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Sergey Vasnetsov – SVP, Strategic Planning and Transactions

LyondellBasell Industries NV (LYB) Citi Basic Materials Conference Call December 3, 2013 2:20 PM ET

Sergey Vasnetsov

Thank you, PJ. This is one of the premier chemical conferences in a year. I have known this many, many years when I was in the industry and it’s my first time – it took some time for PJ to overcome some natural competitiveness, so thank you very much, my pleasure.

It’s also notable that my presentation is in the 10-Q, very good speaker, so we just put some Enterprise Products which is the premier supplier of ethane and private NGLs for the chemical market which is very important to us. So hopefully those views would have some relevance to my presentation. [indiscernible] if I don’t say something right. So with great trepidation I am opening my presentation.

We have been a public company by now for about three and half years and we continue to be focused on making the most out of the economic and chemical cycles whatever they happen to be. Certainly currently we enjoy a very strong fundamental from the US. We are making very good results with our global I&D business. European and Asian businesses are not as strong as yet to the medium point but nonetheless it’s relatively from us and it’s never to ask and continue the most.

So just looking at our results recently, for the past several quarters you noticed a more stability now with EBITDA trends and even though we do have pronounced seasonality when our results in the first and fourth quarter are seasonally somewhat softer but not as much difference as they used to be before and the reason is that the shale gas prosperity that we already talked about earlier does bring a much more stable profit margin to our business and even though it remains commodity, it’s more stable than it has been in the past five, 10, 15 years.

This is one of the largest chemical companies and a significant portion of our profitability does come from North America olefin polymer business which is in blue line, about 65% but also we have a meaningfully large contribution from other business segments as well. So for the past period of three years, as our profit continued to grow, our fundamental position by this time is very strong. Net debt to EBITDA is about 0.3 times and gross debt of 1 times of EBITDA. Out of the $12 billion of deployed cash for the period of time, 30% was directed to CapEx, 15% to debt reduction and the remaining 55% were returned to shareholders via regular and special dividend and share buyback.

As we look at the net portfolio of our company, not all businesses are created equal. They don’t have the same economic market fundamental support and therefore our approach to managing those businesses also is different. When it comes to our O&P Americas business, the flagship of our company, we are having investment and we will continue to invest there in the near term. I will show you some more details about the project, we are taking care of them, NGL advantage we have in the country and also in the future the other cyclical advantage that will happen to the rest of the chemical industry.

Our business in Europe is chemically similar except that we don’t start from glorious US ethane and therefore their cost position on a global cost per ton are different. So our focus in Europe was to continue run the business the best possible to restructure it, to bring down some of the feedcosts and to position ourselves as a first or second quartile competitor by all major product line and we believe that by now after three years of working of it, we have accomplished that position.

In addition, that European business also has a sizable differentiated position in our specialty and intermediate chemicals polymer, catalloy, polypropylene compounds and also international joint ventures. I will talk about it a little bit later.

The R&D business, intermediates and derivative has been stable, strong proprietary technology and full advantage from natural gas advantage and that has grown to be very sizable and steady contributor to us. Refinery has been remained the most solid relatively speaking part of our business but by itself is a large chemical refinery, very competent, very well run asset, which is scalable with our market condition. And technology is smaller part, all are very, very specialty business with high ROC and very high profit margin, we enjoy strong competitive position and want to maintain our leadership.

The changes in the fundamental US feedstock and ethane cost market by now fairly well known. So just to restate, address the slide, about five years ago, natural gas and the whole price decoupled in the US and even since you can see that the delta is growing larger and larger to the point where our competitive cost position globally North America now second only to Middle East and the delta is actually not significant if you look at the delivery cost basis.

As we discussed in the previous presentation, the value there overall shale gas changes from upstream to midstream to downstream. In this case, downstream is up, chemical companies represents on the – part of the slide so that in previous decades it was mostly produces the natural gas who were enjoying the most of the economic advantage when the price was between $5 to $10 per MBTU. Later on as there was bottleneck in the midstream business which developed mostly in 2010 and ’11 and do to the more construction on front is going away. So currently we enjoy ethylene margin range from one of the cheapest cost of raw material globally, US ethane.

We can see additionally on the slide showing changes just for the past year, year and a half and indeed right now we enjoy economic which is very competitive globally and that’s shown on the right hand of the slide.

So what’s our view going forward? Well, we believe that ethane would be in plentiful supply in the foreseeable future which is on this slide showing at 2017 and number of private consultants and private companies such as enterprise confidence that leads them advantaged position will continue for quite a big longer, we would agree with the point as well but for consistency we typically show by five year time horizon from current time.

In terms of propylene global supply rate, supply demand rates, we think that it should continue to improve gradually between now and the next peak of the cycle and next peak of the cycle would be framed to – by capacity addition and also by some point recession that might have globally. So the outlook for the next several years is that quite favourable to us and I think we will continue to improve.

As a company, we certainly have taken advantage of the shale gas evolution that took place and some of the significant shift of specific line of company predecessor US based – about two-thirds focused on imported liquid sea salt and in a short period of time it’s only about four, five years shifted this mix very significantly. First of all, there was a shutdown of one of the least advantaged cracker that took place in 2009 while capacity has gone from 11 billion pounds to about 9.8 and later on we plan to increase capacity by number of debottlenecks to bring to about 11.6 billion pounds. But in this ramp up so to speak in terms of capacity and the makeup of the feedstock is very, very different. You can see that NGLs most notably ethane can’t hold that majority of our feedstock going forward and that’s the future – by early 2016 we plan to be done with all of our large ethane debottlenecks and have this front end on advantage ethane.

Local liquids now coming from Eagle Ford shale and they represent a very viable, very important feedstock for us because we make a number of by-products for products such as propylene, butadiene, benzene and they are part of our overall portfolio mix, we like to give it in the mix as well. So with the bar charts do not go blue completely, and that’s by design, we very much like it’s a green we have position as well.

As we shift gears towards Europe, we report this as one business segment and that’s how we plan to grow forward as well. But you need to be mindful with that, that EAI O&P consists of at least four probably different parts, we just recorded one financial. One part of it is light blue, fairly highly volatile commodity chemical business, predominantly in Europe and that’s traditional ethylene, propylene, olefin to the propylene. The darker blue line is comprised of by three other parts which are quite a bit less volatile and they represent global polypropylene compounding business where we prepare the much advantage for our customers in automotive, supplies, other industries that make parts that go into the [indiscernible] with also about the one Middle East and Asia joint venture which has some sustainable expansion feedstock and therefore more stable and we have certain number of premium grades of other polymers, Catalloy, Polybutene-1 where margins have been quite stable.

So when it comes to the overall European business, we started restructuring there way before some other peer and way before – difficult to arrive to Europe in the middle of 2011. Then the operator started there once we emerged from bankruptcy and as a new company now start focusing on things outside the U.S. US had the deliberate restructuring in 2008-2009, 2010 to some degree, and Europe started immediately after that. So our focus was to change the way business was located and run. We brought our management from different parts of Europe into one central office in Rotterdam. That certainly improved our operation, communication within the company, which became very important particularly for the past couple of years as prices of naphtha, ethylene and polyethylene have been very volatile and therefore a very tight coordination of efforts rather became really critical for us, and I think as seen in our results of that by outperformance of our regional competitors, hopefully this restructuring pays off.

In terms of I&D, this is a segment that’s given a little bit more attention but still is one of the less understood and less appreciated segments of our company compared to this underlying value of it. If you take a look at significant majority of the product lines we – where we particularly enjoy the benefits of highly proprietary technology or advantaged raw material feedstock both and the slide on the bottom shows that these are very time flavor where we particularly in the under-differentiated commodity businesses. The rest of the pie chart has advantage with one to another. To the right hand side, the light grey area I guess, which is about 40% of our business, and it’s represented by MTBE and ETBE. So those – from [indiscernible] going into the global gasoline chain, basically they are not for speaking in this country but outside of the US, it’s very strong couple of products and outside of the fuels we have fairly broadly represent some variety of durable and non-durable part of the business.

So for you to think about – maybe just a couple of reference points. Typically one company talked about the size of the business, they measure it in terms of sales, asset and employees and those are all – these measures have its own merits but ultimately in our view all those elements and others are ingredients of the value that this can create for the company for shareholders, which could be best captured by a definition of free cash flow.

If you look at the free cash flow of the business, it’s sizably larger than several other medium sized public peer companies have been, we are seeing day to day in terms of – pretty broadly. So therefore I&D to us is very large, very significant segment, it’s about quarter of the total EBITDA for the company but very stable and nicely growing.

As we take a look at the global cost curve, it’s a very simple representation of course, but we participate significantly in propylene oxide the TBA route and we have several plans in the U.S. and Europe. We are pursuing our idea of a joint venture in China which would import the technology, and that should be very good development for us as well.

Propylene oxide styrene monomer has been number three in the overall ranking of technology. However recently at the styrene profitability start improving, I think the pension on the low side, because they are bit more profit for the overall chain. The bottom chart shows you that the profit margin has reported by strong consultancy – take the results in the propylene oxide chain overall for us and of course, you can see that our reported profitability of the I&D segment has been quite stable.

This picture is just one of the several – coming from our recent efforts to restart methanol plant which is based in Channelview, Texas and this unit has been shut down in the past, and now it’s been refurbished and put to work. Currently that has been mechanically completed and to go in for the test and start-up phase. So we hope that this is running and contributing strongly to profitability of our company going forward. So clearly a profitability both of methanol and – has been related to opportunity for us to upgrade the value of dry gas, methane, butane towards the premium gasoline value.

Looking at our refinery business there, we have one unit by now, a very large complex refinery in system area and it performs – even the market conditions clearly the rings have been denting the profitability for us and for everybody else in the same industry. However going forward it should then from improved operational capacity, we have done a number of changes this year so far and also from greater availability of heavy crude coming from Canada. While the world is still waiting for the Keystone XL pipeline to be fruitful and eventually constructed, and so hopefully it will happen, hopefully for both Canada and US frankly but in the meantime we should benefit next year from finding and start connection which would now take the heavy Canadian crude oil from Chicago and ships to Conway and be able to deliver to our facilities [indiscernible] so that’s the development that we already started, bringing some food for us that will bring significant and more benefit by the middle of next year.

So in terms of cash deployment, as I mentioned before free cash flow per share is the single most important performance characteristics for our company internally. We recognized EBITDA reported number as well but free cash flow really captures both you as a shareholder – once you pay all the expenses both usual and unusual expenses. So what we have done is focus on the base CapEx which take care of our excellent operation capabilities and we still continue to run our crackers full as we have done for the past more than year by now. We have reduced and restructured our debt, interest costs are fairly modest at this stage. Dividends have increased to $0.60 per share a few weeks ago and by now brings it back into the target zone where we stated we’d like to be which is the top third of our public peer company.

Our growth CapEx about $750 million for each of next two years, and returns from those product should be quite front, we mentioned it earlier we typically aim at less than two years to buyback for the projects above, beyond that should be significant return of the value to shareholders.

And then in terms of discretionary opportunities, we have generated strong cash balances and we deploy them as I mentioned already earlier. So in terms of growth, as there are several elements to that extra profitability that could come to our company, some comes from operational improvement and that’s really mostly sales, doesn’t require much capital, some comes from complete [indiscernible] working on right now and then we have a number of projects in pipeline which we have not sought and identified it for you but we are working on them developing them to bring to fruition.

As a reminder, we can be quite specific with you as to the expected cost, start-up time, the contribution on EBITDA basis, based on the previous last 12 month results. Of course, the cycle itself will make this cumbersome, change in the future, I think that gives you an idea of the size of this investment. It was quite important for us early to decide we want to be fairly quick and target with our -- free cash in terms of project. The reason is that the longer you wait your free cash profile just doesn’t look good. And they can intuitively decide the course along with the time, and obviously then significantly you expect a return. Therefore if you look at the cumulative cash flow from our growth projects, we can see that by late 2014, we expect to cross there zero line which is means by the time the amount of money that we put into the business would be more than money coming out of the business.

And later on once you are currently CapEx, as you talk about the things already in construction, the ones that started over the year earlier, you start throwing up, that could bring in more and more free cash flow. In the meantime if you are thinking about the brand new projects on Gulf Coast it will be starting sometime in 2017 and 2018, and stakeholders five or six years to get through the breakeven line, so you are taking about 2023, 2035 before the projects start generating additional free cash flow. It’s very different value proposition. So we are not saying whether does or does not make sense, we are simply trying to explain to you why our focus and priorities for Q accurate, quickly get the projects developed, approved and get them the construction, and currently -- and this one we expect to get approval from the federal authorities very shortly and then it gets implemented. So over the next two years we expect to bring one sizable project and roughly every six months, so that should fit quite nicely about our improvement in EBITDA in 2014 and 2015.

So bringing all together, we are free cash flow focused, appropriately it’s paying off by results we have achieved so far. Every day is a new day, every quarter is a new quarter. So what’s ahead of us? What’s ahead of us, that’s been in addition to the big side [ph] there has been referring to our [indiscernible]. So things have not changed dramatically since the time. Even the current trend of the company we see additional value coming from the cash flow generated or the project that we plan to – as I discussed with you and of course, for many provisions.

So overall it’s to bring additional significant appreciation for the market state of the company which could be manifested by either growing this via dividends or through our share repurchases. So ultimately it’s total value per share that makes most of the difference, we are not aiming to be a certain size either by sales or by market debt. It’s rather the free cash flow and value per share, that’s the most important.

So with that presentation, we will take any questions.

Question-and-Answer Session

Unidentified Analyst

So you heard about – and you are talking about cost of – you talked about European – what is the [indiscernible].

Sergey Vasnetsov

I think the conversion costs are very sizable and as you noticed it previously – let me speak about just one example that was made public by the company that is financing the port of ethane. One of the recent statements was that the converged base existing, ethane based cracker and Northsea Grand Mark [ph] pipeline, if you take them by $470 million, that’s a significant investment for any European facility, in particular in discussions with the Virginia and they are still pretty close, that particular cracker has been raking about 1 million pounds a year for the past two or three years. So that’s $80 million growth CapEx, so the free cash flow – a very difficult proposition, something we will not be comfortable with, to cover a very large cash burn and requiring significant investments to make the competitors. We expect that there might be two plants, maybe 3 in Europe, might be converted to US ethane, the old are based on the coastal area and that’s already – to convert the existing asset cracker, I don’t know what the number is here.

Unidentified Analyst

I am not saying converting [Question Inaudible]

Sergey Vasnetsov

Well for you to use more ethane whether your 10% or 80% you still need to set in place infrastructure and in fact, if you use a very small of ethane then it doesn’t expend, because you still need to – this easier degree of flexibility between naphtha and butane propane versus naphtha and ethane, I think this could be probably the back of the – so ultimately if you consider a large ethane unit in European, why didn’t make it in the US and then bring to full America across the bond. There are number of economics that made opportunity very little.

Unidentified Analyst

I just wanted – propane price has been increased, it’s just small portion of your feedstock but is there an effort to eliminate that entirely as feedstock shows here?

Sergey Vasnetsov

Well, propane typically has been low teens percentage of the total feedstock for us and in addition to make an – is the sizable amount of propylene and propylene is important to our company where all the integrated – probably an outside or propylene – we need to make some propylene for color. In terms of price competitiveness I think it will be changing as different relative value and relative price is changing around all the time. We have leaner program and model that look at into the market every day, every week and we are going to adjust accordingly. So far propane has not practiced out of market completely. And when it does, we are going to replace the somebody else. It could be ethane and – but in many cases I don’t think we are talking about elimination, just it’s a relative amount which was dependent on the price of feedstock and prices of ethylene and propylene and start –

Unidentified Analyst

And then just a question – you have been operating above nameplate capacity in North America and my understanding is that after a period of time you can’t continue to operate at that level and definitely there is a new version that ultimately takes place, wonder if you could speak to the potential of that going forward and if it does happen, is it a multi-quarter phenomena or could it be one quarter where we operate below nameplate, and then above?

Sergey Vasnetsov

Well, look if there is a lower mean it will not further impact. I don’t believe that there is an old saying that just because you have run well, you are not – there is some element of bad luck. You may mean bad luck by excellence, prevent the maintenance, you focus on safety and you train your people and you reinforce it, this is very, very important. We know by now that our annual competition bonus on a relative by performance and I can tell you not to make the results better than competition, it’s you run your plant by 5% extra capacity because it’s a pretty – it takes no working capital, we take support. Very important to us, while it’s no promise that we run a 100% plus, so far we have implemented it very good.

Unidentified Analyst

And just a last question on some of the mentioned plants, out a couple years, how confident are you in your ability to the resource value, labor and so forth that require to complete those projects –

Sergey Vasnetsov

I would say it’s a very important question, indeed for us and for the rest of the chemical industry. I think our answer was that we work very closely with our supply contractor. As you know our plants are mostly ground field expansion and therefore they have so much easier control. We are working very closely with them every day, it’s a partnership and we made it very clear that we will be very well aligned, so it’s not F&T landlord, I mean we are there every day. So far so good and we have seen some modest increase in cost but partially because of the project become better defined. And of course, we will try to make it larger as much as possible. I am somewhat concerned because those projects got 2014, 2015 start-up plan – on a go forward in 2015-2017.

Unidentified Analyst

In your European olefin business, advantaged feedstock, that it was doubled what it was a year ago, how much of that is one time opportunity behind per existing structure changes?

Sergey Vasnetsov

Richard, I think it depends significantly what the relative cost of propane and butane in Europe, particularly in the Mediterranean. The area opportunity came ironical by echo the shale gas in the US where historical Algeria has been supplying significant amount of propane condensate to the US and now that the propane condensate being pushed out, and if you have given up economic advantage plus, and what happens we took a significant in our bear front which is just across the short sail just from Algeria and both maintenance improvement in our German subsidiary [ph] as well. So I think the structural intent is we are certainly proving to be capable of doing it both mechanically and technically. But in future -- we used to be dictated by financial fraternity. We believe that the shale gas is going to stay and therefore Algerian condensate should be effectively priced next year as well, typically some economics, we don’t get the price difficult to the revenue at the high level, so it could fluctuate in some of the trade line by any means but we should be able to take advantage.

Well, I think PJ has stepped out. Maybe I will return with my own presentation if you don’t mind. So thank you very much for your time and with you shortly in discussion.

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