Lyondellbasell Industries N.V. quarterly report, Q2 FY2014

LyondellBasell Industries N.V. — Q2 2014 Form 10-Q

Reporting period: Quarter and six months ended June 30, 2014. Unaudited consolidated results; amounts in U.S. dollars unless noted. The company manufactures chemicals and polymers, refines crude oil, and licenses process technologies.

Financial performance

Metric	Q2 2014	Q2 2013	Six months 2014	Six months 2013
Revenue	$12.117bn	$11.103bn	$23.252bn	$21.772bn
Operating income	$1.613bn	$1.364bn	$2.953bn	$2.631bn
Net income attributable to shareholders	$1.178bn	$0.929bn	$2.123bn	$1.830bn
Diluted EPS	$2.23	$1.61	$3.94	$3.16
Operating margin	13.3%	12.3%	12.7%	12.1%

• Revenue rose 9% in Q2 and 7% in the first half, reflecting higher average selling prices and volumes. Shareholder net income increased 27% in Q2 and 16% in the first half.
• Segment EBITDA was $1.941bn in Q2 versus $1.652bn, and $3.609bn in the first half versus $3.237bn. Refining, I&D, O&P–EAI and Technology improved in the first half; O&P–Americas EBITDA declined 7% to $1.714bn.
• Effective tax rates were 26.6% for Q2 and 27.6% for the first half, down from 30.8% and 29.5%, respectively.

Cash flow, liquidity and debt

• First-half operating cash flow was $2.598bn, compared with $2.045bn. Capital expenditures were $758m, versus $778m.
• Cash and cash equivalents were $2.030bn at June 30, down from $4.450bn at year-end 2013. Short-term investments were $1.299bn, bringing unrestricted cash and marketable securities to $3.329bn.
• Investing activities used $2.257bn, including purchases of securities and other investments; financing activities used $2.767bn, including $3.067bn for share repurchases and $697m in dividends.
• Total debt, including current maturities, was $6.824bn, versus approximately $5.834bn at year-end. The company issued $1bn of 4.875% notes due 2044. The $2bn revolving facility was undrawn and extended to June 2019; reported unused availability across credit facilities was $3.611bn. The company reported compliance with its revolving-facility leverage covenant.

Material changes and operating drivers

• Management described first-half earnings as a record and Q2 earnings as near-record, despite scheduled maintenance at La Porte. Polyethylene demand and margins were strong; the Channelview methanol plant restart supported acetyls; and stronger refining margins and higher first-half throughput improved Refining results.
• O&P–Americas first-half EBITDA fell amid lower olefins volumes and the La Porte turnaround, partly offset by improved polyethylene margins. The delayed La Porte restart reduced Q2 results by approximately $50m and was expected to weigh on Q3.
• First-half O&P–EAI EBITDA included a $52m benefit from settlement of environmental liabilities under a 2005 indemnification agreement. I&D EBITDA benefited by approximately $85m in the first half from the Channelview methanol restart.
• The company completed its prior 10% repurchase authorization and began a new authorization for up to 10% of outstanding shares through October 2015. It repurchased approximately 34.2m shares in the first half at an average $91.36 per share. The interim dividend increased to $0.70 per share in Q2.
• Expansion projects continued at La Porte and Channelview; the Matagorda polyethylene expansion was completed in Q1, and the company received an EPA permit to begin construction of its Corpus Christi ethylene expansion.

Outlook, risks and contingencies

• Management said early Q3 industry conditions were similar to Q2 and that strong U.S. oil, gas and natural-gas-liquids production supported margins in O&P–Americas, I&D and Refining. The delayed La Porte start-up was expected to negatively affect Q3; O&P–EAI conditions had softened seasonally, and scheduled joint-venture turnarounds could reduce equity earnings. No numerical earnings guidance was provided.
• Key disclosed risks include volatile feedstock and energy costs, possible oversupply and weaker demand, facility outages and project delays, regulatory costs, competition, foreign-exchange exposure, international and geopolitical risks, and access to financing.
• Environmental remediation liabilities were $114m; the company said additional losses were reasonably possible but could not be estimated. The Berre refinery closure is expected to entail exit and disposal costs through 2017 and employee payments substantially complete by 2019; some future dismantling and remediation costs are not determinable.
• Access Industries affiliates have asserted indemnity and management-fee demands connected with pending litigation. The company disputes the obligations and cannot estimate a reasonably possible loss. Several environmental enforcement matters are also disclosed; potential penalties were not quantified.

Investor verification points

• Check the timing and cost consequences of the La Porte restart and related Q3 production impact.
• Assess whether Q2 and first-half earnings benefited materially from temporary factors, including the $52m environmental settlement and plant-restart contributions.
• Reconcile cash reduction, investment purchases, share repurchases, dividend payments and the increase in debt; verify liquidity availability and covenant headroom.
• Monitor environmental and Access-related proceedings, including the unquantified potential exposure, and future Berre closure costs.
• Track completion, spending and expected returns of the ethylene and other expansion projects, alongside feedstock-price and industry-supply conditions.