LyondellBasell Industries N.V. — Form 10-Q Summary
Reporting period: Quarter and nine months ended September 30, 2015. Unaudited results; amounts are U.S. dollars in millions except per-share data and where noted.
Business context and reporting period
LyondellBasell manufactures chemicals and polymers, refines crude oil, produces gasoline blending components, and licenses process technologies. It reports five operating segments: O&P-Americas, O&P-EAI, Intermediates and Derivatives (I&D), Refining, and Technology.
Key financial results
| Metric | Q3 2015 | Q3 2014 | Nine months 2015 | Nine months 2014 |
|---|---|---|---|---|
| Revenue | $8,334 | $12,066 | $25,664 | $35,318 |
| Operating income | $1,650 | $1,706 | $5,070 | $4,659 |
| Net income | $1,186 | $1,257 | $3,679 | $3,377 |
| Net income attributable to shareholders | $1,185 | $1,258 | $3,681 | $3,381 |
| Diluted EPS | $2.54 | $2.45 | $7.77 | $6.38 |
| Segment EBITDA | $2,001 | $2,035 | $6,139 | $5,644 |
| Operating margin, approximately | 19.8% | 14.1% | 19.8% | 13.2% |
Q3 gross revenue fell 31% year over year and nine-month revenue fell 27%, chiefly reflecting lower commodity-linked selling prices and unfavorable euro translation. Net income declined in Q3 but rose for the nine-month period. Operating income and EBITDA also differed by period: both were slightly lower in Q3, while nine-month operating income increased 9% and EBITDA increased 9%.
Net cash provided by operating activities was $4,682 for the first nine months, versus $4,032 in 2014. Capital expenditures were $957, compared with $1,096. Investing activities used $1,103 and financing activities used $3,106. Cash and cash equivalents ended at $1,474, up from $1,031 at year-end 2014.
At September 30, cash and short-term investments totaled $3,076. Total debt, including current maturities, was $8,318; short-term debt was $573 and long-term debt was $7,742. Unused availability under credit facilities was $2,785. The company reported compliance with its revolving-credit leverage covenant.
Material changes and operating drivers
- Lower average selling prices were the principal reason for the revenue decline; lower crude oil and feedstock prices also reduced costs. The euro’s depreciation further reduced reported revenue in international segments.
- Management said operating income, excluding specified inventory and other unusual items, was higher by $80 in Q3 and $717 for the first nine months versus the comparable 2014 periods.
- O&P-EAI EBITDA rose to $549 from $343 in Q3 and to $1,398 from $1,018 for nine months, benefiting from improved margins and equity-investment income. I&D EBITDA increased to $460 from $383 in Q3 and to $1,263 from $1,188 for nine months, led by styrene and other margin improvements.
- O&P-Americas EBITDA declined to $841 from $1,157 in Q3, reflecting lower olefins margins, but was nearly flat for nine months at $2,886 versus $2,871. Refining EBITDA was $93 versus $110 in Q3 and $401 versus $376 for nine months. Technology EBITDA was $45 versus $41 in Q3 and $178 versus $188 for nine months.
- Q3 and year-to-date 2015 results included $181 and $264, respectively, of non-cash lower-of-cost-or-market inventory charges. Management said $3.4 billion of inventory was at risk of further valuation adjustment; additional price declines could cause further charges, while recoveries could reverse some charges.
- Share repurchases totaled approximately 39.1 million shares for $3,444 during the first nine months. Dividends paid were $1,063; the interim quarterly dividend was increased from $0.70 to $0.78 per share. A further repurchase authorization covered up to approximately 47 million shares through November 2016.
Outlook, risks, and contingencies
- Management described the global ethylene market as more balanced entering Q4, with chain margins lower than in Q3 but still healthy historically. It expected product markets to remain balanced to tight heading into 2016, with possible tightening as spring turnarounds increase.
- Expected Q4 headwinds included approximately $30 from building inventory ahead of a Corpus Christi turnaround; approximately $15 from planned maintenance at the Münchsmünster olefins plant; approximately $20 from French PO/TBA plant maintenance; and approximately $15–$20 from Houston refinery maintenance. Seasonal trends were also expected to weigh on oxyfuels, polyolefins, and refining.
- The company identified exposure to volatile commodity prices, foreign exchange, industry cyclicality and oversupply, operational interruptions, environmental regulation, and financing and tax risks. It said its risk factors had not materially changed from the 2014 Form 10-K.
- Environmental remediation liabilities were $97 at September 30; management said additional losses were reasonably possible but could not be estimated. An Access Industries-related indemnity and litigation dispute remained unresolved, and the possible loss could not be estimated. Berre refinery exit costs and employee payments will continue over coming years; possible future dismantling and remediation costs were not determinable.
- The company announced an expected sale of its Argentina-based Petroken subsidiary, with anticipated net cash proceeds of approximately $162 and closing expected in Q4 2015. It also continued construction of a Corpus Christi ethylene expansion expected to be completed in Q2 2016 and cited a planned Gulf Coast PO/TBA project targeted for operation in early 2020.
Important facts for investors to verify
- Whether lower feedstock prices continue to support margins as product prices, supply-demand conditions, and seasonal demand change.
- Whether inventory prices recover or fall further, given $3.4 billion of inventory identified as at risk and $264 of 2015 valuation charges to date.
- Actual Q4 maintenance and turnaround impacts compared with management’s estimated segment-level effects.
- Cash generation and liquidity after substantial dividends and share repurchases, alongside debt of $8,318 and commercial paper outstanding of $493.
- Developments in environmental remediation estimates, the Access-related claims, and the Petroken sale and expected proceeds.