LyondellBasell Industries N.V. — Q2 2016 Form 10-Q
Reporting period: Three and six months ended June 30, 2016. Financial statement amounts are unaudited and in millions of U.S. dollars, except per-share data. The company manufactures chemicals and polymers, refines crude oil, produces gasoline blending components, and licenses process technologies.
Financial performance
| Metric | Q2 2016 | Q2 2015 | First half 2016 | First half 2015 |
|---|---|---|---|---|
| Revenue | $7,328 | $9,145 | $14,071 | $17,330 |
| Operating income | $1,403 | $1,845 | $2,763 | $3,420 |
| Net income attributable to company shareholders | $1,091 | $1,330 | $2,121 | $2,496 |
| Diluted EPS | $2.56 | $2.82 | $4.93 | $5.22 |
| Operating cash flow | Not separately stated | Not separately stated | $2,561 | $2,914 |
- Revenue fell 20% in Q2 and 19% in the first half, largely reflecting lower selling prices tied to crude oil and feedstock prices, with lower volumes also contributing.
- Operating income declined 24% in Q2 and 19% in the first half. Calculated operating margin was approximately 19.1% in Q2 2016 versus 20.2% a year earlier, and 19.6% for the first half versus 19.7%.
- Q2 net income attributable to shareholders declined 18%; first-half net income declined 15%. Lower operating results were partly offset by higher equity-investment income and a lower effective tax rate.
- First-half operating cash flow was $2,561, down from $2,914. Investing activities used $1,068 and financing activities used $1,372. Capital expenditures were $1,090, compared with $584 in the first half of 2015.
Balance sheet and liquidity
- At June 30, cash and cash equivalents were $1,060 and short-term investments were $1,023; the company reported $2,083 of unrestricted cash and cash equivalents plus short-term investments. It also held $462 in tri-party repurchase agreements.
- Total debt, including current maturities, was $9,105, up from $8,028 at December 31, 2015; short-term debt was $616 and long-term debt was $8,485. Shareholders’ equity totaled $6,307.
- Current assets were $9,983 and current liabilities $4,351. Unused availability under credit facilities totaled $2,701. The company reported compliance with its revolving-credit-facility leverage covenant.
- The $2.5 billion revolving credit facility and commercial paper program were extended/increased in June. Commercial paper outstanding was $523; the U.S. receivables facility had no borrowings. The European receivables facility expired in April.
Material changes and operating drivers
- O&P-Americas EBITDA was $754 in Q2 versus $1,014 a year earlier, as weaker olefin margins and lower production outweighed stronger polypropylene results.
- O&P-EAI EBITDA rose to $576 from $492, benefiting from improved European polyolefin margins, a $40 inventory-valuation reversal, and higher equity-investment income.
- I&D EBITDA declined to $397 from $466, primarily due to weaker margins in TBA-chain products and methanol; volume gains and inventory-valuation reversals partly offset the decline.
- Refining EBITDA was a loss of $13 versus income of $159. Lower refining margins and throughput were affected by first-quarter turnaround work, operating limitations, and an April coker-unit fire at the Houston refinery.
- Technology EBITDA increased to $73 from $57. First-half consolidated EBITDA was $3,590 versus $4,138.
- The sale of the Argentine subsidiary generated a $78 gain and $137 net cash proceeds. The gain benefited first-half results by $57 in O&P-Americas and $21 in O&P-EAI.
Outlook, risks, and unusual items
- Management said chemical and polyolefin markets remained generally well balanced entering Q3, while refining and TBA-chain margins had declined as gasoline inventories and supplies increased.
- The company expected significant planned maintenance in the second half of 2016. It estimated a $150 negative impact to Q3 operations: $135 in O&P-Americas and $15 in I&D. Repairs following the Houston refinery fire were complete; the company expected to finish an 800-million-pound Corpus Christi ethylene expansion and related turnaround by the end of Q3.
- In July 2016, the company announced plans for a 1.1-billion-pound annual-capacity U.S. Gulf Coast HDPE plant, with startup expected in 2019. The company also intended to continue quarterly dividends, subject to cash and operating expectations; no earnings guidance was provided.
- Inventory-price exposure is notable: $2.5 billion of the $4.0 billion inventory balance was described as “at-risk” for potential further lower-of-cost-or-market adjustments if prices declined.
- Environmental remediation accruals were $110; management said additional losses were reasonably possible but could not estimate a range. A pending Access-related indemnity demand includes a $100 management-fee claim; the company disputed liability and could not estimate potential loss. The related trial was scheduled to begin the week of October 17, 2016.
- An IRS Section 409A matter involving current and former executives could result in company liability ranging from zero to as much as $165, depending on audit outcomes; the company said it would defend its position. Management reported no material change in the risk factors disclosed in the 2015 Form 10-K.
- Q2 results included a $68 reversal of first-quarter inventory valuation charges. First-half 2015 comparatives included $83 of inventory valuation charges and $35 of expired-emissions-credit amortization, affecting year-over-year comparisons.
Investor verification priorities
- Assess whether the anticipated $150 Q3 maintenance impact, refinery recovery, and planned turnarounds affected results as management expected.
- Track refining throughput and margins, and confirm the effects of the Houston coker fire and Corpus Christi project/turnaround.
- Monitor commodity prices and the $2.5 billion of inventory identified as at-risk for further valuation adjustments.
- Review the outcome and potential financial exposure of the Access litigation/indemnity demand and the Section 409A audits.
- Evaluate capital spending, debt growth, share repurchases, and dividends against operating cash flow and liquidity.