Lyondellbasell Industries N.V. quarterly report, Q3 FY2013

LyondellBasell Industries N.V. — Q3 2013 Form 10-Q

Period and business: Unaudited results for the quarter and nine months ended September 30, 2013, compared with the corresponding 2012 periods. The company manufactures chemicals and polymers, refines crude oil, produces gasoline blending components, and licenses process technologies. Amounts below are in U.S. dollars; financial figures are in millions unless stated otherwise.

Financial performance

Metric	Q3 2013	Q3 2012	Nine months 2013	Nine months 2012
Revenue	$11,152	$11,273	$32,924	$34,255
Operating income	$1,207	$1,328	$3,838	$3,717
Net income attributable to company shareholders	$853	$846	$2,683	$2,216
Diluted EPS, continuing operations	$1.51	$1.47	$4.67	$3.83
Operating cash flow	Not stated for quarter	Not stated for quarter	$3,194	$3,459
Capital expenditures	Not stated for quarter	Not stated for quarter	$1,201	$727

Revenue declined about 1% in Q3 and 4% for the nine-month period. Operating income fell about 9% in Q3 but increased about 3% year to date.
Approximate operating margin, calculated from reported revenue and operating income, was 10.8% in Q3 2013 versus 11.8% in Q3 2012, and 11.7% for the first nine months of 2013 versus 10.8% in 2012.
Q3 net income attributable to shareholders was broadly stable; nine-month earnings increased about 21%. Q3 diluted EPS from continuing operations was $1.51, compared with $1.47; nine-month diluted EPS was $4.67, compared with $3.83.
Cash from operations was $3.194 billion, down from $3.459 billion. Capital spending increased to $1.201 billion from $727 million. The difference between operating cash flow and capital expenditures was approximately $1.993 billion, versus $2.732 billion in 2012; this is a simple derived measure, not a company-reported cash-flow subtotal.
Cash and cash equivalents were $4.414 billion at September 30, up from $2.732 billion at year-end 2012. Total debt, including current maturities, was $5.889 billion, up from approximately $4.400 billion. Approximate net debt was therefore $1.475 billion, versus $1.663 billion at year-end.
Unused availability under credit facilities was $3.563 billion. The company reported $114 million of short-term debt and $5.774 billion of long-term debt on the balance sheet.

Material changes and operating drivers

O&P-Americas: Operating income increased to $759 million in Q3 from $738 million, and to $2.452 billion for nine months from $1.957 billion. Results benefited from North American shale-related low-cost natural gas liquids feedstocks and stronger polyethylene margins. About 87% of U.S. ethylene production used NGLs in the 2013 periods.
O&P-EAI: Operating income rose to $78 million in Q3 from $15 million, and to $360 million for nine months from $221 million. Improved European olefins volumes and margins contributed, although management described regional economic and industry conditions as weak.
Intermediates and Derivatives: Operating income declined to $371 million in Q3 from $424 million and to $979 million for nine months from $1.184 billion. Lower oxyfuels and butanediol margins, weaker demand, and scheduled maintenance outweighed improved styrene results and, year to date, stronger ethylene glycol margins.
Refining: The segment recorded operating losses of $37 million in Q3 and $70 million for nine months, versus income of $114 million and $248 million, respectively, in 2012. Lower product spreads, increased RIN compliance costs, and maintenance-related reductions in crude processing weighed on results. Nine-month crude processing rates fell 10% year over year.
Technology: Operating income increased to $35 million in Q3 from $31 million and to $124 million for nine months from $99 million. A one-time settlement associated with a prior-year process license agreement contributed to year-to-date licensing revenue.
Equity investment income rose to $61 million in Q3 from $32 million and to $163 million for nine months from $105 million, reflecting improved joint-venture operating results.

Liquidity, capital allocation, and outlook

The company generated $3.194 billion of operating cash flow and spent $1.201 billion on capital projects in the first nine months. Investment spending supported turnarounds, plant improvements, a methanol plant restart at Channelview, and expansion projects.
It paid $517 million in dividends and $1.251 billion in cash for share repurchases during the nine months. The board had authorized repurchases of up to 10% of outstanding shares through May 21, 2014; approximately 18.9 million shares had been repurchased by September 30.
In July, the company issued $1.5 billion of unsecured notes: $750 million of 4% notes due 2023 and $750 million of 5.25% notes due 2043. The proceeds were intended for general corporate purposes, including possible share repurchases. The revolving credit facility maturity was extended to May 2018, and the European receivables facility was amended and extended to April 2016.
Management said it expected business conditions similar to those in the first nine months to continue. It anticipated ongoing shale-gas benefits for O&P-Americas and I&D, but seasonally slower polyolefins sales, oxyfuels margin compression, continuing challenges in Europe, and near-term difficulty for refining. No quantified earnings or revenue guidance was provided.
Management stated that cash, operating cash flow, and credit facilities were expected to provide sufficient resources for anticipated requirements. It intended to continue quarterly dividends, with the goal of increasing them over time, subject to cash and operating results.

Risks, contingencies, and unusual items

Key operating exposures include commodity feedstock and energy prices, product-margin cycles, possible oversupply and new industry capacity, facility outages, RIN costs, foreign exchange, and economic or regulatory changes. Management noted that the Houston refinery is the company’s only refining operation.
The company had $123 million accrued for environmental remediation and stated that additional losses were reasonably possible but could not be estimated. Berre refinery exit and severance-related payments were expected to continue, with employee payments substantially complete by 2019.
Unresolved matters include Access Industries-related indemnity and management-fee demands, for which the company said it could not estimate a reasonably possible loss, and a U.S. Foreign Corrupt Practices Act investigation concerning a former Kazakhstan project. The company said it was cooperating with the Department of Justice and could not estimate potential penalties.
Environmental proceedings included alleged emissions, flaring, and hazardous-waste containment violations. Certain potential penalties were expected to exceed $100,000; the filing describes some asserted or anticipated amounts, but does not provide a clear aggregate exposure.
The parent’s tax residency changed to the U.K. effective July 1, 2013 under a ruling by U.K. and Dutch tax authorities. Management expected no significant overall tax-liability impact beyond valuation allowances related to certain Dutch tax losses; realization of French deferred tax assets remained uncertain.
The quarter included unusual comparability items in prior-year results, including inventory valuation and insurance-settlement benefits, and in 2013 refining results included property-tax resolution benefits and recoveries tied to a former employee fraud matter.

Most important facts for investors to verify

Whether low-cost U.S. feedstocks and strong polyethylene economics persist, and how announced U.S. capacity additions affect margins.
The extent and duration of weakness in refining, oxyfuels, butanediol, and European markets, including the effect of RIN costs and planned or unplanned maintenance.
Progress, cost, and expected returns on expansion and restart projects alongside the marked increase in capital expenditures.
Debt and cash trends after the $1.5 billion note issuance, share repurchases, and dividends; confirm liquidity-facility availability and the company’s intended capital allocation.
Potential outcomes of the FCPA inquiry, environmental proceedings, Access-related claims, and disputed indemnities, for which some exposures remain unquantified.
Whether tax-residency conditions remain satisfied and whether Dutch and French deferred tax assets require further valuation allowances.