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LyondellBasell Industries N.V. (LYB)

February 20, 2013 2:10 pm ET

Executives

Sergey Vasnetsov - Senior Vice President of Strategic Planning & Transactions

Analysts

Duffy Fischer - Barclays Capital, Research Division

Charles N. Neivert - Dahlman Rose & Company, LLC, Research Division

Duffy Fischer - Barclays Capital, Research Division

Okay. We'll go ahead and kick off the second of the chemical series here with LyondellBasell, where we have the Senior Vice President for Strategic Planning and Transaction, Sergey Vasnetsov; and the Head of IR, Doug Pike, with us today. Again, we'll roll through the same 6 questions like we did in the previous one. And like you're seeing in most of these, again, I think it's kind of interesting just to go through and look -- so again, for those who haven't been here, you've got the keypads in front of you, I'll read out the question, you'll basically 6 seconds to answer those and then, we'll come and jump into the Q&A specifically with Lyondell in a few minutes. So just first question is, do you currently own Lyondell? And you've got 4 choices there.

[Voting]

Duffy Fischer - Barclays Capital, Research Division

Oh, that's bigger than it should be. All right, question number two, is your general bias towards the stock right now positive, negative or neutral?

[Voting]

Duffy Fischer - Barclays Capital, Research Division

All right, that's looking a little better. We've got some potential buyers, I guess. Question number three. In your opinion, through the cycle EPS growth for Lyondell will be: above peers, in line with peers or below peers?

[Voting]

Duffy Fischer - Barclays Capital, Research Division

All right, fourth question. In your opinion, what should LyondellBasell do with the excess cash?

[Voting]

Duffy Fischer - Barclays Capital, Research Division

All right. Number five, in your opinion, on what multiple of 2013 earnings should LyondellBasell trade?

[Voting]

Duffy Fischer - Barclays Capital, Research Division

And then, the last one, what do you see as the most significant investment issue for LyondellBasell?

[Voting]

Question-and-Answer Session

Duffy Fischer - Barclays Capital, Research Division

Terrific. Okay. So again, who we have with us today, LyondellBasell, one of the largest petrochemical companies, certainly, in the Americas and in the world today. Just been a fantastic story over the last 4 years. Many of you, I know I've followed it. They went through a bankruptcy process, brought in new management and have, in my mind, upgraded the culture and the asset operations, probably more significantly than any company I've seen upgrade in my career, a testament to the 2 guys sitting in front of you and the whole management team at LyondellBasell. So the results have certainly been there, not only with the restructuring and the management actions but also with the feedstock situation that's moved in their favor. And you can say all this has happened even while chemicals has kind of been in a global trough if you look at operating rates. So just been one of the better stories within the chemical space over the last couple of years. And as I look at it, the future is pretty darn bright as well for these guys. So with that, maybe what we can do, Sergey, for some of those who aren't as familiar with the company, just kind of level set the core businesses within Lyondell, kind of, what really drives the earnings, the EBITDA, the profitability, the cash flow within Lyondell today?

Sergey Vasnetsov

Well, we have 5 reported segments for the company of different sizes. All important to us in their own right. They are in different phases of the cycle. Starting from the biggest one by profits is North American Olefins & Polymers. That's where we have 6 crackers that are making ethylene, propylene and other products in the U.S. supported by polymer units downstream. This unit contributes about half of our profits in the past year and continues to grow very strong. Second is a similar structured unit based in Europe, Middle East and Asia, called European, International and Asian operations. Also making ethylene, propylene, polyethylene, propylene, key commodity plastics and producing both on fully-owned plants and also some joint venture facilities we have around the world. That business had been under a little bit more pressure given the global trough that you described, Duffy. And we are doing significant self-help improvement there and I'll talk about this a little bit later. Third business is Intermediates & Derivatives, that's a platform based on advanced technology, a very large scale we have in propylene oxide and some other derivatives. Very strong profitability helped by virtually every segment of that unit. It's quite diverse in its nature, it's more downstream, it's intermediate business performing very well for us. Our Houston refinery is a single asset based around Houston. Heavy refinery, in general, and has been performing quite well over the past couple of years and they to be somewhat more volatile given the spreads that we have between crude oil and refined products. Hence, the smallest units, but it's very important to us is our technology, in which it includes catalysts and licensing and this is where the fruits of our engineers and scientists become available to the rest of the world not only to our own, and so it has been very steady, very high profitability, very high return on assets product for us.

Duffy Fischer - Barclays Capital, Research Division

And then, to just to jump back to the largest, the OPs America, couple of drivers of the profitability in there. One, competitors are buying products based off of high-priced oil. You obviously get to take advantage of natural gas in North America. How do we think about how much money that segment is making just from producing product versus how much of it is in arbitrage between that natural gas and that oil? And then, as you look at over the next 3 to 5 years, how do you see the scenarios playing out and maybe, some of the probabilities of what happens to that ratio of oil and gas and then, within that natural gas, kind of the components that are important to you, the ethane and the propane?

Sergey Vasnetsov

Well, profitability of North American assets, if you take a look at the -- Lyondell's history, in the past 15, 20 years, seen that at the lower level in the past because at that time, our natural gas and oil were rough in parity and therefore, profits made by this unit were directly proportional to what phase of the cycle you were in. A particular cycle was quite profitable making, at that time, probably about $1.5 billion at the trough of the cycle, so it was less profitable. Currently, it makes more than double of the peak, previously, and we're still not at the peak yet. So what are the drivers there? Well, a couple of reasons. Fundamentally, shale gas opened up the arbitrage that we're seeing between ethylene propane, which is priced locally and globally priced to oil-based competitors who define their global selling price. So this certainly helped us and other people in the industry. Secondly, for the past 3 years, the company spends money and efforts to refurbish and rebuild the core 6 crackers we have in this country and as a result of that, we improved our operability and efficiency quite significantly. You might recall that for the past 6 months, all these 6 units have been running flat out, more than 100% of their capacity, and that's a fairly unique position in the industry. We certainly hope to maintain it at this level, that's well above what our respective peers are running in the United States. And third element of that is our flexibility and some unique features we have in our portfolio. We are able to switch within different feedstocks, it depends on the relative pricing. We are also able to engage, periodically, our so-called flex units, which takes ethylene into propylene if market conditions allow to do so and lastly, combined with good cost management and excellent operations there, I think we're running on full cylinders, given current market conditions. However, we believe that's within our upcoming cyclical up-cycle, global petrochemical industry, and those plants as well, with meaningful upside year as prices will increase.

Duffy Fischer - Barclays Capital, Research Division

Okay. And then, just a follow on to that. How do you see the global ethylene, propylene cycle playing out over the next 3 to 4 to 5 years and then, what effect do you think the build-out of these new plants that have been announced in the U.S. will have on that cycle?

Sergey Vasnetsov

Well, global chemical cycles typically coincide with global economic cycle, not surprisingly. And so they're driven by demand factors, which are driven by economy. It's also driven by supply factors, which are driven by new capacity additions by the different players around the world. But clearly, demand fluctuations are big enough to basically define the troughs and the peaks. Therefore, we have the history of the previous 5 to 6 cycles to look at. And so historically, typically, the delta of profitability for a chemical cracker was around 10 percentage of EBITDA points between the trough and the peak. If you look at the results of the 2012, you could say that U.S. is in a stronghold, defined by shale gas, Europe and Asia are at the trough of the cycle, which is defined as the profitability close to break-even level. We believe that this upside could become available to the global petrochemical industry over the next few years as we have demand growth continue to tighten up supply-demand balance. When exactly this peak will happen, we're -- very difficult to predict. Partially, it's driven by the economy, the growth rates and its own peak in the future years, but I think the direction is pretty clear, we're going up. And in terms of shale gas, I think we have significant advantage there today, not only in our core polymers division but also, of course, in our I&D and even to some degree, in the Refinery business. So shale gas plays a significant role in the fortune that our company just is enjoying right now and chemical cycle [indiscernible] .

Duffy Fischer - Barclays Capital, Research Division

Okay. And then, let's just assume we go through a normal chemical cycle, 2016 feels like typical chemical peaks and we've got a number of announced crackers here in the U.S. Exxon, Dow, CP. And we can stage them in different ways, but let's say, between '17 and '19, 5 chemical crackers in the U.S. come up, do those get feathered in or does that end the cycle? How do you think about that capacity coming into the world balance, what that will mean for operating rates and profitability for, again, more for the high-cost players, that'll effect you guys as well?

Sergey Vasnetsov

Well, you have to remember this, globally, demand for ethylene is growing at a rate of about, let's say, 4% to 5% a year. So that's roughly 4 to 5 new units are required to be built somewhere around the world. So the 5 units you mentioned in the U.S., first of all, would give them a different degree of likelihood and probability in timing, and the startup date is not going happen all at the same time. But probably, 3 of them could happen in 2017, a couple others could be somewhat delayed given where they are in their overall development process. And so those 5 units will represent essentially 1 year of demand growth for the globe. Clearly, U.S. is much part of the global system and we participate actively in trade, both ourselves and the industry in general. So we're not escalated by any means and so therefore, you can think of -- that 1 year of growth will come in the U.S. We don't see it as a cycle-defining moment if I were to look out 4, 5, 7 years I would say, it's economic cycle that will dictate when the peak is, since I'm not sure what your own economist strategists view as that far out. I think it's quite uncertain, at this time, as to when that economic peak might be.

Duffy Fischer - Barclays Capital, Research Division

Fair enough. And then, just to go back to the actual NGLs. When you look at the various NGLs in the bucket, the ethane and propane, that's important for you. Both on kind of a near-term review and then, maybe a medium term view, how do you see those trading relative to natural gas in the U.S.?

Sergey Vasnetsov

Well, the NGLs which are important to us would include ethane, propane and butane. And so they each play a role in different parts of our portfolio. Clearly, overall, ethane is the most important. But the 2 other should not be ignored as well. So in terms of shale gas developments, we draw NGLs from all over the country and they get supplied to the core production centers around Texas and Louisiana for the U.S. and for us specifically in Texas, by a variety of pipeline. So to a degree, we are ambivalent as to where the ethane is coming from as long as it overall becomes available for the chemical industry and for us to be used. We certainly see that those NGLs and most specifically, ethane, came down to its fuel parity value recently and it remains quite a bit, a favorable supply from our point of view, oversupplied from a suppliers point of view. And so we see this situation continue for a number of years given the profile of shale gas developments and also shift towards -- from dry gas towards wet gas and/or oil fields where these heavy gas becomes available. We modeled this internally for several years out quite favorably. Therefore, it means that generally speaking, ethane should be trading around the parity value with fuel -- or with natural gas. Having said that, of course, it's somewhat volatile, so it could go up slightly, it could go back to parity, it depends on what the incremental month or week supply might look like. But I think it should be at -- quite at the bench level.

Duffy Fischer - Barclays Capital, Research Division

Okay. And then, if you look over the last couple of years, you guys have had a pretty prodigious cash flow generation capability. I think most analysts, as you look forward, would project that, that continues for the next -- as far out as we can really see. That, coupled with the fact that your space is extremely advantaged, so others are putting capital in, people are talking about M&A. When you look through kind of the uses and the priorities for your cash flow, how would you handicap those or how do you look at the those going forward?

Sergey Vasnetsov

Oh, indeed, the company was able to generate about $10 billion of free cash flow for the past 2.5 years since the emergence. And so I really would like to call it discretionary rather than excess. Excess implies something wrong with it and you need to get rid of it. We surely don't see it this way, but discretionary means a capability to deploy for the benefit of the shareholders and the company. But what we've done so far is that the company paid $5.3 billion of dividends, both regular quarterly dividend, which could be an increase in rates and also, special dividends twice in 2011 and '12 each. Going forward, we see that we have additional tools becoming available to us for deployment of this discretionary cash and those would be share buybacks. And so given our valuation, I think, it's quite an important avenue for us, to have it available. In addition to that, we also have M&A and capital projects. Certainly, all those options compete amongst themselves for cash the company has, and so we will make decisions where deployment depends on the attractiveness, economic attractiveness of returns, risk factors, opportunity factors, to act upon something -- some more within your control, some other things require certain other factors for it to get aligned. So hopefully, what -- you've seen us to be a good source of cash, shareholder cash for the past several years. We are disciplined and stable -- with the company and it will continue just will take more diversified forms of expression.

Duffy Fischer - Barclays Capital, Research Division

Okay. And then, one of the businesses that you have that I actually like a lot, I&D. Can you kind of walk through the propylene oxide story? I think it gets lost a lot of times in the Lyondell portfolio because people are so focused on the U.S. shale gas and the ethane or ethane and ethylene. Walk through how propylene oxide works, the different technologies going from PO/SM, now where MTBE by-product is favorable? And what the growth opportunities are there and kind of who you might butt heads with as you're trying to grow over the next several years in that space?

Sergey Vasnetsov

Indeed, I&D, probably doesn't get as much attention because that's a business that is very profitable but also at the same time, very stable and a natural attention of shareholders is typically either a business that's very volatile and so we have several of those volatile businesses as well. It is still surprising that it gets lost because it has more than $1 billion of EBITDA. So it's a very large business, but we are a large company, so I guess, several of our businesses, as I said, doesn't get as much attention. Lyondell has been one of the global leaders in this area for many years, going back to the legacy of ARCO Chemical where this process was invented. And so up to now, to the current day, we have a number -- share a #1 and #2 position in this product chain globally, along with Dow Chemical. We produce propylene oxides from 2 different processes, one of them is involves co-product of styrene, and another one is MTBE. Styrene goes into a variety of durable applications, polystyrene, et cetera and MTBE goes predominantly to the fuel market, to the gasoline market. It's a very high-octane component and therefore, it's highly valuable. That's part of the business we've been doing exceptionally well recently and given that octane seem to be short globally, we expect that to continue. Propylene oxide itself is used in durable products. So it's a furniture insulation, automotive construction of different kinds, so it's a durable -- a sturdy and flexible forms of different kinds. So it's quality of life product that continues to grow comfortably above the GDP, run rate and we are in excellent position in this business in all regions of the world. Specifically, in China, we started our joint venture with Sinopec subsidiary in late 2009, and that particular plant was sold out within 5 months of operations. So it enjoys up to the current date a very strong operational capability, continues to pay down debt and will contribute dividends to us going forward. We are currently pursuing an idea of another joint venture this time with, also with Sinopec, the same partner, which will be focused on fewer TBA. So it will be pursuing the MTBE product as a by-product, and that combination is very profitable -- very profitable. We think China is a great market for that, both for propylene oxide and for MTBE, given the -- our partner, Sinopec, which has a major dominant local distributor of gasoline, I think, it's the right choice for us. So far, those negotiations are proceeding quite well, and so we look forward to completing this plant. And in terms of global competition, I think besides Dow, as I already mentioned, it's Shell and BASF, are all very strong, competent companies who have found that the propylene oxide market is very competitive. But at the same time, all people who have good quality, scale and cost in mind, it's a very profitable area.

Duffy Fischer - Barclays Capital, Research Division

And you mentioned that there are some pretty significant technology there. Does that technology look like it's still ring fenced at this point, I mean, a lot of times that's what has bitten different chemical streams in the butt. You thought you had or you did have something that was good, somebody back-engineered it, the Chinese producer and then, all of a sudden, you had more entrants coming in. How strong do you feel about the technology protection MTO going forward?

Sergey Vasnetsov

Well, so far we haven't seen evidence of that concern that you expressed, and certainly, I've seen it happen in some other product areas. We haven't seen it taken place in PO/TBA or PO/SM for that matter. The few companies that have this technology, they typically do not license it out, they typically keep it, either to themselves, to joint ventures. So that allows -- it takes us the highest degree of -- technology control, as well as marketing control. We feel strongly that Sinopec is -- the best partner that I can think about is if you wanted to build in China -- and it's important for us to build China because that's where the market is, both for MTBE and propylene oxide.

Duffy Fischer - Barclays Capital, Research Division

Right. Okay. And then, if you go back, you guys had an Investor Meeting in late fall of 2011 where you laid out a number of capital projects that, at that time, had roughly a 2-year payback period, which, if you just reverse-engineer the math, 50% return on capital, very, very nice projects relative to what most companies had available. One, can you just kind of update us on the progression of those capital projects on time, on budget; does it look like we're going to be able to hit those numbers? And then two, just given the economics of the market today, how would those projects look today versus the assumptions that you had in the market in 2011 when you made them?

Sergey Vasnetsov

Well, since December of '11 meeting, we continue to update you on this project so hopefully, some of this will be reinforcement, what you've heard already before. And also, on March 13, just in about 1 month, we'll have another Investor Day in New York City, so we certainly encourage you to participate either in person or via webcast. And we'll give you more specific updates, project by project, towards our expectation of capital, costs and returns and how it all fits together. But -- so to give you a brief summary, we identified a few growth projects in the United States of scale and those all incremental large scale, de-bottlenecks which involve our most profitable businesses, which are ethylene crackers. We also identified a number of quick payback of projects, which are small scale that we typically talk about in a broader audience. Just -- there are literally dozens of them and they typically enjoy even stronger profitability than the ratio that you have mentioned. As a company, we didn't have enough funds in the previous decades to pursue some of the projects, so we perhaps have more opportunities as compared to our peers already have exercised those options in the past. So those plants are moving along quite nicely. I think the larger projects naturally depends on obtaining a permit from the environmental authorities and we are in the process of pursuing that, so far there are no delays. But those things aren't done until we have them, but still well on track. In addition to the projects already announced, we identified a few other expansions of sites that we plan to pursue in the United States, as well, linked to the U.S. shale gas and ethane-based ethylene. So they have comparably attractive economics for us. That's where the bulk of our growth capital is being spent in the United States. Just exceptions of that -- few ones are, therefore, isn't mentioned, one of them is the project in Europe where we are expanding significant amount of capacity to purify and produce pure butadiene, which has very high value, particularly in Europe. And another different project is the [indiscernible], a methanol facility which is based in Houston area and so that's a very attractive project for us as well. And that reports to I&D, Intermediates & Derivatives segment. In terms of where the economics is today, typically, when we look at these projects, we look at the cycle-through economics for the next 15 years, so actually captures 2 chemical cycles going forward. For simplicity of communication, we have provided to you the view of what those returns would look like when we cycle our first year economics and that's a number which is roughly 2 years payback. If you look, by the -- 2012 actual results in those respective business lines, economics looked even better. Once again, we certainly build them not for a given year, but to run for a long time, but nonetheless, you should have possible buyback.

Duffy Fischer - Barclays Capital, Research Division

Right. Okay. And then, your stock has had a very nice run, almost any time during...

Sergey Vasnetsov

There's a question to Doug.

Duffy Fischer - Barclays Capital, Research Division

Yes. But when you look at it, do you think there are things that investors are still missing or underestimating that either the earnings power or the quality within the LyondellBasell portfolio?

Sergey Vasnetsov

All right. Well, Doug is talking to you on a regular basis on a particular release. One, but from what we have discussed, I think the -- perhaps, different people have different views, that's what makes the market, of course, but generally speaking, we're seeing that the market is not build through and priced in the chemical up-cycle, which is ahead of us, I believe. And secondly, despite strong cash flow and I think respectable returns that our shareholders have enjoyed, free cash flow value, to be accumulated over the next several years, is not fully captured in analyst models or company evaluation. And so we joked, as we have naphtha crackers, we have ethane furnaces, we do not have cash furnace in Houston. We do not burn cash. We have not done it in the past. We have no intention to do it in the future and so hopefully, what you'll see is that -- the values of cash, you can calculate from EBITDA all the way to the bottom line, is frankly -- by far the most important thing to us, and I think to you as well, because that's what makes all other steps possible.

Duffy Fischer - Barclays Capital, Research Division

And then, maybe just one on the downside, again, when the stock has run this far, this high, what are some of the things when you look at it, that can go wrong with the story? What are some of the things that could disappoint investors as you look out over the next several years?

Sergey Vasnetsov

Well, this is probably not something that investors focus on very closely, but we do. Excellent operational safety is supreme -- are very important to us. And I'm saying -- it's not that we had a bad safety record, we actually have a terrific safety record, but it's that -- those things you never take for granted and you see us working on it very hard because when you mixing chemicals at very high pressure, at very high temperatures things could go wrong, as you've seen them periodically at other companies. So excellent safety in operations is the key, that's absolutely a foundation for us. The second fact is industry conditions. So clearly, shale gas give a significantly new life to the U.S. petrochemical industry and as dictated by delta between the global price of oil and the local price for ethane, propane, we believe that ethane-propane balance remains attractive as I discussed earlier. The price of oil is clearly out of our control and out of our predictability, but it seems like it's, globally, has been pretty stable a little of Brent between $100 to $115 per barrel and that's a range where we're comfortable with and we'll even work with. So should oil price correct -- continue coming on downside consistently for a long period of time, that would impact our profitability margins. That follows logically. However, if you look at supply-demand globally, if you look at the budgets assumptions for Saudi Arabia, some other Middle Eastern countries and Russia, they're all looking for oil to be in high-$70s, $80s to barrel to balance their budgets. And so I think it suggests to you that absent macroeconomic shocks of large scale like in 2009, that's probably where oil prices will be. In terms of natural gas pricing by itself, it has been fluctuating between $250 to $450. Broadly speaking, I think we're comfortable with that range, I think it provides enough economic incentive for the upstream producers to continue to drill and explore for wet gas, and that's what will benefit the petrochemical industry.

Duffy Fischer - Barclays Capital, Research Division

Right. And then, maybe, if we just look a little bit near-term propylene, obviously, had a very nice price hike in January. A lot of people think February is going to be nice and maybe, even March. Propylene has kind of spiked each of the last 2 years previously, about that time, whether it was January, February, then kind of trailed off as we got to May. Does this year -- is there reason to think that this year will be different, that maybe supply-demand kind of through the year balance is a little bit different? Or is this just kind of becoming a norm for a seasonal pattern, maybe, coming into the cracker turnaround season and stuff like that? How do you think about propylene, both seasonally and where we are just supply-demand for the year versus the past couple of years?

Sergey Vasnetsov

Right. Duffy, I think there is a difference. With propylene both a seasonal product, to a degree, but also, it's a product which tends to go more into durable markets. So the big contrast versus ethylene. Ethylene tends to be used in nondurables, therefore, the underlying demand for ethylene is pretty steady. Propylene could be used in construction, some durable automotive applications, et cetera. Therefore, you tend to, then, to have more volatility in apparent demand and more volatility in underlying demand. And the difference between the 2 demands is, of course, inventory fluctuations. So I'm not sure that's how we'll be drawing an analogy against 2012 directly. It's a good starting point for a discussion, but I think the key question you need to ask, whether you expect global economy and specifically, European economy, to be as weak in 2013? China economy to be as weak in '13 as compared to '12? And we're not economists and so we don't have economists on staff but on reading a variety of industry reports, it seems like the -- that China should be sequentially improving; Europe, hopefully, also sequentially improving although slightly; U.S., certainly, is enjoying revival in the construction cycle, that should be helpful to the product line, both in propylene and propylene oxide. But importantly, for us. So therefore

[Audio Gap]

I think it's early to call whether there going to be a repeat of that or not. We hope to see better demand for propylene because that's really a variable part. Supply is pretty steady.

Duffy Fischer - Barclays Capital, Research Division

All right. Okay. And then, if we just roll out over to ethylene, again, ethylene, maybe on the back of propylene, maybe just on its own, but had been decently strong. How do you see the near-term playing out for ethylene and its derivatives especially as they come out of the U.S.?

Sergey Vasnetsov

I think the supply and demand for ethylene in the U.S. had been quite strong. We have been running our crackers flat out and so it's -- there's basically, every volume we could produce, we can find very viable, profitable outlet in the market to sell it, whether it's internally within the country or it goes to exports. We think that the ethylene chain is in pretty good shape. We think that global propylene butadiene should be improving with the durable demand coming back, that -- it should help, notably, the European operations. And then, beyond that, when we're thinking about ethylene, of course, it's a regional product, globally-connected, but in the meantime, U.S. is doing very well; Europe is, generally speaking, runs at low-operational rate and the same is true for Asia and that's why we say that even though U.S. is a great place to be globally, ethylene, still is a profitable cycle.

Duffy Fischer - Barclays Capital, Research Division

Okay. And then, if you look at your Refining business, couple converging forces, I guess. One, when the Keystone pipeline finally comes in, we'll be able to get some more Canadian crude down, heavy crude should help your ability to buy cheaper. Two, as we get into the lighter, sweeter shale oils in the U.S., that pushes the skew kind of against you guys a little bit. Those and any other forces, I guess, how do you see your Refining business competitively today versus, maybe, 3 years from now versus 5 years from now with these changes coming down the pike?

Sergey Vasnetsov

Well, if you look at our core of the -- of the Refinery, I think it's only getting better for the past few years, because our operating rates effective operating rates improved from mid-80s to high-90s. And certainly, it's a pretty big accomplishment because high operating rates is generally good. And for us, we just felt this excellent hardware just needed to be run better. And so we got significantly -- refined it to the stage where we'd like it to be, there were few more steps we need to do this year and then, operationally, we'll be done. In terms of margins, of course, margins will depend on industry supply-demand for a given crude. And in 2011, we had the opportunity to buy some advantageous crude supply since the Refinery made a very strong year in terms of profitability. 2012 was somewhat more challenging because those opportunities did not present themselves. Going forward, we believe that, indeed, heavy crude oil from Canada would be quite helpful, both to Canadian producers of ethylene and also to American customers such as ourselves because our Refinery are made to run that kind of crude oil. In the meantime, we'll optimize in the portfolio of different fractions of crude oil coming to us. We shift a little bit more towards light crude because it's quite advantageous when priced in the U.S. But this Refinery was really made to run heavy crude and so therefore, we hope that whether the Keystone pipeline or railroad delivery or some other ways that will connect Canadian tar sands with the U.S. gasoline market, would be beneficial for ourselves and heavy refineries like ourselves.

Duffy Fischer - Barclays Capital, Research Division

And then, I'll just ask one more question and we can kind of go to the audience. So if the mic runners are around. So I guess, my last one, acquisitions. As you look out, one of the purviews of your role, the history of the chemical industry is, commodity guys, they generally look downstream, whether SABIC into GE Plastics or BASF, several decades ago, going downstream, Dow with Rohm and Haas, Westlake with Georgia Gulf, so that's kind of been the trend. When you look at it, one, what do you think of those examples vis-à-vis how you look at the footprint of Lyondell? Where might we find opportunity for acquisitions and what should investors expect from Lyondell on that front over the next several years?

Sergey Vasnetsov

Okay. Well, if -- we'll just start with a few examples that you mentioned. SABIC to go downstream was in the interest of both the company and the kingdom. And so they wanted to create more jobs, they wanted to have more diversified technology and presence in the area to upgrade their feedstocks with a higher value and so that's what drove the acquisition, I believe. BASF is a completely different story. Commodity chemicals do not enjoy low cost production in Europe, therefore, BASF, being significantly a European company, naturally shifted more towards specialties where they have more competitive advantage. I think I'll skip the Dow Chemical, if you don't mind, I think their story's pretty well known. But if it comes to us, for LyondellBasell, we understand the company we are and we understand the company we're not. And so I think it's really important to recognize what are the strengths that you have, both in terms of management and people, engineers and your assets. The center of gravity of the company is very much rooted in the commodity and intermediates space, that's who we are, that's who we want to be. I think I would take you back to a very early presentation that Jim Gallogly made when he became the CEO of this company, that's probably about 3 years by now, that we are not trying to skip commodity, we're trying to become the best commodity company globally. And so far, for the past 3 years, I think we've made significant strides to that. We're not there yet, but significant improvements both on an absolute and relative basis. That's really what's -- it's important to us, it's what we want to be. We believe that the timing is very fortunate this decade is terrific for commodity chemical producers. So we don't need to escape our past for we to make our present and future brighter and better. And so now we have some interesting opportunities and interesting challenges for deploying this discretionary cash, that's a good problem to have.

Duffy Fischer - Barclays Capital, Research Division

Okay. Any questions for Sergey and Lyondell?

Charles N. Neivert - Dahlman Rose & Company, LLC, Research Division

Is the capital structure of this company longer-term debt-to-EBITDA or debt to total cap, or what are some of the financial variables? When you're in a highly cyclical industry, you go back to other industries, they always had, at some point, started holding onto cash or they started being very defensive. So I wonder what your thoughts are on longer-term capital structure management?

Sergey Vasnetsov

Okay. Well, Charlie, we continue to evolve as a company and have already changed significantly for the past couple of years. I think going forward, next couple of years, we'll change -- evolve again. And then, one of the important measures of this evolution was the transition from a bankrupt company to a high-yield company, to a high-grade company. So currently, as you well know, we spent fairly close to being a full-scale investment grade company. We're not there yet. We have been upgraded for the full investment grade by Moody's, but not yet by S&P. On a corporate level and on -- sorry, on bond level. So I think that step, hopefully, will happen sometime soon and when it does, it's said to accompany with other different credit profile as well. So probably that time would be more appropriate for us to say what would be our long-term view. Currently, what you see us as having quite a conservative balance sheet, with $4.3 billion of gross debt, net debt being lower and fluctuating, of course, as the cash builds outs and as cash gets distributed. But in the meantime, with this level of debt, we're pretty comfortable, we know it's very conservative. We talked about the trough of the cycle a few times and we stand -- that's where we are at now, that's where we might be at some point in the future. When you run a commodity business with Refinery business combined, your best defense from the trough of the cycle is your conservative balance sheet. So to us, it's -- it presents significant core value. We intend to keep it this way, but say, if you don't mind, the answer -- a specific answer to your question will evolve, hopefully, over a short period of time.

Unknown Analyst

I have a more pedestrian question for you, Sergey, too. One, do you guys think -- there is an announced price increases for polyethylene for February, I think it's $0.04, but you know better than I do. How do you see it right now in terms of what's the chance of it sticking to get half of it, et cetera, just to give us your view on that, if you might?

Sergey Vasnetsov

Maybe I'll repeat the question if you didn't have a chance to hear. So what Walt was asking is that, what are the chances for the February polyethylene price increase in the U.S. to take place and what's your view in the near-term future. Well, I would remind you that the prices went up by $0.05 per pound in the month of January before that and there are 2 price increases on the table, each for $0.04 for February and March. We see that the demand for polyethylene in the United States is quite strong. Seasonally, coming up into the strong period of time, typically, between February and May. And capacity utilization is high, the industry is quite robust. So we feel that the chances for the price increase are quite good. I would not have any guess, particularly, in this audience and you can imagine why. But I think the chances are pretty good.

Unknown Analyst

And the second question, from where you guys sit, again, I'm not looking for a forecast, economic forecast, but do you think things are a little bit better than maybe, thought at the beginning of the year? Or about where you thought or a little worse?

Sergey Vasnetsov

Well, the difference between today and our conference call time in late March -- sorry, late January, early February is that we had Chinese New Year, that's just about to finish up. And so I think, seasonally, you should see a pickup in the Chinese industrial activity and chemical demand as well. We have seen this incrementally, prices have been stabilizing, firming up in that area, in general. And that's just quoting the industry-wide sources. So I don't see some negative indicators over this period of time. There was a question asked earlier about sequestration. And so we're not in the business of supply and defense or health care as much as maybe some other industries, so for our product lines, it's probably, it's not such a big deal.

Duffy Fischer - Barclays Capital, Research Division

One last question for Lyondell? All right. Well, Sergey, Doug, thank you guys very much. Appreciate it.

Sergey Vasnetsov

Thank you.

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Source: LyondellBasell Industries NV Presents at Barclays Industrial Select Conference, Feb-20-2013 02:10 PM
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