LyondellBasell Industries N.V. — Q1 2019 Form 10-Q
Business context and period. The company manufactures chemicals and polymers, refines crude oil, and licenses process technologies. This unaudited report covers the three months ended March 31, 2019; comparisons are with Q1 2018 unless noted. Results include A. Schulman, acquired in August 2018, primarily within Advanced Polymer Solutions (APS).
Key financial results
| Metric | Q1 2019 | Q1 2018 | Change |
|---|---|---|---|
| Revenue | $8.778 billion | $9.767 billion | Down 10% |
| Operating income | $1.017 billion | $1.494 billion | Down 32% |
| Net income | $817 million | $1.231 billion | Down 34% |
| EPS, diluted | $2.19 | $3.11 | Down 30% |
| Operating margin | 11.6% | 15.3% | Down 3.7 percentage points |
| Net cash from operating activities | $657 million | $1.006 billion | Down $349 million |
| Capital expenditures | $599 million | $429 million | Up $170 million |
Operating cash flow less capital expenditures was $58 million, versus $577 million in Q1 2018; this is a simple cash-flow proxy, not a company-reported free-cash-flow measure. Cash and cash equivalents plus restricted cash ended the quarter at $358 million. Management separately reported $762 million of unrestricted cash and marketable securities, plus $534 million in tri-party repurchase agreements.
Debt and liquidity. Total debt, including current maturities, was $9.904 billion at March 31, 2019, versus approximately $9.387 billion at year-end 2018. Short-term debt rose to $2.377 billion from $885 million, including a fully drawn $2 billion, 364-day term loan; long-term debt was $7.522 billion. The company reported $7.037 billion of unused availability across its credit facilities and compliance with debt covenants. Its facilities generally require a quarterly leverage ratio of no more than 3.50 to 1.00.
Material changes and operating performance
- Management attributed weaker overall results mainly to lower margins across most businesses. Lower product prices, lower volumes in several segments, and unfavorable foreign exchange contributed to the revenue decline; lower feedstock and energy costs partly reduced cost of sales.
- Segment EBITDA was $1.428 billion, down from $1.913 billion. O&P-Americas fell to $516 million from $756 million; O&P-EAI to $296 million from $419 million; Intermediates and Derivatives to $390 million from $486 million; and Refining to a $15 million loss from $63 million of EBITDA.
- APS EBITDA increased to $148 million from $123 million, reflecting A. Schulman’s contribution, partly offset by $16 million of integration costs. Technology EBITDA rose to $83 million from $56 million, primarily on higher licensing revenue.
- Refining results were pressured by lower market margins: the reported Maya 2-1-1 benchmark declined to $13.55 per barrel from $20.72. A fire-related service disruption at a third-party Houston Ship Channel terminal constrained oxyfuels logistics and volumes.
- Investing cash use was $178 million, including $599 million of capital expenditures, offset partly by investment-security proceeds. Financing cash use was $521 million, including $512 million of cash paid for share repurchases and $372 million of common dividends.
Outlook, risks, and notable items
- Management reported signs of industry improvement in early April: stronger sentiment and margins in O&P-EAI, improving seasonal volumes in O&P-Americas, and better refining conditions from wider heavy-crude discounts and increasing gasoline spreads. These are qualitative observations, not quantified guidance.
- The company expected a third-quarter 2019 start-up of its Hyperzone high-density polyethylene plant. The PO/TBA project, estimated to cost approximately $2.4 billion, was expected to be completed in Q3 2021. Capital expenditure commitments were approximately $681 million, primarily for these projects.
- Management said current liquidity and operating cash flow should be sufficient for anticipated capital requirements and obligations. It intended to continue quarterly dividends, with the goal of increasing them over time, subject to cash balances and expected operating results. Share repurchases remained authorized through December 2019; approximately 37 million shares remained authorized as of April 24, 2019.
- Key stated risks include commodity-price volatility and industry oversupply, dependence on low-cost U.S. natural gas liquids, operating outages and logistics disruptions, execution and cost risks on growth projects, foreign-exchange exposure, and legal, tax, and environmental matters. The Houston refinery is the company’s only refining operation.
- Accrued environmental remediation liabilities were $93 million at quarter-end; the company said additional losses may be reasonably possible but could not estimate an amount or range. It was negotiating with the EPA regarding potential Clean Air Act violations at its Lake Charles facility and expected potential penalties could exceed $100,000.
- Adoption of lease accounting guidance added operating lease assets of $1.534 billion and liabilities of $1.555 billion at March 31, 2019, without a material impact on income or cash flows. The company was still assessing A. Schulman’s internal controls; that business was excluded from management’s internal-control assessment for the quarter.
Important facts for investors to verify
- Whether margin and volume improvements described for early April persisted, especially in O&P, refining, and intermediates.
- Project spending, schedule, and start-up progress for Hyperzone and PO/TBA, including the effect of the $681 million in capital commitments on cash generation.
- Debt maturities and refinancing plans for the $2 billion 364-day term loan, covenant headroom, and the composition of short-term debt.
- The sustainability of dividends and share repurchases relative to operating cash flow and elevated capital spending.
- Developments in the Lake Charles EPA matter and other environmental contingencies, as well as completion of A. Schulman’s control integration and assessment.