LyondellBasell Industries N.V. — Form 10-Q Summary
Business context and reporting period
Unaudited results for the quarter and nine months ended September 30, 2016, compared with the corresponding 2015 periods. LyondellBasell manufactures chemicals and polymers, refines crude oil, produces gasoline blending components, and licenses process technologies. Its five segments are O&P-Americas, O&P-EAI, Intermediates and Derivatives (I&D), Refining, and Technology. Management cautions that interim results are not necessarily indicative of full-year results.
Financial performance and liquidity
| Metric | Q3 2016 | Q3 2015 | 9M 2016 | 9M 2015 |
|---|---|---|---|---|
| Revenue | $7.365B | $8.334B | $21.436B | $25.664B |
| Operating income | $1.249B | $1.650B | $4.012B | $5.070B |
| Net income attributable to shareholders | $952M | $1.185B | $3.073B | $3.681B |
| Diluted EPS | $2.30 | $2.54 | $7.23 | $7.77 |
| Segment EBITDA | $1.606B | $2.001B | $5.196B | $6.139B |
- Revenue declined 12% in Q3 and 16% year to date. Management attributed the decline mainly to lower selling prices following lower crude oil and feedstock prices, with refinery outages and maintenance also reducing volumes.
- Operating income fell 24% in Q3 and 21% year to date. Excluding prior-year inventory valuation charges and, for the nine-month comparison, expired emissions-credit amortization, operating income was lower by $582M in Q3 and $1.357B year to date.
- Segment performance was mixed: O&P-EAI EBITDA increased to $584M in Q3 and $1.669B year to date; O&P-Americas declined to $682M and $2.314B; I&D declined to $304M and $1.027B. Refining EBITDA was negative $10M in Q3 and negative $9M year to date. Technology EBITDA was $45M and $201M, respectively.
- Effective tax rate was 25.4% for Q3 versus 29.1%, and 26.4% for nine months versus 28.5%.
- Operating cash flow was $3.893B for nine months, down from $4.682B. Capital expenditures were $1.676B versus $957M; cash used in investing was $1.527B. Financing activities used $2.567B, including $2.501B of share repurchases and $1.049B of dividends paid.
- At September 30, cash and cash equivalents were $740M, short-term investments $1.090B, and repurchase agreements $296M. Management reported $1.830B of unrestricted cash and short-term investments and $2.725B of unused credit availability.
- Total debt, including current maturities, was $9.088B, versus $8.028B at December 31, 2015. This included $621M of short-term debt, principally $500M of commercial paper. The company reported compliance with its revolving-credit leverage covenant.
Material changes versus prior periods
- Lower margins and turnaround-related production losses weighed on O&P-Americas. O&P-EAI benefited from stronger European polyolefin spreads, partly offset by weaker olefin margins.
- I&D results were pressured by weaker gasoline-related product prices and increased supply in certain markets, despite higher volumes. Refining was sharply weaker as margins fell and throughput was reduced by planned maintenance and unplanned outages, including a coker fire and utility disruptions.
- Prior-year periods included $181M of Q3 and $264M of nine-month noncash lower-of-cost-or-market inventory charges; these reduced the comparative-period earnings burden. 2016 year-to-date results included a $78M gain on the sale of the Argentine subsidiary and $11M of gains on sales of a Japanese joint-venture interest and Australian idled assets.
- The company issued €750M of 1.875% guaranteed notes due 2022, extended and increased its revolving credit facility to $2.5B, and expanded its commercial-paper program to $2.5B. It repurchased approximately 31.4M shares in the first nine months.
Outlook, risks and contingencies
- Management said global olefin and polyolefin conditions remained favorable in October, while expecting typical winter seasonal slowing. It expected to complete major olefin and polyolefin turnarounds in Q4; associated downtime could reduce Q4 results by $75M–$100M. The 2017 maintenance schedule was expected to be lighter.
- The company intended to refinance certain debt in Q4 2016, subject to market conditions. It estimated approximately $130M of charges based on then-current conditions; actual costs could vary. Management said cash, operating cash flow and credit facilities should be sufficient for anticipated requirements and obligations.
- The company announced a planned 1.1-billion-pound-per-year HDPE plant at La Porte, Texas, with expected startup in 2019. It was also exploring alternatives for the Houston refinery, including a possible sale; no sale decision had been made.
- Inventory price exposure remains relevant: $2.6B of the $4.0B inventory balance was identified as “at-risk” for potential valuation adjustments. The first-quarter 2016 $68M adjustment was fully reversed in Q2; sustained price declines could result in further charges.
- Environmental remediation accruals were $105M. Management said additional losses were reasonably possible but could not estimate an amount or range. The Access Industries indemnity dispute remained unresolved, with potential loss not estimable. A separate IRS executive compensation matter could result in company liability from zero to $165M.
- The EPA issued a notice concerning alleged excess-sulfur fuel production and sulfur-credit retirement at the Houston refinery; the company reported a tentative settlement and expected documentation in Q4 2016. Management also cited commodity-price volatility, facility outages, competition, regulatory changes, tax developments, and financing conditions as risks.
Key facts for investors to verify
- Whether planned turnarounds conclude as expected and refinery throughput and reliability recover from outages.
- Whether margins and volumes in O&P-Americas, I&D, and Refining stabilize, and how durable O&P-EAI’s improved spreads prove to be.
- Actual Q4 refinancing costs versus the estimated $130M, and the effect of higher debt on interest expense and liquidity.
- Whether inventory prices trigger additional valuation charges, given the $2.6B of inventory identified as at-risk.
- Developments in the Access indemnity dispute, the IRS 409A matter, environmental remediation exposure, and the EPA settlement.
- Capital spending, buybacks, dividends, and progress on the La Porte HDPE project and any Houston refinery decision.