Lyondellbasell Industries N.V. quarterly report, Q2 FY2016

LyondellBasell Industries N.V. — Q2 2016 Form 10-Q

Reporting period: Three and six months ended June 30, 2016. Financial statement amounts are unaudited and in millions of U.S. dollars, except per-share data. The company manufactures chemicals and polymers, refines crude oil, produces gasoline blending components, and licenses process technologies.

Financial performance

Metric	Q2 2016	Q2 2015	First half 2016	First half 2015
Revenue	$7,328	$9,145	$14,071	$17,330
Operating income	$1,403	$1,845	$2,763	$3,420
Net income attributable to company shareholders	$1,091	$1,330	$2,121	$2,496
Diluted EPS	$2.56	$2.82	$4.93	$5.22
Operating cash flow	Not separately stated	Not separately stated	$2,561	$2,914

Revenue fell 20% in Q2 and 19% in the first half, largely reflecting lower selling prices tied to crude oil and feedstock prices, with lower volumes also contributing.
Operating income declined 24% in Q2 and 19% in the first half. Calculated operating margin was approximately 19.1% in Q2 2016 versus 20.2% a year earlier, and 19.6% for the first half versus 19.7%.
Q2 net income attributable to shareholders declined 18%; first-half net income declined 15%. Lower operating results were partly offset by higher equity-investment income and a lower effective tax rate.
First-half operating cash flow was $2,561, down from $2,914. Investing activities used $1,068 and financing activities used $1,372. Capital expenditures were $1,090, compared with $584 in the first half of 2015.

Balance sheet and liquidity

At June 30, cash and cash equivalents were $1,060 and short-term investments were $1,023; the company reported $2,083 of unrestricted cash and cash equivalents plus short-term investments. It also held $462 in tri-party repurchase agreements.
Total debt, including current maturities, was $9,105, up from $8,028 at December 31, 2015; short-term debt was $616 and long-term debt was $8,485. Shareholders’ equity totaled $6,307.
Current assets were $9,983 and current liabilities $4,351. Unused availability under credit facilities totaled $2,701. The company reported compliance with its revolving-credit-facility leverage covenant.
The $2.5 billion revolving credit facility and commercial paper program were extended/increased in June. Commercial paper outstanding was $523; the U.S. receivables facility had no borrowings. The European receivables facility expired in April.

Material changes and operating drivers

O&P-Americas EBITDA was $754 in Q2 versus $1,014 a year earlier, as weaker olefin margins and lower production outweighed stronger polypropylene results.
O&P-EAI EBITDA rose to $576 from $492, benefiting from improved European polyolefin margins, a $40 inventory-valuation reversal, and higher equity-investment income.
I&D EBITDA declined to $397 from $466, primarily due to weaker margins in TBA-chain products and methanol; volume gains and inventory-valuation reversals partly offset the decline.
Refining EBITDA was a loss of $13 versus income of $159. Lower refining margins and throughput were affected by first-quarter turnaround work, operating limitations, and an April coker-unit fire at the Houston refinery.
Technology EBITDA increased to $73 from $57. First-half consolidated EBITDA was $3,590 versus $4,138.
The sale of the Argentine subsidiary generated a $78 gain and $137 net cash proceeds. The gain benefited first-half results by $57 in O&P-Americas and $21 in O&P-EAI.

Outlook, risks, and unusual items

Management said chemical and polyolefin markets remained generally well balanced entering Q3, while refining and TBA-chain margins had declined as gasoline inventories and supplies increased.
The company expected significant planned maintenance in the second half of 2016. It estimated a $150 negative impact to Q3 operations: $135 in O&P-Americas and $15 in I&D. Repairs following the Houston refinery fire were complete; the company expected to finish an 800-million-pound Corpus Christi ethylene expansion and related turnaround by the end of Q3.
In July 2016, the company announced plans for a 1.1-billion-pound annual-capacity U.S. Gulf Coast HDPE plant, with startup expected in 2019. The company also intended to continue quarterly dividends, subject to cash and operating expectations; no earnings guidance was provided.
Inventory-price exposure is notable: $2.5 billion of the $4.0 billion inventory balance was described as “at-risk” for potential further lower-of-cost-or-market adjustments if prices declined.
Environmental remediation accruals were $110; management said additional losses were reasonably possible but could not estimate a range. A pending Access-related indemnity demand includes a $100 management-fee claim; the company disputed liability and could not estimate potential loss. The related trial was scheduled to begin the week of October 17, 2016.
An IRS Section 409A matter involving current and former executives could result in company liability ranging from zero to as much as $165, depending on audit outcomes; the company said it would defend its position. Management reported no material change in the risk factors disclosed in the 2015 Form 10-K.
Q2 results included a $68 reversal of first-quarter inventory valuation charges. First-half 2015 comparatives included $83 of inventory valuation charges and $35 of expired-emissions-credit amortization, affecting year-over-year comparisons.

Investor verification priorities

Assess whether the anticipated $150 Q3 maintenance impact, refinery recovery, and planned turnarounds affected results as management expected.
Track refining throughput and margins, and confirm the effects of the Houston coker fire and Corpus Christi project/turnaround.
Monitor commodity prices and the $2.5 billion of inventory identified as at-risk for further valuation adjustments.
Review the outcome and potential financial exposure of the Access litigation/indemnity demand and the Section 409A audits.
Evaluate capital spending, debt growth, share repurchases, and dividends against operating cash flow and liquidity.