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LyondellBasell Industries N.V. (LYB)·Q3 2014 Earnings Summary

Executive Summary

  • Record quarter: income from continuing operations of $1.26B and diluted EPS of $2.46; EBITDA topped $2.0B for the first time, driven by O&P Americas’ EBITDA >$1.1B .
  • Revenue was $12.07B, up vs Q2 ($12.12B flat) and up y/y ($11.15B); net income rose to $1.26B; diluted shares fell to 512M as buybacks continued (~12M repurchased in Q3) .
  • Operational catalysts: La Porte ethylene expansion (+800M lbs/year) came online late in Q3; tight U.S. ethylene market enabled ~15% spot sales at strong prices; CEO announced retirement, succession process underway .
  • Near-term outlook: seasonal oxyfuels compression and holiday slowdown; expected benefits from La Porte capacity and initial Canadian crude via Flanagan South; crude declines may ultimately pressure margins but tight markets could delay impact .

What Went Well and What Went Wrong

What Went Well

  • O&P Americas delivered a record quarter; EBITDA rose ~$179M q/q to $1.157B, supported by ethylene price +~8¢/lb and lower NGL costs; La Porte restarted and expansion added capacity late Q3 .
  • O&P EAI improved q/q with EBITDA +$24M to $343M; advantaged feedstocks supplied ~55% of ethylene, plants ran ~95% rates, margins benefited from lower naphtha .
  • Shareholder returns remained robust: ~$1.6B in Q3 dividends and buybacks; ~12M shares repurchased; LTM FCF ~$4.3B; total debt/LTM EBITDA 0.9x .

What Went Wrong

  • Intermediates & Derivatives EBITDA fell $47M q/q to $383M on styrene margin declines (~13¢/lb y/y), unplanned outages in EO and methanol, and lower oxyfuels volumes .
  • Refining EBITDA declined $27M q/q to $110M as Maya 2-1-1 crack fell ~$2.66/bbl to $24.35/bbl and hydrodesulfurization maintenance lowered yields; exports <5% of product sales .
  • Non-cash LCM inventory charge of $45M impacted results; management flagged typical Q4 seasonal compression and potential crude-driven margin pressure ahead .

Financial Results

Headline Metrics

MetricQ3 2013Q2 2014Q3 2014
Sales and other operating revenues ($USD Millions)$11,152 $12,117 $12,066
Net income ($USD Millions)$851 $1,176 $1,257
Income from continuing operations ($USD Millions)$854 $1,173 $1,260
Diluted EPS – continuing ops ($USD)$1.51 $2.22 $2.46
Diluted share count (Millions)567 527 512
EBITDA ($USD Millions)$1,531 $1,941 $2,035

Margins (calculated from reported figures)

MetricQ3 2013Q2 2014Q3 2014
Operating income ($USD Millions)$1,207 $1,613 $1,706
Operating margin (%)10.8% (1,207/11,152) 13.3% (1,613/12,117) 14.1% (1,706/12,066)
EBITDA margin (%)13.7% (1,531/11,152) 16.0% (1,941/12,117) 16.9% (2,035/12,066)
Net income margin (%)7.6% (851/11,152) 9.7% (1,176/12,117) 10.4% (1,257/12,066)

Segment Results

SegmentMetricQ3 2013Q2 2014Q3 2014
O&P AmericasOperating income ($MM)$759 $898 $1,068
EBITDA ($MM)$841 $978 $1,157
O&P EAIOperating income ($MM)$78 $190 $223
EBITDA ($MM)$204 $319 $343
Intermediates & DerivativesOperating income ($MM)$371 $375 $321
EBITDA ($MM)$427 $430 $383
RefiningOperating income ($MM)($37) $95 $67
EBITDA ($MM)$8 $137 $110
TechnologyOperating income ($MM)$35 $56 $26
EBITDA ($MM)$52 $71 $41

KPIs and Volumes

MetricQ3 2013Q2 2014Q3 2014
O&P Americas – Ethylene produced (MM lbs)2,111 1,721 2,301
O&P Americas – PE sold (MM lbs)1,378 1,451 1,577
O&P Americas – PP sold (MM lbs)669 632 681
O&P EAI – Ethylene produced (MM lbs)984 1,024 1,039
O&P EAI – PE sold (MM lbs)1,212 1,363 1,284
O&P EAI – PP sold (MM lbs)1,612 1,707 1,633
Refining – Throughput (MBPD)250 257 264
Cash from operations ($USD Millions)$1,116 $1,797 $1,434

Guidance Changes

MetricPeriodPrevious GuidanceCurrent GuidanceChange
Tax rateFY 2014 / Q4 2014Not specified prior; general commentaryFY14 ~27%; Q4 ~28% (CFO) Provided quantified tax guidance
CapexFY 2014~$1.6B (ongoing) ~$1.6B reaffirmed Maintained
O&P Americas capacityQ4 2014 onwardLa Porte expansion expected late Q3 800M lbs/yr ethylene expansion online late Q3; benefit expected in Q4 Raised (realized capacity addition)
Refining crude slateQ4 2014Anticipated Flanagan South completion late Q3/early Q4 Expect first Canadian crude via Flanagan South in Q4; target 30–35% Canadian over time Directional improvement
Seasonal impactsQ4 2014Typical seasonal patterns Expect oxyfuels margin compression and slower polyolefin demand around holidays Maintained (seasonality)
DividendsQ3/Q4 2014Interim dividend $0.70 per share Regular dividend ~$0.70 declared in Q3; continued returns Maintained

Earnings Call Themes & Trends

TopicQ1 2014 (Prev-2)Q2 2014 (Prev-1)Q3 2014 (Current)Trend
U.S. feedstock advantage (NGL/ethane)Abundant NGLs; ethane tracks natgas; planning La Porte turnaround Ethane prices fell; advantage supports margins Continued advantage; ethane accounted for ~75% of ethylene production; tight markets Stable/positive
European advantaged feedstock~35% advantaged cracking; improving margins ~55% advantaged feedstocks; ~95% rates ~55% advantaged feedstocks; ~95% rates; margin tailwind from lower naphtha Improving execution
Oxyfuels seasonalityWeak in Q1; expected improvement Seasonal Q2 improvement Anticipated Q4 seasonal compression, though early Oct stable Seasonal downtrend into Q4
Refining slate & spreadsCoker maintenance; Maya 2-1-1 ~$28.26/bbl Maya 2-1-1 ~$27.01/bbl; throughput 257 MBPD; Canadian ~25% Maya 2-1-1 ~$24.35/bbl; throughput 264 MBPD; Canadian ~25%; Flanagan South expected Q4 Mixed: spreads lower, slate improving
Capacity expansionsMatagorda +200M lbs PE; permits for Corpus; La Porte prep La Porte restart delay; expansion expected late Q3 La Porte +800M lbs online late Q3; Channelview +550M lbs eval (2017); PO/TBA greenfield (2019) Accelerating realization
Macro oil priceNot highlightedNot highlightedEarly-Q4 crude decline noted; margins may ultimately compress; tightness delays impact Emerging headwind

Management Commentary

  • “We are pleased to deliver a second consecutive quarter of record earnings… for the first time, EBITDA exceeded $2 billion. Our Olefins and Polyolefins- Americas segment generated EBITDA in excess of $1.1 billion during the quarter.” — CEO Jim Gallogly .
  • “Our fourth quarter results should be favorably impacted by the new La Porte ethylene capacity… However, we historically experience margin compression in products such as oxyfuels in winter months and slower polyolefin demand around the holiday season.” — CEO Jim Gallogly .
  • “During the quarter we introduced $45 million non-cash lower of cost to market inventory charge… Capital expenditure remains consistent with our full year guidance of approximately $1.6 billion.” — CFO Karyn Ovelmen .
  • “We plan to deliver [a] new Gulf Coast PO/TBA plant by 2019… increase our own PO capacity ~35%… [Channelview] adds another 550 million pounds per year ethylene capacity in 2017.” — CEO Jim Gallogly .

Q&A Highlights

  • Oil price and margin sensitivity: Management expects lower crude to ultimately pressure margins but tight supply-demand is delaying impact; rule-of-thumb cited for naphtha-based ethylene pricing versus WTI with ongoing U.S. tightness and strong spot ethylene .
  • Demand and destocking: Customer inventories viewed as lean; minimal evidence of destocking despite oil decline; strong U.S./Europe order books .
  • Tax, interest, and financing: Q3 tax rate ~25.5% given mix; FY14 ~27% and Q4 ~28%; lower interest expense aided by floating swaps and securities income; initiated commercial paper program up to $2B .
  • Refining slate: Expect first Canadian crude via Flanagan South in Q4; Canadian expected 30–35% of slate over time, supporting margins .
  • Spot ethylene and flexibility: ~15% ethylene sold at spot in Q3; metathesis unit and operational flexibility allowed capture of strong pricing .

Estimates Context

  • S&P Global consensus for Q3 2014 EPS, revenue, and EBITDA could not be retrieved due to SPGI daily request limit; therefore, comparison to Wall Street consensus is unavailable at this time (Values retrieved from S&P Global unavailable).
  • Given record results and segment outperformance, estimate models may need to reflect: higher O&P Americas EBITDA from ethylene tightness; La Porte capacity uplift starting Q4; seasonal oxyfuels compression; updated tax rate trajectory .

Key Takeaways for Investors

  • O&P Americas strength is the core driver; tight ethylene markets, lower NGL costs, and capacity addition should support Q4, though crude declines pose medium-term margin risk .
  • European execution continues to improve via advantaged feedstock and high utilization (~95%); watch winter feedstock mix shift back toward naphtha .
  • I&D volatility tied to styrene/benzene and plant reliability; planned methanol/PO/TBA maintenance and the 2019 PO/TBA project are key for medium-term margin normalization and growth .
  • Refining spreads dipped, but throughput and Canadian crude mix should support margins into Q4; monitor Flanagan South ramp and RIN costs .
  • Capital returns remain compelling: LTM FCF ~$4.3B; leverage low (total debt/LTM EBITDA 0.9x); continued buybacks/dividends provide downside support .
  • Near-term trading: Positive bias from record results and La Porte uplift; caution on seasonal oxyfuels and any rapid crude-driven margin resets; CEO transition appears orderly .
  • Medium-term thesis: Early-mover capacity expansions (La Porte, Channelview, Corpus) and PO/TBA project underpin structural earnings power in advantaged U.S. petrochemicals .