LyondellBasell Industries N.V. — Q3 2019 Form 10-Q
Reporting period: Three and nine months ended September 30, 2019. The company manufactures chemicals and polymers, refines crude oil, and licenses production technologies. Figures below are in millions of dollars except per-share data.
Financial performance
| Metric | Q3 2019 | Q3 2018 | 9M 2019 | 9M 2018 |
|---|---|---|---|---|
| Revenue | $8,722 | $10,155 | $26,548 | $30,128 |
| Operating income | $1,124 | $1,317 | $3,318 | $4,437 |
| Net income | $965 | $1,113 | $2,785 | $3,998 |
| Diluted EPS | $2.85 | $2.85 | $7.72 | $10.18 |
| Operating cash flow | Not provided for quarter | Not provided for quarter | $3,719 | $4,174 |
| Capital expenditures | Not provided for quarter | Not provided for quarter | $1,963 | $1,407 |
Margins: Operating margin was approximately 12.9% in Q3 2019 versus 13.0% in Q3 2018; for the first nine months it was 12.5% versus 14.7%. Net margin was approximately 11.1% versus 11.0% in Q3 and 10.5% versus 13.3% for the nine-month periods.
- Revenue declined 14% in Q3 and 12% in the first nine months, mainly reflecting lower selling prices, with lower volumes and unfavorable foreign exchange also contributing. Lower crude-linked prices were a key factor.
- Operating income fell 15% in Q3 and 25% year to date. Nine-month EBITDA decreased to $4,520 from $5,655.
- Q3 results benefited from a lower effective tax rate (12.3% versus 17.2%), including an $85 million noncash tax benefit from a statute-of-limitations expiration. Nine-month effective tax rate was 15.4% versus 11.4%.
- Cash from operations was $3,719; investing activities used $1,210 and financing activities used $2,382 in the first nine months. Cash and restricted cash totaled $512 at period end.
- Period-end debt was $12,070, including $2,438 short-term debt. Cash, cash equivalents and short-term investments totaled $529; the company also reported $518 of tri-party repurchase agreements. Unused availability under credit facilities was $5,011. The company stated it was in compliance with debt covenants.
Material changes and segment trends
- O&P-Americas EBITDA declined 7% in Q3 and 15% year to date, principally from weaker polyethylene margins; improved ethylene margins partly offset the pressure.
- O&P-EAI EBITDA increased 11% in Q3 but declined 11% year to date. Q3 olefin margins and volumes improved, while lower joint-venture income and foreign exchange weighed on results.
- I&D EBITDA declined 23% in Q3 and 25% year to date, due mainly to weaker intermediate chemicals margins and lower volumes.
- Refining reported EBITDA losses of $6 in Q3 and $87 year to date, compared with positive EBITDA of $84 and $251, respectively, in 2018. Compressed heavy-crude differentials and weaker byproduct margins were significant factors.
- APS EBITDA rose to $102 in Q3 and $370 year to date, partly reflecting the A. Schulman acquisition; integration costs and weaker demand/volumes were offsets. The acquisition contributed $120 of APS EBITDA year to date.
- Share repurchases totaled $3,752 cash in the first nine months, including a July tender offer for 35.1 million shares at $88 each. Dividends paid were $1,111. Repurchases contributed to lower weighted-average shares and helped keep Q3 diluted EPS level despite lower net income.
Outlook, risks and unusual items
- Management expected low-cost natural gas liquid feedstocks to continue into October 2019 and typical seasonal demand softening in the final months of 2019. It expected Houston refinery profitability to begin improving in Q4 ahead of IMO 2020 low-sulfur marine-fuel requirements.
- The Hyperzone polyethylene plant was being commissioned in the second half of 2019, with sales expected in Q1 2020 and profitability anticipated to increase through 2020. The approximately $2.4 billion PO/TBA project was expected to be completed in the second half of 2021.
- After quarter end, the company issued $1 billion of 4.2% notes due 2049 and used proceeds, operating cash and additional commercial paper to repay $2 billion of its 2020 term loan.
- Environmental remediation accruals were $130, up from $90 at year-end 2018. Management said additional losses were reasonably possible but could not estimate a range. A $225,000 civil penalty demand relating to Illinois emissions events was under settlement discussion; a separate Illinois flare matter was settled for a $25,000 penalty and a supplemental environmental project.
- Key risks include commodity-price and margin volatility, industry capacity additions and oversupply, demand weakness, unplanned outages, project execution, currency movements, environmental/legal matters, and refinancing or covenant risks. The filing reported no material change in disclosed risk factors.
Important facts for investors to verify
- Whether margins and volumes stabilize, particularly in polyethylene, intermediate chemicals, and refining, and whether the expected Q4 refinery recovery materializes.
- Progress, cost and timing of the PO/TBA and Hyperzone projects, including the expected start of commercial sales.
- Debt maturities, short-term borrowings, commercial-paper usage and facility availability following the October refinancing.
- Cash generation and capital allocation after substantial share repurchases and dividends; confirm the remaining repurchase authorization and intended pace.
- Potential changes in environmental remediation exposure, tax examinations and unrecognized tax benefits, including the possible tax impact of repatriating approximately $550 million of foreign earnings.