortization.
Outlook, risks, and contingencies
- The company expected industry maintenance in the U.S. and Asia to tighten olefins and polyolefins markets in Q2 2016, potentially benefiting O&P. It also anticipated seasonal margin improvement in fuels for I&D and Refining. No full-year earnings guidance is stated in the supplied filing text.
- After a fire at the Houston refinery in April 2016, the company expected reduced Q2 operating rates and an approximately $40–$70 negative impact to Q2 results. The filing also estimated turnaround and ethylene-expansion impacts of about $10 in Q2 and $40 in Q3, plus $20–$30 of Q2 impact from other planned maintenance.
- Inventory-price exposure is significant: $3.3 billion of the $4.0 billion inventory balance was described as “at-risk” for further valuation adjustments. Sustained price declines could cause additional charges; a reversal in prices could allow some charges to be reversed.
- Environmental remediation liabilities were $106. Management said additional losses were reasonably possible but could not estimate a range.
- A tax audit matter involving current and former executives could result in company liability ranging from zero to $165, depending on the IRS audit outcome. The company said it would defend its position. A separate Access Industries indemnity dispute has an unestimable potential loss, according to the filing.
- Key business risks include volatile raw-material and energy costs, commodity-product competition, industry oversupply, facility outages, environmental regulation, foreign-exchange exposure, and legal and tax proceedings. The company said risk factors had not materially changed from its 2015 Form 10-K.
Important facts for investors to verify
- Whether refinery repairs and Corpus Christi turnaround and expansion work stayed within the estimated timing and earnings impacts.
- Subsequent inventory-price movements and any additional valuation charges or reversals, given the $3.3 billion at-risk inventory balance.
- Whether the strong O&P-EAI margin improvement persisted, and how U.S. olefins and refining margins and volumes evolved.
- Debt, liquidity, and capital returns after the new euro-note issuance, share repurchases, dividend payments, and expiration of the European receivables facility.
- Developments in the $0–$165 million executive tax matter, the Access indemnity dispute, and environmental remediation exposure.