LyondellBasell Industries NV (LYB) Bhavesh Vaghjibhai Patel on Q2 2016 Results - Earnings Call Transcript

LyondellBasell Industries NV (NYSE:LYB)

Q2 2016 Earnings Call

July 29, 2016 11:00 am ET

Executives

Douglas J. Pike - Vice President Investor Relations

Bhavesh Vaghjibhai Patel - Chief Executive Officer and Chairman

Thomas Aebischer - Chief Financial Officer & Executive Vice President

Analysts

Stephen Byrne - Bank of America Merrill Lynch

John Roberts - UBS Securities LLC

Arun Viswanathan - RBC Capital Markets LLC

David I. Begleiter - Deutsche Bank Securities, Inc.

James M. Sheehan - SunTrust Robinson Humphrey, Inc.

P.J. Juvekar - Citigroup Global Markets, Inc. (Broker)

Don Carson - Susquehanna Financial Group LLLP

Vincent Stephen Andrews - Morgan Stanley & Co. LLC

Aleksey Yefremov - Nomura Securities International, Inc.

Hassan I. Ahmed - Alembic Global Advisors LLC

Nils-Bertil Wallin - CLSA Americas LLC

Frank J. Mitsch - Wells Fargo Securities LLC

Duffy Fischer - Barclays Capital, Inc.

Jonas Oxgaard - Sanford C. Bernstein & Co. LLC

Robert Andrew Koort - Goldman Sachs & Co.

Jeffrey J. Zekauskas - JPMorgan Securities LLC

Operator

Hello and welcome to the LyondellBasell Teleconference. At the request of LyondellBasell, this conference is being recorded for instant replay purposes. Following today's presentation, we will conduct a question-and-answer session.

I would now like to turn the conference over to Mr. Doug Pike, Vice President, Investor Relations. Sir, you may begin.

Douglas J. Pike - Vice President Investor Relations

Okay. Well, thank you, Tony. Well, thank you, all and hello and welcome to LyondellBasell's second quarter 2016 teleconference. And I'm joined today by Bob Patel, our CEO; and Thomas Aebischer, our CFO, who is calling from our Rotterdam office.

Before we begin the business discussion, I'd like to point out that a slide presentation accompanies today's call and is available on our website at www.lyb.com. I'd also like for you to note that statements made in this call relating to matters that are not historical facts are forward-looking statements. And these forward-looking statements are based upon assumptions of management, which are believed to be reasonable at the time made and are subject to significant risks and uncertainties. And actual results could differ materially from those forward-looking statements.

Now for more detailed information about the factors that could cause our actual results to differ materially, please refer to the cautionary statements in the presentation slides and our financial reports, which are available at www.lyb.com/investorrelations. And reconciliations of non-GAAP financial measures to GAAP financial measures, together with any other applicable disclosures, including the earnings release, are currently available on our website at www.lyb.com.

And finally, I'd like to point out that a recording of this call will be available by telephone beginning at 2 PM Eastern Time today until 1 AM Eastern Time on August 29 by calling 866-453-2318 in the United States, and 203-369-1226 outside the United States. And the passcode for both numbers is 72916. And during today's call, we'll focus on second quarter results, the current environment, and the near-term outlook.

But before turning the call over to Bob, I'd like to call your attention to the non-cash, lower of cost or market inventory adjustments, or LCM, that we have discussed on past calls. As previously explained, these adjustments are related to our use of LIFO accounting and the volatility and prices of our raw material and finished goods inventories.

And second quarter price recoveries for impacted products resulted in the reversal of the entire $68 million first quarter LCM charge. Interim LCM charges are reversed in subsequent periods when information shows the LCM charge may not be sustained through yearend. However, I'd also remind you that LCM charges that exist at yearend cannot be reversed.

Additionally, if there are future price declines within our inventory pools during the remainder of the year, this could lead to additional LCM charges. Comments made on this call will be in regard to our underlying business results excluding the impacts of these LCM inventory charges.

Now with that being said, I'll turn the call over to Bob.

Bhavesh Vaghjibhai Patel - Chief Executive Officer and Chairman

Thanks, Doug. Good morning to all of you and thank you for joining our second quarter earnings call. Let's begin with slide four and review the highlights from the second quarter. Our second quarter diluted earnings per share declined relative to the first quarter to $2.45 per share with EBITDA of $1.7 billion. This excludes the $68 million lower of cost or market inventory gain.

When the gain on sale of the Petroken Argentine business is also excluded from first quarter results, underlying earnings per share in the second quarter increased by $0.15 per share.

Overall, second quarter business trends were as we had expected. During the quarter our downstream integration in polyolefins and other olefin derivatives enabled us to capture strong chain margins. Positive seasonal oxyfuel margin trends benefited the Intermediates & Derivatives business. While our chemical and polymer operations generally ran well, there was scheduled maintenance and some unplanned downtime across company.

Most significantly, the refinery operated at reduced rates throughout the quarter as repairs were required following a fire in our coker unit in April. The refinery returned to normal operation in mid-July. Based upon industry benchmark margins, the value of second quarter loss production due to planned and unplanned outages across the company is estimated to have been approximately $140 million.

The ability to generate strong earnings during a period of heavy planned maintenance and a refinery upset is indicative of our solid portfolio. We progressed our financial priorities during the quarter as well and Thomas will provide you with an update on those in a few moments.

Slide five reflects our continued outstanding safety performance. As I mentioned, during the first half of this year we performed an unusually high amount maintenance. Periods like this often result in an increased number of injuries. However, our results remained steady. We strongly believe that an unrelenting focus on safety has resulted in the excellent performance we have seen over the past four years.

Now Thomas will discuss our financial highlights for the second quarter.

Thomas Aebischer - Chief Financial Officer & Executive Vice President

Thank you, both, and good morning. On slide six, we outlined our quarterly and trailing 12-month segment results. Combined olefins and polyolefins generated good results with $1.3 billion of EBITDA in the second quarter and $5.5 billion during the last 12 months. The Intermediates & Derivatives segment remained steady with second quarter EBITDA of approximately $370 million and $1.5 billion over the last 12 months.

Due to operating issues, the refinery recorded a loss. Technology continued to perform well at an LTM pace of approximately $270 million. Overall, despite ongoing maintenance and global economic uncertainties, our profitability has remained strong with $7.5 billion of EBITDA over the past 12 months. The first half 2016 EBITDA represents an annual pace of nearly $7.2 billion.

Please turn to slide seven, which provides a picture of cash generation and use. During the second quarter, we generated $1.3 billion of cash from operations and utilized $1.1 billion for dividends and share repurchases. Our maintenance and growth capital investments increased to approximately $560 million during the second quarter with a significant portion of this investment focused on our Corpus Christi ethylene expansion and the turnaround at our Berre, France facility.

During the second quarter cash and liquid investments decreased by approximately $400 million to end with a balance of $2.5 billion. Over the last 12 months cash from operations was $5.5 billion. A nearly equal amount was dedicated to dividends and share repurchases over the same period.

After investments in our capital program, returns to our shareholders, borrowing and other activities, the cash and liquid investments balance declined by approximately $1.3 billion. However, at $2.5 billion this remains well above our minimum requirement.

Slide eight provides a longer perspective of cash flow as well as some current financial metrics. Our strong results and cash flow generation over multiple years positioned us to steadily raise our dividend and purchase shares. In May 2016, we increased our quarterly interim dividend by 9% to $0.85 per share.

Additionally, our results have allowed us to access favorable credit markets while maintaining a strong balance sheet, BBB/Baa1 corporate credit rating and available liquidity of approximately $5 billion. During the first six months of 2016, cash flow generation remained strong although somewhat less than the pace seen in 2014 and 2015.

On an annualized basis, using June 30 market capitalization, the cash flow yield is 9.4%. Our share repurchase program remained at an approximate 10% annual pace. During the quarter, we purchased 8.8 million shares representing 2% of our outstanding shares with approximately 4 million shares purchased during June.

Notably, during May, we received approval for our fourth share repurchase program for up to an additional 10% of outstanding shares over the next 18 months. Based on the June 30 share price and the May quarterly dividend increase to $0.85 per share, the current dividend yield is approximately 4.6%.

Before I wrap up, I want to point out a few other items that may help your modeling. First, our effective tax rate for the quarter was 24%, several percentage points lower than our previously communicated estimate. The rate variance for the quarter compared to our forecasted annual rate was impacted primarily by discrete items including the impact of a non-U.S. tax law change, as well as by our global earnings mix being balanced towards lower tax regions. We currently estimate our full-year tax rate at approximately 27%, which is approximately 1 percentage point below our previous estimate.

2016 CapEx spending is on target to meet our forecast of $2.1 billion. Depreciation, amortization and interest expense are currently running at rates in line with our previous estimate.

With that, thank you very much for your attention and I will turn the call back to Bob.

Bhavesh Vaghjibhai Patel - Chief Executive Officer and Chairman

Thank you, Thomas. Let's turn to slide nine and review segment results. As mentioned previously, my discussion of business results will exclude the impact of the LCM inventory gain.

In our Olefins & Polyolefins Americas segment second quarter EBITDA was $754 million. Results declined by $67 million, excluding the first quarter gain of $57 million on the sale of the Petroken polypropylene business.

Relative to the previous quarter, olefin results were generally unchanged. Ethylene prices improved by approximately $0.04 per pound and our margins improved while customer and internal derivative plant maintenance resulted in reduced ethylene volumes.

Our operating rates during the quarter averaged approximately 80% due to the planned maintenance and expansion at our Corpus Christi facility. Excluding the Corpus Christi outage, quarterly rates were approximately 90%. During the quarter, we operated our metathesis unit but the contribution was not material.

74% of our ethylene production was from ethane and approximately 90% came from NGLs. We initiated the Corpus Christi ethylene turnaround and expansion during mid April with completion planned for the end of the third quarter. At industry benchmark margins, second quarter lost production impact was estimated to be approximately $65 million. However, all but approximately $15 million was offset by purchases and inventory management during prior quarters.

In polyolefins, combined results declined by approximately $60 million. Results were driven by lower polyethylene and polypropylene volumes. Approximately, half of the polyethylene volume decline was due to scheduled plant maintenance. Polypropylene volumes declined 5% primarily due to lower sales following the first quarter sale of Petroken. Polyethylene price spreads were relatively unchanged while propylene's price declined by approximately $0.02 per pound, several cents less than industry data would indicate.

Thus far, during the third quarter, Olefins & Polyolefins Americas' industry trends are relatively unchanged. Our heavy planned maintenance schedule continues into the quarter. The Corpus Christi plant is scheduled to remain down throughout the quarter. Two weeks ago, we began a turnaround in our Morris, Illinois facility. At current industry benchmarks, the net value of lost third quarter production is estimated to be approximately $135 million.

Let's turn to slide 10 and a review performance in the Olefins & Polyolefins Europe, Asia and International segment. During the second quarter, underlying EBITDA was $536 million. Exclusive of a $21 million first quarter gain from the Argentine Petroken sale, EBITDA was relatively unchanged.

Olefin results declined by approximately $30 million as increased feedstock cost outpaced olefin price increases. A turnaround at our Berre facility impacted olefin and polyolefin production during both the first and second quarters. At industry benchmark margins, the second quarter value of lost production is estimated to be approximately $35 million, $20 million greater than the first quarter impact. Advantaged feedstock accounted for 52% of ethylene production contributing approximately $25 million over naphtha and polyolefins results were relatively unchanged. Exclusive of the gain from Petroken sale, our polypropylene compounding and polybutene-1 results improve by about $10 million. Joint Venture equity income was very strong, increasing by $27 million consistent with strong polyolefin margins.

During the early weeks of the third quarter, underlying industry conditions have followed expectations and remain relatively unchanged. However, the third quarter is typically impacted by slower seasonal conditions. During the quarter, there is no significant maintenance planned at our wholly-owned facilities, but there will be some at our joint ventures.

Now please turn to slide 11 for a discussion of our Intermediates & Derivative segment. Second quarter EBITDA was $369 million, an improvement of $15 million versus the first quarter. Results for propylene oxide and derivatives declined by approximately $20 million, partially due to sales, product mix and derivative margins. This was offset by an improvement in the intermediate chemicals of approximately $10 million.

Styrene margins were the leading factor with an improvement of approximately $0.04 per pound versus the first quarter. Higher oxyfuels volumes and seasonal margin increases contributed approximately $30 million more than the first quarter results.

Thus far in the third quarter, PO and derivatives and intermediate chemical industry conditions are relatively unchanged from the second quarter. However, weaker gasoline markets have negatively impacted oxyfuels. This is seen on the slide in the reduction of the July MTBE margins. Additionally, a turnaround at our Bayport EO/EG plant is estimated to impact third quarter results by approximately $15 million.

Let's move to slide 12 for a discussion of the Refining segment. Second quarter EBITDA was a loss of $13 million, a decline of $27 million from the prior quarter. Crude throughput averaged 183,000 barrels per day as rates were impacted by the April 8 fire and other maintenance.

During the second quarter, the Maya 2-1-1 spread increased by $3.21 per barrel to average $21.07 for the quarter. However, due to our processing limitations, we were not able to benefit from the increased spreads.

Based on the second quarter industry benchmark spreads, the lost profit opportunity is estimated to be approximately $85 million. Repairs are now complete and the refinery returned to normal operation in mid-July. As you can see on the slide, during July, industry spreads trended downward.

Additionally, the cost of RINs increased following the issuance of new EPA guidelines. Compared to the second quarter, market RIN price July month-to-date has increased by approximately $0.17 per gallon. At full refinery rates, every $0.10 change in the RIN cost is estimated to impact quarterly cross by approximately $5 million.

Our Technology segment continued to perform well with second quarter EBITDA of $73 million.

I will conclude with slide 16. Second quarter industry trends generally developed as we anticipated. We continued to see strong results in global olefins and polyolefins businesses. Our I&D segment benefited from strengthening styrene margins and seasonal oxyfuel improvements. Refining results were impacted by the refinery coker unit fire.

Our solid cash flow enabled us to increase our dividend and extend our share repurchase program. In the near-term, we believe that olefin and polyolefin markets will remain balanced with periods of potential tightness.

Our refinery has returned to normal operation. Due to recent gasoline market changes, our oxyfuels and Refining business are experiencing some margin pressure.

We continue to invest in our facilities with third quarter planned maintenance turnarounds at two olefin sites and our EO/EG facility at Bayport. At recent industry margins, we estimate the impact of the related production loss in the third quarter to be approximately $150 million. However, this maintenance is the foundation for continued reliability over the coming years. Due to our unusually high planned maintenance schedule this year, the value of lost production through the first three quarters based upon the industry benchmark margins is estimated be approximately $300 million. In contrast, next year's schedule is quite light. Within chemicals, there are no olefin plant turnarounds and only one PO plant turnaround. The refinery will also have a fluid unit turnaround.

Finally, I'm pleased to announce that in a separate press release to be issued shortly, you will see that we have made the final investment decision for a new 1.1 billion pound per year polyethylene line. Startup is targeted to occur during 2019. This facility represents an 18% increase in our U.S. polyethylene capacity. Additionally, it is the first of its kind process combining attributes of both of our polyethylene and polypropylene technologies. As a result the product capabilities will range from basic benchmark resins through to higher value-added grades.

We are now pleased to take your questions.

Question-and-Answer Session

Operator

Thank you. We will now begin the question-and-answer session. Our first question will come from Steve Byrne from Bank of America. Your line is now open.

Stephen Byrne - Bank of America Merrill Lynch

Yes. Thank you. It looks to us like polyethylene imports by China year-to-date are a little below year ago levels. Just wondering if you think that's a reasonably good metric for demand in Asia. Anything that you're seeing that would suggest any softening in polyolefin demand in that region?

Bhavesh Vaghjibhai Patel - Chief Executive Officer and Chairman

Good morning, Steve. I think the imports of polyethylene into Asia or into China are generally they do vary because of inventory changes and planned outages and so on. But what we're seeing is still very solid growth in Asia year-over-year. So I would not read too much into just that import statistic.

Stephen Byrne - Bank of America Merrill Lynch

And any root cause of that refinery fire that you found meaningful or lessons learned from that that you'd care to share?

Bhavesh Vaghjibhai Patel - Chief Executive Officer and Chairman

Well, we've corrected what we found and we've checked out more than just the source of that fire. So we think we've addressed the root causes and we understand those well. And the refinery is back up and running at full rates.

Stephen Byrne - Bank of America Merrill Lynch

Okay. Thank you.

Operator

Thank you. Our next question would come from John Roberts from UBS. Your line is now open.

John Roberts - UBS Securities LLC

Thank you. What's the startup date on the new polyethylene unit and could you give us an update on the propylene oxide project as well?

Bhavesh Vaghjibhai Patel - Chief Executive Officer and Chairman

Sure. So the startup we're estimating to be mid-2019. And that's progressing very well. The PO/TBA project, we're continuing with our front-end engineering and so that project is progressing very nicely. We expect to make a final investment decision in the first half of next year, but it looks good so far.

John Roberts - UBS Securities LLC

And are you basically longed at ethylene in the marketplace until the startup of the polyethylene unit?

Bhavesh Vaghjibhai Patel - Chief Executive Officer and Chairman

Well, we've been a merchant seller of ethylene and we place some of that Corpus Christi volume already. And so over time, yes, that's our intention is through the addition of this derivative capacity, we would move towards our long-term target of something around 15% of our ethylene as merchant sales.

John Roberts - UBS Securities LLC

Thank you.

Operator

Thank you. Our next question would come from Arun Viswanathan from RBC Capital Markets. Your line is now open.

Arun Viswanathan - RBC Capital Markets LLC

Great. Thanks. Good morning. Just wanted to get your tenor on the markets right now. You discussed a balancing environment. How would you describe your customer inventory levels? How would you discuss polyethylene pricing. We have seen some movement up in spot ethylene in the last couple weeks and it looks like the polyethylene price declines that were expected in July have been pushed out to August. Maybe you could just discuss what you're seeing on demand and your expectations for polyethylene pricing for the next maybe, say, six months.

Bhavesh Vaghjibhai Patel - Chief Executive Officer and Chairman

Good morning, Arun. We're seeing very balanced markets. The demand is growing very solidly year-over-year. As in prior calls, we've talked about this that lot of polyethylene and polypropylene demand is tied to everyday use, sort of, applications. And so that's evidenced in the growth rate despite some uncertainty in the macroeconomic environment, and we're seeing that play through in terms of demand growth globally. It has been pretty solid year-over-year. Because of planned and unplanned outages in the industry, including our planned maintenance that we're doing at Corpus, the market seemed to be balanced to tight. Our sense is that inventories are about average or below average. So my view is that in the next quarter or two markets should be pretty well-balanced and anything unplanned would create tightness in markets. There's a reasonable planned maintenance schedule both in the U.S. and Asia in Q3. So I think that will keep things pretty well-balanced to tight for most of the remainder of the year.

Arun Viswanathan - RBC Capital Markets LLC

Just as a follow-up on the cost side, ethane has also come off. Maybe you can just give us your view on ethane and propane over the next couple quarters as well. Thanks.

Bhavesh Vaghjibhai Patel - Chief Executive Officer and Chairman

Sure. Ethane came off a little here because there were some unplanned cracker outages. There's some turnarounds going on. So ethane demand has been off some. Propane looks to be pretty long. And we think that propane will play an important role in setting the price of ethane, not only in the near-term but also longer term. And so for now we see an abundance of ethane supply. And, as I've mentioned in prior calls, over the medium-term, we'll expect for ethane to trade a little bit over its fuel value. Historically, it's traded $0.05 to $0.10 over and that still affords the U.S. a reasonable feedstock advantage, and in a tight market environment like we have today, it provides for a good backdrop for solid earnings.

Arun Viswanathan - RBC Capital Markets LLC

Thanks.

Operator

Thank you. Our next question would come from David Begleiter from Deutsche Bank. Your line is now open.

David I. Begleiter - Deutsche Bank Securities, Inc.

Thank you, Bob. Polypropylene margins have come off pretty hard since Q1. Can you discuss your expectations for the back half of the year and any potential for this to improve?

Bhavesh Vaghjibhai Patel - Chief Executive Officer and Chairman

Good morning, David. Yes, polypropylene margins, last time we spoke there was pretty wide gap between Asia and the U.S. And we'd said that that would come in some, partly with Asian prices coming up, which they did, and U.S. prices coming off a bit. I think we've reached that delta where likely we don't see a whole lot more. If you step back and look at supply/demand and especially here in the U.S., there's not a lot of new supply coming in. And there is growth year-over-year. So I expect the polypropylene market in the U.S. to be relatively balanced to tight over the coming quarters. And we don't really see meaningful new capacity in the U.S. for a couple of years. There might be some debottlenecks, but I think it's probably two, three years out before we see new grassroots capacity.

David I. Begleiter - Deutsche Bank Securities, Inc.

And, Bob, you did highlight again strength in styrene in the quarter. Could you discuss your outlook for styrene over the next maybe six to 12 months here?

Bhavesh Vaghjibhai Patel - Chief Executive Officer and Chairman

Yes, styrene demand continues to grow. Again, no real new capacity in the near term. So we're pretty constructive about styrene, and we haven't had the opportunity to say that very often in the past few years, but it seems like there is some resilience in the market and we'd expect that to continue.

David I. Begleiter - Deutsche Bank Securities, Inc.

Thank you very much.

Operator

Thank you. Our next question would come from Jim Sheehan from SunTrust Robinson Humphrey. Your line is now open.

James M. Sheehan - SunTrust Robinson Humphrey, Inc.

Yes, could you discuss your priorities for cash allocation? You've got a lot of free cash flow and you went over some of the dividends and share buyback that you've done in the past. Are you considering M&A to be more of the mix going forward?

Bhavesh Vaghjibhai Patel - Chief Executive Officer and Chairman

Let me start and then I'd ask Thomas to also jump in. But, Jim, our free cash flow so far we've deployed it towards a very strong dividend and share buyback program, and I would say over time as we ramp up on our growth projects, certainly we'll use some of that cash flow to fund these growth projects.

In terms of M&A, there's not a lot of change from what we've discussed in prior calls. We'd have to see a clear path to value creation to consider M&A. It's certainly something that many companies think about, but for us, we've got to make sure we know clear path to value creation. So, Thomas, I don't know if there's anything more you'd like to add to that?

Thomas Aebischer - Chief Financial Officer & Executive Vice President

No, thank you very much for the question. So, as you see and as I have mentioned in my comments, we are in the fortunate situation with a strong balance sheet. Clearly we are committed, as we have repeatedly said, to a progressive dividend policy. We maintained the dividend. We were able to increase the dividend again to 9%, which we have mentioned. And we've just got another approval for another 10% share buyback over the next 18 months. So we're in the fortunate situation to execute on our financial objectives.

James M. Sheehan - SunTrust Robinson Humphrey, Inc.

Thank you. And on the polyethylene unit, you're timing it for mid-2019. Looks like that the environment for delays is a hot topic. How have you evaluated the potential for delays in the industry and the resources that are needed in timing your own project?

Bhavesh Vaghjibhai Patel - Chief Executive Officer and Chairman

I think generally, Jim, we're timing the construction of this project quite well, because it will be post some of the large greenfield projects completing construction. So I like our position there. And in terms of delays, they're always difficult to forecast, but if you look back at history and including some of our debottlenecks, these are very large, complicated plants, and so we've seen delays with not only some of our debottlenecks but also other projects, and we expect some of that to occur, which frankly has some implications on how operating rates turn out in 2018 and 2019. But I like our position in terms of the construction cycle.

James M. Sheehan - SunTrust Robinson Humphrey, Inc.

Thanks a lot.

Operator

Thank you. Our next question would come from P.J. Juvekar from Citigroup. Your line is now open. Excuse me, P.J. Juvekar, your line is now open.

P.J. Juvekar - Citigroup Global Markets, Inc. (Broker)

Can you hear me? I'm sorry.

Bhavesh Vaghjibhai Patel - Chief Executive Officer and Chairman

Yes, we can hear you, P.J. Go ahead.

P.J. Juvekar - Citigroup Global Markets, Inc. (Broker)

Sorry about that. So there is a large price gap between Asian ethylene, which is $0.20 higher than U.S. ethylene, and the situation could get potentially worse in 2017. So how do you see this resolving? You are building a new polyethylene plant. Some of the MLP companies are talking about ethylene exports. So how and when do think the situation gets resolved? Thank you.

Bhavesh Vaghjibhai Patel - Chief Executive Officer and Chairman

Well, I think, P.J., we're going to have to look at ethylene prices more regionally rather than globally. So it's more important in my view to look at polyethylene prices globally. So to the extent that the Asian price is the price setter, then I think that's what we have to watch.

Ethylene exports out of the U.S., I think they can only be good for the U.S. ethylene market. So it's a relief valve if you will, for the U.S. ethylene business. So if those are to be built, I would consider that to be a net positive for U.S. ethylene producers.

P.J. Juvekar - Citigroup Global Markets, Inc. (Broker)

And I wanted to go back to your ethane comment on the medium-term. There are some new crackles coming up. You have ethane exports going up. But balancing that what is your outlook for supply, particularly on the Gulf Coast, in Eagle Ford and Permian?

Bhavesh Vaghjibhai Patel - Chief Executive Officer and Chairman

Yes. Well, there's still a significant amount of rejection that's occurring, even some still in Eagle Ford and then places more further away. P.J., I think what's going to be important to see is how propane and butane prices develop because part of what will balance markets is feedstock flexibility. That's something that we're very focused on for the long run is to continue to find ways to increase feedstock flexibility. The cracker fleet in the U.S. has a reasonable amount of feedstock flexibility, which if ethane prices were to rise above let's say propane or butane economics, then a lot of us could switch, which would take some of that pressure off of ethane.

The other thing is in a low oil price environment, I would think that some of the ethane exports could be more variable, and they could be shut off if ethane price were to rise. So I think there's balancing factors in the market from a supply standpoint. With some premium over fuel value and with oil price moderately rising over time, I would think that that will attract more supply. So we think this will balance out over time. And also the timing of startups of crackers will impact that too, right. So there are delays, then that pushes out that tightness of ethane and more time for more ethane productions to come to market.

P.J. Juvekar - Citigroup Global Markets, Inc. (Broker)

Thank you for your detailed answer.

Bhavesh Vaghjibhai Patel - Chief Executive Officer and Chairman

Thank you.

Operator

Thank you. Our next question would come from Don Carson from Susquehanna Financial. Your line is now open.

Don Carson - Susquehanna Financial Group LLLP

Thank you. Bob, you recently announced that you're going to delay your planned expansion at Channelview in ethylene. So wondering if you could go over the rationale for that. Was that related to the fact that you just don't think the returns are there right now at current prospective margins, or is that more of a strategic issue that you just want to not expand your merchant ethylene position?

Bhavesh Vaghjibhai Patel - Chief Executive Officer and Chairman

Yes. So that project looks very good to us, even in today's environment. So we didn't delay it for economic reasons. It's really a matter of priority. First of all, we've got a lot going on in Channelview where that debottleneck was to be done. That's a large part of our PO/TBA project potentially as we go forward. So we have a certain number of resources and we've got to deploy those in a way where we can focus and execute well. So we want the team over there focusing on PO/TBA.

Also if you look more broadly in the company, near-term our priority is more to build out our derivative portfolio. And then in time we'll come back and do that debottleneck. When we do our turnarounds at our Channelview crackers in 2018 and 2019, we'll likely be able to put in tie-ins such that we can implement that debottleneck any time and it may not have to be dependent on a turnaround. So we're going to do that project at some point. But I'd like for us to focus in the near-term on the polyethylene plant and on PO/TBA and build out our derivatives, and then we'll come back and take a look at that one.

Don Carson - Susquehanna Financial Group LLLP

I've got a follow-up on polypropylene. You mentioned that your spreads were only down $0.02 in the quarter, which certainly was a lot less than the overall decline we saw in North America. So was this something unique to Lyondell in terms of your sales mix or was this just the consultants getting the data wrong?

Bhavesh Vaghjibhai Patel - Chief Executive Officer and Chairman

No, I think it has to do with our sales mix and geographic mix.

Don Carson - Susquehanna Financial Group LLLP

So would that imply that there's more downside to come in Q3 and the second half in general that some of this industry reduction in spreads has been delayed at Lyondell?

Bhavesh Vaghjibhai Patel - Chief Executive Officer and Chairman

No, not necessarily. We don't really see that.

Don Carson - Susquehanna Financial Group LLLP

Great, okay. Thank you.

Bhavesh Vaghjibhai Patel - Chief Executive Officer and Chairman

Okay.

Operator

Thank you. Our next question would come from Vincent Andrews from Morgan Stanley. Your line is now open.

Vincent Stephen Andrews - Morgan Stanley & Co. LLC

Thanks and good morning. Bob, if I heard you correctly, you said you ran at 80% rate in the U.S., 90% ex-Corpus Christi, and I'm just wondering what types of rates we should be thinking about going forward. At least I can think back over the past two years or so and sometimes those rates were at or above 100%. So whether it's that's sort of rate we should be thinking about going forward.

Douglas J. Pike - Vice President Investor Relations

Hi, Vincent, this is Doug. If you think going forward, really the key thing is that we do have the two facilities in turn around. Otherwise, everything should be running full.

Bhavesh Vaghjibhai Patel - Chief Executive Officer and Chairman

Yes, and so the two facilities are Corpus and Morris. And remember, Morris is an integrated ethylene, polyethylene site. So when we're not making ethylene, we don't run polyethylene up there either. But otherwise our plan is to run full for the rest of the year.

Vincent Stephen Andrews - Morgan Stanley & Co. LLC

So something around 100% then?

Bhavesh Vaghjibhai Patel - Chief Executive Officer and Chairman

Yes. That should be near the base.

Vincent Stephen Andrews - Morgan Stanley & Co. LLC

Great. Thanks very much.

Operator

Thank you. Our next question would come from Aleksey Yefremov from Nomura Securities. Your line is now open.

Aleksey Yefremov - Nomura Securities International, Inc.

Good morning. Thank you. Could you talk about your outlook for propylene? There is some new seaborne exports of propylene out of the U.S. and inventories appear to be low. On the other hand, there's new PDH unit in the startup mode. Any prospects for higher price for this monomer?

Bhavesh Vaghjibhai Patel - Chief Executive Officer and Chairman

I think propylene prices depend a lot on where propane is and refinery rates and so on. Our sense is that with the new PDH units that are being built propylene looks to be coming more in the balance and could be long here in the U.S. over the medium-term. So we're watching that but the feedstocks do have a role to play in how much propylene is produced and when propane is favored, the crackers that have flexibility tend to produce a lot more propylene.

Aleksey Yefremov - Nomura Securities International, Inc.

So it sounds like you think the export facility is not a big deal basically for the U.S. market?

Bhavesh Vaghjibhai Patel - Chief Executive Officer and Chairman

Well, for propylene there have been exports in the U.S. for some time. And so, I think it has a role. But I would summarize my comment by saying that, I think propylene is going to move towards a long position as some of this new PDH capacity comes on and if there are derivatives, if they are lagging then it becomes a bit long.

Aleksey Yefremov - Nomura Securities International, Inc.

Thank you. And then turning to MTBE, what is the supply/demand balance there, especially on the demand side. Outside of seasonality, is there any reason to be worried that sort of that octane value that MTBE was getting over the last year or so is diminishing?

Bhavesh Vaghjibhai Patel - Chief Executive Officer and Chairman

No. I think this has been more of a gasoline phenomenon that you've seen this year in terms of spreads. Our view about MTBE longer term and we still think octane is short. When you think about new fuel regulations, they are requiring us to take sulfur out of the gasoline pool, which reduces octane and then also on a demand side more and more higher compression engines require more octane. So our view is that octane is tight to short and MTBE plays an important role in that.

Aleksey Yefremov - Nomura Securities International, Inc.

Thank you.

Operator

Thank you. Our next question would come from Hassan Ahmed from Alembic Global. Your line is now open.

Hassan I. Ahmed - Alembic Global Advisors LLC

Good morning, Bob.

Bhavesh Vaghjibhai Patel - Chief Executive Officer and Chairman

Good morning, Hassan.

Hassan I. Ahmed - Alembic Global Advisors LLC

Bob, question around the I&D segment. You know, as I was taking a look at your sales volumes, the asset yield volume sequentially saw a big jump-up. We are talking, if I've run my numbers correctly, you are around 17%. So I'm just trying to figure out, you guys have reported a 17% rise in acetyl volumes Q1 to Q2. While one of your big competitors reported double-digit volume declines again for the same time period. So, I'm just trying to understand clearly the market is a bit oversupplied. So, is there an element of sort of gaining market share at the cost of pricing going on over there?

Bhavesh Vaghjibhai Patel - Chief Executive Officer and Chairman

For us it was more about just running methanol at higher rates and also we had some planned maintenance earlier in the year on the van (43:36) unit and now that's done. So we ran at higher rates in Q2.

Hassan I. Ahmed - Alembic Global Advisors LLC

Fair enough. Okay. Now moving on, obviously a lot of questions on this call as well as on previous calls about ethane. Clearly, a lot of paranoia sort of about ethane potentially jumping up significantly. Now, even partially is there a desire on your part maybe even sort of small, you know, one facility or a few facilities to at least try to lock into some longer-term contract in terms of ethane?

Bhavesh Vaghjibhai Patel - Chief Executive Officer and Chairman

We have an ongoing sort of contracting strategy around ethane. We are one of the bigger buyers of ethane from the Gulf Coast. I think we buy the largest right now. So we have a very balanced strategy around buying ethane. I will come back to my earlier comments which I think around ethane is we have to think about what are the balancing factors on ethane price. And, again, I think propane and butane will play an important role, also exports.

Some of those could be variable at very high ethane prices so I think the market will balance. The other thing if ethane values persist at much higher than its fuel value that ought to attract more supply or incent more supply. And so really I think what we're all concerned about here, I suppose, is more about the volatility not about some structural change and how ethane will be priced.

I think as we saw earlier in this decade, when ethane price rose and margins on ethane over fuel value were $0.30 per gallon or $0.40 per gallon that was met with a lot more supply. And so we think that these crackers start up and so on, a combination of switching to other feedstocks, maybe less exports and more supply, the market will find a new equilibrium and that leave us in a position where the U.S. still has advantage vis-à-vis heavier crackers globally.

Hassan I. Ahmed - Alembic Global Advisors LLC

Super. Thanks so much, Bob.

Operator

Thank you. Our next question will come from Nils Wallin from CLSA. Your line is now open.

Nils-Bertil Wallin - CLSA Americas LLC

Good morning. Thanks for taking my question. With respect to Corpus, the delay, the turnaround is extended. I'm curious was this extension due to lower efficiency? Was that did you have some issues getting equipment or are you just trying to help the market find a little bit more balance into the back half of the year?

Bhavesh Vaghjibhai Patel - Chief Executive Officer and Chairman

No, Nils, we'd like to get this done as soon as possible. So it's really about just the complexity in the construction and the debottlenecks are very, very complex, because we are working in tight spaces and so on. But having said all that, we are a few weeks later than we had anticipated. We are expecting to be done by the end of September and commissioning.

The other thing is when we started the turnaround and especially in June and early July, we had some very, very unusual weather patterns, had a lot of – we had a few days where we couldn't be in the field because of lightning and heavy rains. So on the Texas Gulf Coast those things do have an impact at this time of year. But we're aiming to get that done by the end of Q3.

Nils-Bertil Wallin - CLSA Americas LLC

Understood. And just on polyethylene expansions this year. Obviously the Mexico plants have taken a while to get up. Some JVs in the Gulf Coast are apparently getting pushed out. Saudi Arabia had some issues as well and is not up. So are these delays going to – will they be sufficient to allow demand to grow into the capacity growth or is there a risk that at some point all this capacity comes on stream in the next six to 12 months and the market is surprised by a supply shock?

Bhavesh Vaghjibhai Patel - Chief Executive Officer and Chairman

I think, again, you are highlighting that these projects are complex and they don't tend to start up as people plan and hope, including our debottleneck, as I just mentioned. So I think with delays, as you say, demand will grow into the capacity. And we see a pretty balanced market through the balance of this year and well into next year. And then we'll just have to see how the timing develops on the other big projects. But they are quite large and complex and it's just history indicates that a quarter or two delays are not unusual.

Nils-Bertil Wallin - CLSA Americas LLC

Understood. Thanks very much.

Bhavesh Vaghjibhai Patel - Chief Executive Officer and Chairman

Thank you.

Operator

Thank you. Our next question would come from Frank Mitsch from Wells Fargo Securities. Your line is now open.

Frank J. Mitsch - Wells Fargo Securities LLC

Hey, good morning, gentlemen. Good morning, Bob.

Bhavesh Vaghjibhai Patel - Chief Executive Officer and Chairman

Good morning, Frank.

Frank J. Mitsch - Wells Fargo Securities LLC

I was wondering, obviously volumes were off in Olefin, Polyolefins Americas due to the planned/unplanned outages, customer turnarounds, et cetera. And you mentioned that your plan is to run flat out for the balance of the year ex the Corpus and Morris turnarounds. How should we think about sequentially Q3 versus Q2 volumes in O&P Americas given those factors? Would you expect it to be up, flat or down Q3 versus Q2?

Douglas J. Pike - Vice President Investor Relations

Production will be lower, Frank, right, because of Morris being down and the timing of that turnaround. So that's one of the things you have to factor in. That's also going to put some pressure and impact kind of polyethylene, as Bob said. So, I think you'll see that. We had some maintenance and turnarounds planned work in the second quarter. So, that you will probably see hold pretty even I think across the quarters. But we will see ethylene production being down.

Frank J. Mitsch - Wells Fargo Securities LLC

All right. Terrific. And then just to clarify, you are expecting a $10 million sequential headwind from planned/unplanned outages Q3 versus Q2, correct?

Bhavesh Vaghjibhai Patel - Chief Executive Officer and Chairman

Well, we said in our prepared comments that third quarter production loss would result in about $150 million impact for the quarter.

Frank J. Mitsch - Wells Fargo Securities LLC

Right. But sequentially you were off $140 million, so it's just a modest – if we're looking sequentially, correct?

Bhavesh Vaghjibhai Patel - Chief Executive Officer and Chairman

Yeah.

Douglas J. Pike - Vice President Investor Relations

Yeah. No, of course, with the $140 million you are considering the refinery in there.

Frank J. Mitsch - Wells Fargo Securities LLC

Fair enough. And then, lastly, you mentioned a 1.1 billion pound polyethylene plant scheduled to come online mid-2019. What are the capital costs associated with that facility?

Bhavesh Vaghjibhai Patel - Chief Executive Officer and Chairman

Well, we're in the low to mid $0.60 per pound range for – per annual pound of capacity.

Frank J. Mitsch - Wells Fargo Securities LLC

All right. Terrific. Because we actually – there's a lot of facilities that are bumping against the dollar per pound range. So, terrific. Thanks so much.

Bhavesh Vaghjibhai Patel - Chief Executive Officer and Chairman

All right. Thank you.

Operator

Thank you. Our next question will come from Duffy Fischer from Barclays. Your line is now open.

Duffy Fischer - Barclays Capital, Inc.

Yeah. good morning, fellows.

Bhavesh Vaghjibhai Patel - Chief Executive Officer and Chairman

Good morning, Duffy.

Duffy Fischer - Barclays Capital, Inc.

Question on Europe which just seems to keep doing better and better. And I am getting some pushback from folks that it might be too good to be true. Can you just walk through how much of the European improvement over the last several years you think is kind of structural and therefore sustainable, and how much of that will be susceptible to the cycle over the next three or four years?

Bhavesh Vaghjibhai Patel - Chief Executive Officer and Chairman

Yeah. Duffy, if you think about the improvement, probably about half of it is structural based on feedstock improvements, fixed cost improvements and so on. The rest is more market related. But having said that, if you think about the European market, there is really no new capacity coming. The euro is weaker than it was two, three years ago. We had $1.4 euro-dollar. Today, we're $1.1. So my sense is that Europe will kind of be an insular market. I don't see a whole lot going out or coming in. And with no new capacity being installed in olefins and polyolefins there and demand growing modestly but growing some, we see a pretty balanced market. So I think the operating rates ought to be reasonably high over there.

Duffy Fischer - Barclays Capital, Inc.

Okay. Thank you. And then coming back to the U.S., we were long derivative capacity, short ethylene. That seems to have flipped. When you look out over the next three or four years with the capacity additions in the U.S., when do you think we get to the maximum point of being long ethylene, short derivative capacity?

Bhavesh Vaghjibhai Patel - Chief Executive Officer and Chairman

Well, I would suspect that will be some time back-half 2018, into 2019. But, Duffy, not all of the derivative capacity has been announced yet. So just like we're announcing today our polyethylene plant. And so I think that will balance out. But on paper, you would assume that it's something in that back half of 2018, 2019 range.

Duffy Fischer - Barclays Capital, Inc.

Terrific. Thanks, guys.

Operator

Thank you. Our next question would come from Jonas Oxgaard from Bernstein. Your line is now open.

Jonas Oxgaard - Sanford C. Bernstein & Co. LLC

Hey, guys.

Bhavesh Vaghjibhai Patel - Chief Executive Officer and Chairman

Hi, Jonas.

Jonas Oxgaard - Sanford C. Bernstein & Co. LLC

A question on polypropylene in Europe. Normally, polypropylene in Europe ties to polyethylene. But in the last six months, we've seen the polypropylene like 200 or so below polyethylene. Any comments on that and whether that will persist?

Bhavesh Vaghjibhai Patel - Chief Executive Officer and Chairman

No. I think the European market just has a different underpinning, given the feedstock and olefin prices there. So our sense is that that should continue for the foreseeable future.

Jonas Oxgaard - Sanford C. Bernstein & Co. LLC

You don't think polypropylene will rise up to polyethylene anytime soon.

Bhavesh Vaghjibhai Patel - Chief Executive Officer and Chairman

No. Polypropylene is a little bit – in about flat or a little bit less than ethylene over there. So I think you've got to step back and look at global pricing as well to be instructive on that.

Jonas Oxgaard - Sanford C. Bernstein & Co. LLC

Okay. And on the U.S. side, you talked a little about the propylene exports. But, right now we are only exporting to Colombia. If we were to start cracking more propane and then some of these PDH plants actually come online, how much more propylene do you think LatAm can actually absorb and at what point would we have to start exporting to Asia or Europe which are then the much lower net back?

Bhavesh Vaghjibhai Patel - Chief Executive Officer and Chairman

No, I suspect that some of it would need to go to Europe which would be the next logical destination. Europe over time will probably need propylene. So, I think Europe seems logical. Of course, Asia, they have large need. And for them it's also make versus buy. Because in Asia you see a lot of new PDH capacity coming. So, we will have to watch that. The thing we have to see is how much propylene export capacity there really is in the U.S. and whether somebody would build more or not? And I don't have a fresh view on that.

Jonas Oxgaard - Sanford C. Bernstein & Co. LLC

Enterprise talk yesterday about how they can repurpose on their propane to propylene.

Bhavesh Vaghjibhai Patel - Chief Executive Officer and Chairman

Okay. Well, I would think Europe would be more logical destination as a next to South America.

Jonas Oxgaard - Sanford C. Bernstein & Co. LLC

Yeah move on. Once South America is full clearly, and I just how – if they can absorb anything else. It makes perfect sense. Thanks guys.

Bhavesh Vaghjibhai Patel - Chief Executive Officer and Chairman

Thank you.

Operator

Thank you. Our next question would come from Bob Koort from Goldman Sachs. Your line is now open.

Robert Andrew Koort - Goldman Sachs & Co.

Thank you. Good morning.

Bhavesh Vaghjibhai Patel - Chief Executive Officer and Chairman

Good morning, Bob.

Robert Andrew Koort - Goldman Sachs & Co.

Bob, we have seen, I guess, there was some ebbs and flows. Sasol may be pushed out their plant for a bit and now we've heard Total, Shell, SABIC, Exxon, maybe all mobilizing the build capacity. So, just curious do you have any more appetite for a greenfield and is there any option to maybe do it in a joint venture arrangement with either Middle East partner or maybe a North American partner?

Bhavesh Vaghjibhai Patel - Chief Executive Officer and Chairman

Bob, you know what we see is that, in a more moderate oil price environment, over the medium or longer-term, and ethane trading somewhat above its fuel value, construction cost being what they are in the Gulf coast, greenfield is challenging, we think, to earn reasonable returns and perhaps our return aspirations are a lot higher. I don't know. But so far we would like to see how the rest of the decade plays out before we take a really firm view on that.

In the meantime, we still got some debottleneck capacity that we can do. As I mentioned, we have one more we can do a Channelview. We are focused on PO/TBA and polyethylene. So we have pretty healthy slate of growth projects and capital projects ahead of us. And I'd like to see us execute those really well before we think about new greenfield plant.

Robert Andrew Koort - Goldman Sachs & Co.

And can I ask on the – you are talking about these new investments, new capital as you say it's PO and polyethylene. Is this given after margins have come in a little bit in the industry. Does this decelerate your share repurchase activity or can you give us some sense on what you think your buyback pace and balance sheet looks like over the next 24 months?

Bhavesh Vaghjibhai Patel - Chief Executive Officer and Chairman

So we've announced this 18 month and this next 10% buyback over 18 months. And so we are on pace to be able to fund that. Beyond that, we'll just kind of have to see how markets develop and what – our view is that we have sufficient cash flow to do to continue to supplement our share repurchase and so one and still engage in these growth projects. So, Thomas, I don't know if you have anything else to add to that?

Thomas Aebischer - Chief Financial Officer & Executive Vice President

No. We have been able really given prospectively information or estimates about share buybacks. As we have said, we have a new program approved for 10%. We have more than $5 billion of liquidity if you look at the committed credit facility as well. So, we are in a good situation to execute on the progressive dividend and on the share buyback program.

Robert Andrew Koort - Goldman Sachs & Co.

Very good. Thank you.

Operator

Thank you. Our last question would come from Jeff Zekauskas from JPMorgan. Your line is now open.

Jeffrey J. Zekauskas - JPMorgan Securities LLC

Thanks very much. Maybe if I can follow up on Bob's question. Share repurchase for Lyondell right now is a good idea maybe you are above 1 times levered. And CFO talked about your borrowing capacity. Would you be willing to move up to 1.5 times leverage or 2 times leverage or maybe another way of asking it is, under what circumstances would share repurchase not be a feasible option for you exclusive of acquisition opportunities.

Bhavesh Vaghjibhai Patel - Chief Executive Officer and Chairman

Jeff, I'll start and then I will turn it over to Thomas. Generally speaking, our aim is to create value for shareholders. So the range of options you outlined, we evaluate those. At the end of the day, that's what we are focused on near-term, midterm, long-term. So, Thomas, I don't know if you want to add more to that?

Thomas Aebischer - Chief Financial Officer & Executive Vice President

No, we are evaluating the share repurchase, obviously, with other options. But, answering your question about how far would we go with respect to leverage. What's very important to us is to maintain a healthy balance sheet and we are focusing on the BBB+ rating as mentioned in my initial outlines and that is clearly a very much a guiding benchmark to maintain that BBB+ rating through the cycle.

Jeffrey J. Zekauskas - JPMorgan Securities LLC

Thanks very much.

Bhavesh Vaghjibhai Patel - Chief Executive Officer and Chairman

Okay, Thank you, Jeff.

If there are no other questions then I will close with a few comments. First of all in the near-term we see markets being very strong. We see solid demand growth year-over-year. Planned maintenance and some unplanned outages in the industry and our planned maintenance have kept supply moderate. So we see pretty balanced markets.

When we think about the cycle with some delays in new capacity, operating rates were not going to dip much below 90% on paper in the past. And as we see, some of these delays and even some of the CTO project in Asia being canceled, there's a higher likelihood that 2018 effective operating rates may not dip below 90%.

So, our view is that we are very constructive on markets near-term, medium term. We are continuing to deliver strong earnings, last 12 months at a pace of nearly $10 per share. Excluding LCM, we have a strong dividend. We are engaged in our fourth 10% share buyback program. So by virtue of those two things we are returning significant cash back to our shareholders.

Our focus remains very consistent, safe, reliable, cost efficient cost operations. We're going to finish the Corpus turnaround and debottleneck it by the end of Q3. We're want to continue to execute on the other turnarounds that we have. I think what all of this planned maintenance activity sets us up for is a strong 2017. We have very little turnaround activity in 2017. And so I think that positions us well for next year. And we're starting to build out our growth project portfolio with our polyethylene project in 2019 and potentially the PO/TBA project in 2020. So we're continuing to advance those growth projects as well.

So we look forward to updating all of you on those items at our next call. So thanks again for your interest in our company.

Operator

Thank you. That concludes today's conference. Thank you all for participating. You may now disconnect.

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