LyondellBasell Industries N.V. — Q2 2013 Form 10-Q
Reporting period: Three and six months ended June 30, 2013; comparative periods are the corresponding 2012 periods. Figures are in millions of U.S. dollars except per-share amounts and where noted. The filing’s interim financial statements are unaudited.
Business context and results
LyondellBasell manufactures chemicals and polymers, refines crude oil, produces gasoline-blending components, and licenses process technologies. It reports five segments: O&P-Americas, O&P-EAI, Intermediates and Derivatives (I&D), Refining, and Technology.
| Metric | Q2 2013 | Q2 2012 | First half 2013 | First half 2012 |
|---|---|---|---|---|
| Revenue | $11,103 | $11,248 | $21,772 | $22,982 |
| Operating income | $1,364 | $1,449 | $2,631 | $2,389 |
| Income from continuing operations | $923 | $768 | $1,829 | $1,362 |
| Net income attributable to Company shareholders | $929 | $770 | $1,830 | $1,370 |
| Diluted EPS | $1.61 | $1.33 | $3.16 | $2.37 |
| Operating cash flow | Not stated for quarter | $2,063 | $1,417 |
Revenue fell 1% in Q2 and 5% in the first half. Operating income declined 6% in Q2 but rose 10% for the first half; shareholder net income increased 21% and 34%, respectively. The filing attributes the Q2 operating-income decline mainly to weaker Refining, butadiene and some I&D results. The first-half improvement chiefly reflected stronger olefins margins and volumes, partly offset by weaker Refining and I&D.
Calculated operating margin was approximately 12.3% in Q2 2013 versus 12.9% in Q2 2012, and 12.1% for the first half versus 10.4% in 2012. The filing does not present these margin percentages directly.
Cash, liquidity, debt and capital allocation
- Cash and cash equivalents were $3,233 at June 30, up from $2,732 at December 31, 2012. First-half cash flow was $2,063 from operations, $797 used in investing, and $760 used in financing. Operating cash flow included $224 of VAT refunds from prior periods; working-capital movements used cash overall.
- Capital expenditures were $778 for the first half, up from $461 in 2012, including spending on turnarounds, debottlenecking, railcars and growth projects.
- Total debt, including current maturities, was reported as $4,421 in MD&A; the balance sheet shows $4,306 long-term debt, $114 short-term debt and $1 current maturity. Approximate net debt using the MD&A total and reported cash was $1,188.
- Unused credit-facility availability was $3,461. The $2 billion revolving facility had no borrowings and $119 of letters of credit outstanding; receivables facilities also had no borrowings. Management said available cash, operations and credit facilities were sufficient for anticipated requirements.
- First-half dividends paid were $490; dividends declared were $0.90 per share. The company repurchased about 5.36 million shares for approximately $360 at an average $67.14 per share; $270 was paid in cash during the first half. The authorization permits repurchases of up to 10% of outstanding shares over twelve months.
- On July 16, 2013, a subsidiary issued $1.5 billion of guaranteed notes: $750 million of 4% notes due 2023 and $750 million of 5.25% notes due 2043. Proceeds were intended for general corporate purposes, including possible share repurchases.
Segment developments and material changes
- O&P-Americas: Q2 operating income rose to $872 from $700; first-half income rose to $1,693 from $1,219. Strong U.S. olefins performance benefited from low-cost NGL feedstocks and higher production. About 90% of U.S. ethylene production used NGLs in the first half, versus 85% a year earlier.
- O&P-EAI: Q2 operating income was $189 versus $203; first-half income was $282 versus $206. First-half results improved with better cracker margins and polyolefin volumes, while European economic conditions remained weak and Q2 was affected by lower butadiene margins and maintenance.
- I&D: Operating income declined to $285 from $390 in Q2 and $608 from $760 in the first half. Lower BDO, oxyfuels and acetyls results and maintenance weighed on performance; certain ethylene glycol and styrene margins improved.
- Refining: The segment recorded an operating loss of $16 in Q2 and $33 for the first half, versus income of $124 and $134 in 2012. Lower heavy/light crude differentials, higher renewable identification number (RIN) costs, and first-quarter maintenance reduced results. RIN costs increased $38 in Q2 and $56 in the first half versus 2012.
- Technology: Operating income increased to $39 from $30 in Q2 and $89 from $68 for the first half, helped by a one-time lump-sum license settlement and improved catalyst results.
Outlook, risks and unusual items
- Management expected near-term conditions similar to the first half. O&P-Americas and I&D were expected to continue benefiting from shale gas developments; a scheduled Clinton, Ohio turnaround was expected to offset some O&P-Americas benefit. I&D was expected to benefit after Q2 PO-facility turnarounds. O&P-EAI conditions were expected to remain challenging; Refining results were expected to improve from first-half levels despite significant RIN costs. No quantitative earnings guidance was provided.
- Management cited commodity-price volatility, feedstock and energy costs, potential U.S. shale-gas/NGL supply changes, industry capacity and oversupply, plant outages, regulation, competition, economic weakness, currency and counterparty exposure, and financing access as risks.
- Environmental remediation liabilities were $123 at June 30. The company said additional losses were reasonably possible but could not estimate their amount or range. Access affiliates’ indemnity demands include $100 of management fees and other unspecified amounts; the company disputes the claims and could not estimate potential loss.
- The company continued cooperating with the U.S. Department of Justice over a voluntary disclosure concerning a former Kazakhstan project and possible FCPA issues; potential penalties could not be estimated. A Harris County lawsuit concerning four Channelview emissions events alleges a maximum penalty of $200,000.
- The company was seeking a joint U.K.-Dutch tax-residency ruling. The filing identifies potential adverse tax consequences if sole U.K. treaty residence is not established, as well as uncertainty from possible tax-law changes.
- Other notable items: Moody’s and S&P raised the company’s credit rating to investment grade; the revolving facility was extended to May 2018 and the European receivables facility to April 2016. The Berre refinery remained a discontinued operation, with exit costs expected through 2013 and employee payments substantially complete by 2019.
Most important facts for investors to verify
- Whether strong North American feedstock advantages and first-half olefins performance persist, particularly amid announced U.S. capacity expansion and potential feedstock-supply changes.
- Whether Refining improves as forecast, given RIN expense, crude differentials and the company’s reliance on its Houston refinery.
- How the $778 first-half capital program, $1.5 billion subsequent note issuance, share repurchases and dividends affect debt and cash balances.
- Developments in the Access litigation, environmental exposures, Kazakhstan/FCPA inquiry, and U.K.-Dutch tax-residency process; several potential exposures are not quantifiable in the filing.
- Whether the one-time Technology license settlement and the $224 VAT refund materially affect comparisons with future periods.