LyondellBasell Industries N.V. — Q2 2023 Form 10-Q
Business context and reporting period
Quarter ended June 30, 2023; financial statements are unaudited. LyondellBasell manufactures chemicals and polymers, refines crude oil, produces gasoline blending components, and licenses process technologies. Unless noted, amounts below are in U.S. dollars.
Financial performance
| Metric | Q2 2023 | Q2 2022 | Six months 2023 | Six months 2022 |
|---|---|---|---|---|
| Revenue | $10.306bn | $14.838bn | $20.553bn | $27.995bn |
| Operating income | $1.011bn | $2.141bn | $1.724bn | $3.802bn |
| Net income attributable to company shareholders | $714m | $1.643bn | $1.186bn | $2.961bn |
| Diluted EPS | $2.18 | $4.98 | $3.62 | $8.98 |
| Operating margin | 9.8% | 14.4% | 8.4% | 13.6% |
Operating margins are calculated as operating income divided by revenue. Segment EBITDA, the company’s primary segment profitability measure, was $1.383bn in Q2 versus $2.387bn a year earlier; first-half segment EBITDA was $2.532bn versus $4.408bn. EBITDA is a non-GAAP measure.
For the first six months, operating cash flow was $1.772bn, down from $3.101bn. Capital expenditures were $653m, yielding approximately $1.119bn of operating cash flow less capital expenditures. Investing activities used $742m; financing activities used $701m. Cash and cash equivalents were $2.468bn at June 30, 2023, plus $26m restricted cash.
Total debt, including current maturities, was $11.612bn; current maturities were $1.206bn. The company had $4.150bn of unused availability under its revolving credit and receivables facilities, no borrowings or letters of credit outstanding under those facilities, and reported compliance with debt covenants.
Material changes and segment performance
- First-half revenue declined 27% year over year, mainly due to lower average selling prices, which the company links largely to lower crude oil prices; lower volumes also contributed. Operating income fell 55%.
- Q2 revenue was nearly unchanged sequentially from Q1, while operating income rose 42%. Management attributed improved O&P results to modest margin gains from lower feedstock costs and improved I&D results to volume gains; lower refining margins partly offset those gains.
- First-half EBITDA declined across O&P-Americas, O&P-EAI, I&D, Refining and Technology, reflecting weaker margins, demand, pricing and, in Refining, downtime and exit-related costs. APS reported a first-half EBITDA loss of $192m, including a $252m non-cash goodwill impairment recorded in Q1 after a segment reorganization.
- Interest expense increased to $231m for the first half from $132m, primarily due to lower capitalized interest after the PO/TBA plant began operating and the effect of interest-rate swaps amid higher rates.
- Dividends paid were $797m and cash paid for share repurchases was $170m in the first half. A new authorization permits repurchase of up to 34.0m shares through November 19, 2024.
Outlook, risks and unusual items
- For Q3 2023, management expected earnings to be mid-teen to mid-twenty percentage points below Q2, citing soft demand, economic uncertainty, volatile feedstock costs and new capacity in North America and China. Expected operating rates were approximately 85% for North American olefins and polyolefins and 75% for European olefins and polyolefins and I&D assets.
- Management planned approximately $1.7bn of 2023 capital expenditures, about 70% for sustaining maintenance. It targets long-term shareholder returns equal to 70% of free cash flow, subject to significant or unforeseen business challenges, mergers or acquisitions.
- The Value Enhancement Program was reported ahead of schedule. Its near-term target was raised to $150m of net income and $200m of recurring annual EBITDA by year-end 2023; estimated 2023 costs to achieve that milestone were $150m. The longer-term target is approximately $575m of recurring annual net income improvement by the end of 2025.
- The company extended planned Houston refinery operations from no later than end-2023 to no later than end-Q1 2025. It recorded $235m of refinery exit costs in the first half, estimated asset retirement obligations of $255m (within a stated $150m–$450m range), and does not anticipate material 2023 cash payments related to the exit. Additional exit costs are expected in later periods.
- In May, the company issued $500m of 5.625% guaranteed notes due 2033, its first green financing instrument; proceeds are designated for eligible green projects. In July 2023, it repaid $425m of notes due 2023.
- Environmental remediation accruals were $123m; management said possible additional losses could not be estimated. Management did not expect currently pending lawsuits to have a material adverse effect. A Texas air-permitting matter was settled for $2.6m subject to court approval; a separate La Porte matter resulted in a $1.1m settlement and final judgment.
- Key risks include commodity and energy price volatility, oversupply and weak demand, operational interruptions, project execution, environmental and legal matters, foreign exchange, tax-law changes, and the execution and timing of the Houston refinery exit. The filing reported no material changes to previously disclosed risk factors.
Important facts for investors to verify
- Whether the anticipated Q3 earnings decline and asset operating rates were borne out by subsequent results.
- How margins, demand, selling prices and feedstock costs evolved across the segments after June 30.
- Progress and realized returns from the Value Enhancement Program, including costs and the year-end 2023 milestone.
- Houston refinery extension plans, remaining exit costs, asset-retirement obligations and future site options.
- Debt maturities and liquidity following the July 2023 repayment, and the pace of dividends and share repurchases relative to cash generation.
- Developments in environmental remediation and litigation, including final court approval of the Texas settlement.