LyondellBasell Industries N.V. — Q3 2020 Form 10-Q
Reporting period: Three and nine months ended September 30, 2020. LyondellBasell is a global chemicals and polymers manufacturer, refiner, and technology licensor. Amounts are in U.S. dollars unless otherwise stated.
Financial performance
| Metric | Q3 2020 | Q3 2019 | Nine months 2020 | Nine months 2019 |
|---|---|---|---|---|
| Revenue | $6.776bn | $8.722bn | $19.816bn | $26.548bn |
| Operating income | $23m | $1.124bn | $666m | $3.318bn |
| Net income | $114m | $965m | $572m | $2.785bn |
| Net income attributable to shareholders | $112m | $963m | $567m | $2.780bn |
| Diluted EPS | $0.33 | $2.85 | $1.69 | $7.72 |
| EBITDA | $466m | $1.513bn | $1.872bn | $4.520bn |
| Cash from operating activities | — | $2.661bn | $3.719bn | |
| Capital expenditures | — | $1.673bn | $1.963bn |
Operating margin was approximately 0.3% in Q3 2020 versus 12.9% a year earlier, and 3.4% for the first nine months versus 12.5%. EBITDA margin was approximately 6.9% versus 17.3% in Q3, and 9.4% versus 17.0% year to date. The Q3 $125m income-tax benefit helped produce positive net income despite an $11m pretax loss; the reported Q3 effective tax rate is unusually high because pretax income was close to zero.
Q3 operating cash flow was not separately stated in the provided filing text. Year-to-date operating cash flow declined by $1.058bn year over year. Working-capital changes provided $514m, mainly from lower inventories. Cash and cash equivalents were $2.459bn at September 30; cash plus short-term investments totaled $2.820bn. Total debt, including current maturities, was $14.377bn, up from $12.062bn at December 31, 2019. Unused credit-facility availability was $2.691bn. The current ratio was approximately 2.25.
Material changes and business drivers
- Revenue fell 22% in Q3 and 25% year to date, chiefly because lower crude-oil-linked selling prices reduced revenue; lower volumes also contributed. Cost of sales fell, but not enough to offset weaker revenue and margins.
- A $582m non-cash impairment of the Houston refinery drove a substantial portion of the Refining segment’s reported losses. Refining EBITDA was negative $692m in Q3, versus negative $6m a year earlier.
- Q3 EBITDA declined in O&P–Americas ($474m versus $653m), O&P–EAI ($148m versus $291m), and Intermediates and Derivatives ($267m versus $390m). Advanced Polymer Solutions improved to $157m from $102m, and Technology rose to $111m from $83m.
- Year-to-date results included $163m of lower-of-cost-or-market inventory charges; Q3 included a $160m inventory valuation benefit as prices recovered. Management said 10 of 11 LIFO inventory pools, covering $2.9bn of inventory, remained at risk of further adjustment if prices fell.
- Year-to-date investing cash use was $2.307bn, including $1.673bn of capital expenditures and $472m invested for a 50% interest in a new China joint venture with Bora. Financing activities provided $1.192bn, including debt issuance. The company paid $1.053bn in common dividends and repurchased $4m of shares.
Outlook, risks and unusual items
- Management reported improving demand and sequential volume and margin recovery in most businesses, and expected recovery in global economies to benefit petrochemicals. It expected global polyethylene demand growth for 2020 and continued strength in North American integrated polyethylene margins in Q4, with possible seasonal moderation.
- Slow recovery in mobility was expected to prolong pressure on refining and oxyfuels. The company planned to operate the Houston refinery at about 80% of nameplate crude throughput in Q4, reduce its workforce by approximately 10%, and defer non-safety discretionary work.
- The company cut its 2020 capital expenditure budget to $1.9bn. Construction on the Houston PO/TBA project was restarting, with completion expected in Q4 2022—about a year later than initially planned. Delays and other costs were expected to increase the original $2.4bn estimate by at least 30%.
- On October 1, 2020, the company agreed to pay $2bn for a 50% interest in Sasol’s Louisiana integrated polyethylene venture, subject to approvals and closing. October financing raised $3.848bn net. If the Louisiana transaction fails to close by March 31, 2021, or is terminated, certain October notes must be redeemed at 101% of principal plus accrued interest.
- October credit amendments revised leverage covenant limits and further restricted certain dividends and other payments. Management said it remained in covenant compliance at September 30. The company stated it would prioritize debt repayment over share repurchases for the remainder of 2020 and after closing the Louisiana venture.
- Management said it would continue quarterly dividends, subject to cash balances and expected operating results, and remained committed to an investment-grade balance sheet. It did not provide updated 2020 effective-tax-rate guidance, citing CARES Act uncertainty and discrete items.
- Key risks include continuing COVID-19 effects on demand, fuel-market oversupply and weak refinery margins, commodity-price and margin volatility, further inventory write-downs or asset impairments, operating outages, and execution, cost and approval risks for major projects and the Louisiana venture. The filing also discusses environmental proceedings, including Texas claims concerning Houston Refining emissions, and a proposed $225,000 penalty for Corpus Christi emissions events.
Most important facts for investors to verify
- Whether demand, product spreads and segment EBITDA continued to recover after Q3, especially in refining and intermediates.
- Whether the Houston refinery’s utilization, margins and cash-flow assumptions support the impairment estimate, and whether additional impairments or operating reductions are needed.
- Whether commodity prices and LIFO pool composition cause further inventory valuation charges or reversals.
- Closing status, final purchase price and funding of the Louisiana joint venture, including any contingent note redemption obligations.
- Debt levels, leverage covenant headroom, refinancing and redemption costs, liquidity, and the ability to fund dividends and planned investment from operations.
- Progress, revised cost and schedule for the PO/TBA project, and whether 2020 capital spending remains within the $1.9bn budget.