Lyondellbasell Industries N.V. quarterly report, Q3 FY2014

LyondellBasell Industries N.V. — Q3 2014 Form 10-Q

Reporting period: Quarter and nine months ended September 30, 2014. Unaudited consolidated results; dollar amounts are in millions unless stated otherwise. The company manufactures chemicals and polymers, refines crude oil, produces gasoline blending components, and licenses process technologies.

Key financial results

Metric	Q3 2014	Q3 2013	Nine months 2014	Nine months 2013
Revenue	$12,066	$11,152	$35,318	$32,924
Operating income	$1,706	$1,207	$4,659	$3,838
Net income	$1,257	$851	$3,377	$2,678
Diluted EPS, continuing operations	$2.46	$1.51	$6.38	$4.67
EBITDA, company-reported segment measure	$2,035	$1,531	$5,644	$4,768
Cash from operating activities	Not stated for quarter	Not stated for quarter	$4,032	$3,161

Revenue rose 8% in Q3 and 7% year to date. Operating income margins, calculated as operating income divided by revenue, were approximately 14.1% versus 10.8% for Q3 and 13.2% versus 11.7% for the nine-month periods. Effective tax rates declined to 25.6% from 28.4% in Q3 and to 26.9% from 29.2% year to date.

Cash, liquidity and debt

• At September 30, cash and cash equivalents were $1,185; short-term investments were $1,544. Together these totaled $2,729 of unrestricted cash and marketable securities.
• Total debt, including current maturities, was $6,811, up from $5,835 at December 31, 2013. Long-term debt was $6,753 and short-term debt was $56.
• Unused availability under credit and receivables facilities was approximately $3,580. The $2,000 revolving credit facility and U.S. receivables facility had no borrowings outstanding; the European facility also had no borrowings outstanding.
• Nine-month investing cash outflow was $2,895, including substantial purchases of short-term securities and other investments; capital expenditures were $1,096. Financing cash outflow was $4,388, including $4,347 of cash share repurchases and $1,055 of dividends.
• Operating cash flow less capital expenditures was approximately $2,936 for the nine months, compared with $1,960 in 2013; this is a derived measure, not a company-reported metric.

Material changes and business drivers

• Management reported record earnings for Q3 and the first nine months. O&P-Americas contributed more than $1 billion to Q3 results.
• Q3 EBITDA improved across O&P-Americas, O&P-EAI and Refining, while I&D and Technology declined. Nine-month EBITDA increased in all five operating segments.
• Q3 segment EBITDA: O&P-Americas $1,157 versus $841; O&P-EAI $343 versus $204; I&D $383 versus $427; Refining $110 versus $8; Technology $41 versus $52. Nine-month segment EBITDA was $2,871, $1,018, $1,188, $376 and $188, respectively, compared with $2,690, $724, $1,138, $48 and $177.
• Higher North American olefins and polyethylene volumes and margins, improved European olefins and polymers results, stronger PO and derivatives, and higher refining margins supported results. La Porte production constraints from an expansion and turnaround weighed on first-half-to-date olefins volumes; the facility’s 800-million-pound-per-year ethylene expansion was completed late in Q3.
• Q3 O&P-Americas results included a $45 inventory valuation charge following lower feedstock prices. Nine-month O&P-EAI results included a $52 benefit from an environmental-indemnity settlement. Prior-year Refining results included certain property-tax and employee-fraud-related benefits.
• Foreign currency translation reduced other comprehensive income by $554 in Q3 and $594 for the nine months, materially offsetting higher net income in comprehensive income.

Outlook, risks and contingencies

• Management said industry fundamentals remained favorable in early October, with strong domestic ethylene and polyolefin pricing and advantaged U.S. natural gas liquids feedstocks. It expected new La Porte capacity to benefit Q4 results and anticipated beginning to receive Canadian crude at the Houston refinery through the Flanagan South pipeline.
• Risks to the near-term outlook included possible margin compression in oxyfuels, seasonally weaker holiday-period polyolefin demand, declining crude oil prices and potential effects on domestic margins. Management cautioned that future results depend on volatile commodity markets, feedstock availability, industry capacity, demand, operating reliability, regulation, foreign exchange and financing conditions.
• The company planned a Gulf Coast PO/TBA plant with annual capacity of 900 million pounds of PO and 2 billion pounds of TBA and derivatives; construction was preliminarily expected to begin in 2017, with operations targeted for 2019. It also continued an ethylene expansion at Channelview and had an EPA permit to begin construction on the Corpus Christi expansion.
• Environmental remediation accruals were $105, down from $120 at year-end. The company said additional losses were reasonably possible but could not estimate an amount or range.
• Potential Access Industries indemnity claims related to the Weisfelner litigation remain unresolved; the company disputed liability and could not estimate a reasonably possible loss. Berre refinery exit and severance-related cash outflows were expected to continue through 2017 and 2019, respectively; potential future dismantling and remediation costs were not determinable.
• The company disclosed environmental notices involving its Louisiana and Illinois facilities, where regulators could seek penalties exceeding $100,000; the filing does not provide a clear value for any eventual penalties. Management stated there were no material changes to the risk factors in its 2013 annual report.

Most important facts for investors to verify

• Whether stronger margins and volumes persist, particularly in O&P-Americas, and how crude oil and feedstock price declines affect spreads.
• Whether announced capacity expansions and the proposed PO/TBA project remain on schedule and within expected cost; project cost estimates are not provided here.
• Cash deployment and leverage: the scale of repurchases and dividends, the rise in debt, and the company’s ability to sustain returns while funding capital projects.
• How much of reported segment improvement is recurring versus affected by the $52 million indemnity settlement and other unusual items.
• Potential financial exposure from environmental matters, the Access-related litigation and Berre refinery exit activities, for which some possible losses or cash flows remain unquantified.