LyondellBasell Industries N.V. — Q2 2020 Form 10-Q
Reporting period: Three and six months ended June 30, 2020. Amounts are in U.S. dollars; financial figures are in millions unless stated otherwise. The company manufactures chemicals and polymers, refines crude oil, and licenses related technologies.
Financial performance and position
| Metric | Q2 2020 | Q2 2019 | Six months 2020 | Six months 2019 |
|---|---|---|---|---|
| Revenue | $5,546 | $9,048 | $13,040 | $17,826 |
| Operating income | $339 | $1,177 | $643 | $2,194 |
| Net income | $314 | $1,003 | $458 | $1,820 |
| Company shareholder net income | $313 | $1,002 | $455 | $1,817 |
| Diluted EPS | $0.94 | $2.70 | $1.36 | $4.88 |
| Segment EBITDA | $760 | $1,579 | $1,406 | $3,007 |
Revenue fell 39% in Q2 and 27% for the first half. Operating margin was approximately 6.1% in Q2 (13.0% in Q2 2019) and 4.9% for the first half (12.3% in 2019). Net margin was approximately 5.7% in Q2 (11.1% in Q2 2019) and 3.5% for the first half (10.2% in 2019). The Q2 tax provision was a $32 million benefit, including effects of the CARES Act; the reported effective tax rate was -11.3% for Q2 and 8.6% for the first half.
- Cash flow: First-half operating cash flow was $1,834, compared with $1,843 in 2019. Capital expenditures were $1,248; operating cash flow less capital expenditures was approximately $586. Cash and restricted cash at period-end totaled $2,578.
- Liquidity: Cash, cash equivalents and short-term investments totaled $3,203 at June 30, 2020. The company reported $2,541 of unused credit availability, including $2,017 under its revolving facility and $524 under its receivables facility.
- Debt: Total debt, including current maturities, was $14,336, versus approximately $12,062 at year-end 2019. The company issued $2 billion of notes in April, receiving net proceeds of $1,974, and reported compliance with debt covenants.
- Shareholder distributions: First-half common dividends paid were $701 ($2.10 per share). Share repurchases were $4, versus $512 in the prior-year period.
Material changes and drivers
- Management attributed weaker results mainly to lower prices, reduced margins and COVID-19-related demand declines. Lower average prices accounted for most of the revenue drop; lower sales volumes also contributed.
- Olefins and polyolefins benefited from demand for packaging and healthcare applications, while intermediates, refining and advanced polymer solutions faced weaker fuel, automotive and durable-goods demand.
- Q2 segment EBITDA was $248 for O&P–Americas, $185 for O&P–EAI, $101 for I&D, $(44) for APS, $165 for Refining and $112 for Technology. Refining improved from a prior-year loss, while most other segments declined.
- First-half working capital provided $465 of cash, mainly from lower receivables and inventories, partly offset by lower payables.
Outlook, risks and unusual items
- Management said demand was improving and believed the pandemic-driven demand decline bottomed in Q2. For Q3 2020, it expected North American ethylene plants to operate at about 95% of nameplate capacity, European crackers at about 90%, and the refinery at 85%–90%. These are expectations, not guarantees.
- 2020 capital expenditure guidance was reduced to $1.9 billion from $2.4 billion, a 20% reduction. Selected growth projects and maintenance were postponed or slowed, including construction of the Houston PO/TBA plant; completion was expected in the second half of 2022.
- The company said it intended to continue quarterly dividends, with the goal of increasing them over time, while prioritizing liquidity and maintaining an investment-grade balance sheet.
- First-half lower-of-cost-or-market inventory charges totaled $323; Q2 included a $96 benefit as some market prices recovered. Management reported $2.6 billion of inventory in pools considered at risk of further adjustment, making future charges or reversals dependent on prices and inventory composition.
- COVID-19 duration, economic disruption, commodity-price volatility, demand and product margins remain significant uncertainties. Other disclosed risks include operational outages, feedstock costs, competition, foreign exchange, financing and legal, tax and environmental matters.
- Environmental remediation liabilities were $129. Management said possible additional losses could exist but could not estimate them; it did not expect pending lawsuits to materially affect the company. A settlement concerning Tuscola emissions events carried a $120,000 penalty; a separate Morris matter could result in a penalty demand exceeding $100,000.
Most important facts for investors to verify
- Whether improving demand and operating-rate expectations materialize, particularly in polyethylene, refining and automotive-related markets.
- Whether inventory-price recoveries continue or further LCM charges affect earnings and cash generation.
- Whether the $1.9 billion capital plan, PO/TBA project schedule and China joint-venture plans remain on track.
- How debt levels, available liquidity and covenant headroom evolve as market conditions and cash flows change.
- The sustainability of the dividend and management’s stated capital-allocation priorities amid ongoing uncertainty.