Q3 2021 LyondellBasell Industries NV Earnings Call
Hello, and welcome to the Lyondellbasell teleconference at the request of wind all the sell this conference is being recorded for instant replay purposes.
Following today's presentation, we will conduct a question and answer session.
Now, let's turn the conference over to Mr. David Kinney head of Investor Relations, Sir you may begin.
Thank you operator, Hello, and welcome to <unk> third quarter 2021 teleconference. I'm joined today by Bob Patel, Our Chief Executive Officer, and Michael Mcgarry Mcmurray, our Chief Financial Officer.
Before we begin the discussion I would like to point out that a slide presentation accompanies today's call and is available on our website at www Dot Lyondellbasell Dot com Slash Investor Relations.
Today, we will be discussing our business results, while making reference to some forward looking statements and non-GAAP financial measures. We believe the forward looking statements are based upon reasonable assumptions and the alternative measures are useful to investors. Nonetheless, the forward looking statements are subject to significant risks and uncertainty.
Encourage you to learn more about the factors that could lead our actual results to differ by reviewing the cautionary statements in the presentation slides and our regulatory filings, which are also available at our investor website.
Additional documents on our Investor website provide reconciliations of non-GAAP financial measures to GAAP financial measures together with other disclosures, including the earnings release.
A recording of this call will be available by telephone beginning at one PM Eastern time today until November 30th by calling 870 76606853 in the United States and 20161 to 741 five outside the United States. The pass code for both numbers is $1 37 to $3.
396.
During today's call, we will focus on third quarter results. The current environment, our near term outlook and provide an update on our growth initiatives.
Before turning the call over to Bob I would like to call your attention to the noncash lower of cost or market inventory adjustments or LCM that we have discussed on past calls. These adjustments are related to our use of last in first out or LIFO accounting and the volatility in prices for our raw material and finished goods inventories during the third quarter of 2020, we recognized.
Noncash impairment of $582 million that reflected our expectation for reduced profitability from our Houston refinery comments.
Comments made on this call will be in regard to our underlying business results, excluding the impacts of the refinery impairment and the LCM inventory adjustments, but that being said I would now like to turn the call over to Bob.
Thank you Dave.
<unk> joined from my 28th and last earnings call as CEO of Lyondellbasell.
Per our usual practice, we will review our results from the quarter.
As I prepare to leave the company at the end of the year I've taken some time to reflect on the strong company. We have built in our outlook for the future.
Without a doubt lyondell <unk> future is very bright.
Because of the efforts of our incredibly talented and hardworking global team.
<unk> built a company that has proven it can perform under a range of conditions.
During an event like a global pandemic that no one could have predicted or imagined.
We were able to fund our dividend with cash from operations.
And grow our company through accretive M&A.
I am confident that lyondell, Brazil will continue to deliver for our stakeholders in the future.
This is a company that is focused on building value for the long term and one that is built to stand the test of time.
With that said, let's review our third quarter results.
Please turn to slide three.
Lyondellbasell businesses are continuing to benefit from robust global demand and tight market conditions.
In the third quarter, our company delivered $5 25 per share of earnings.
More than four times higher than the same quarter last year.
EBITDA was approximately $2 7 billion.
Our year over year quarterly improvement of $1 8 billion.
<unk> cash conversion generated $2 $1 billion in cash from operating activities, a new quarterly record for our company.
These results are indicative of strong markets, the discipline with which we approach running our business and the increased earnings power from our value driven investments in accretive growth over the past several years.
We remain focused on improving Lyondellbasell is cash generation through all stages of the business cycle.
Please turn to slide four to review our quarterly profitability.
While our portfolio delivered $2 $7 billion of EBITDA and this quarter's results reflect a sequential decline of 11%.
Increased costs for natural gas ethane naphtha <unk>.
And butane compressed margins for many products from the high seen in the second quarter.
This however does not change how we see the future we continue to see very solid demand for our products and remain highly constructive on the outlook for our businesses as global reopening continues to play out over the coming quarters.
Okay.
We expect the combination of a well funded economy and pent up consumer demand for durable goods as well as the non durable goods associated with travel leisure and other in person activities will continue to underpin attractive markets.
In short, we remain confident that our reopening global economy.
Eventual normalization of global supply chains will support continued growth for our businesses over the coming quarters.
Let's turn to slide five and review our safety performance.
Our year to date total recordable incident rate for employees and contractors rose to 0.24 during the third quarter.
Much of this increase is associated with the tragic incident at our asset deals facility in La Porte, Texas during July.
We remain committed to learning from this incident and incorporating the learnings from the investigations to help prevent such tragedies from ever happening again.
Looking more closely at the chart. We are encouraged by the notable improvement in chemical industry safety performance during 2020.
We are watching to see if this is a durable trend or perhaps a one time benefit from reduced in person work hours during the hydro depend annick.
Lyondellbasell continuous learning and self improving culture, our key focus areas in our pursuit of goal zero safety performance for both our employees and our contractors.
On slide six I would like to highlight <unk> increased commitments to help address the global challenge of climate change.
In late September, we announced accelerated targets and our goal to achieve net zero scope, one and scope two greenhouse gas emissions from our global operations by 2015.
We now aim to reduce absolute emissions from our global operations by 30% relative to a 2020 baseline.
We plan to achieve these goals by advancing progress on several fronts.
We are improving energy efficiency, and all our plants and reducing our need for high carbon content fuel sources such as call.
We are already moving on this front in September we announced our plan to phase out coal from the power plant at our side investment in Germany.
We intend to procure at least 50% of our electricity from renewable sources by 2030.
Third we are focusing on minimizing flare emissions from our clients, particularly during shutdowns and startups events.
In addition, we're evaluating our portfolio of technology options across the company's manufacturing footprint, including sustainable hydrogen increased electrification and carbon capture for storage for a real utilization and our processes.
We believe this strategy puts us on an achievable pathway toward our net zero goal.
In the near term, we do not expect significant increases in our overall capital budget has reduced spending associated with the completion of our TBA project in 2022 will be offset by an increasing share of climate related investment.
With that I will turn the call over to Michael who will describe our financial and segment results in more detail.
Thank you Bob good morning, everyone.
Before I begin I would like to share my sincere gratitude to Bob for his tireless work inspirational energy and thought partnership in leading and growing lyondellbasell for nearly 12 years.
We're all sad to see you go Bob, but we will be eagerly watching your progress and wishing you continued success.
Please turn to slide seven and let me begin by highlighting our strong cash generation, which has been bolstered by our recent growth investments.
In the third quarter Lyondellbasell generated a record $2 1 billion of cash from operating activities that contributed towards the $5 4 billion of cash generated over the last 12 months.
Our free operating cash flow for the third quarter improved by more than 10% relative to the second quarter and our free operating cash flow yield was 15% over the last 12 months.
We expect this chart will continue to improve during the fourth quarter as 2020 results drop off from our trailing performance.
Let's turn to slide eight and review the details of our cash generation and deployment during the third quarter.
As I have mentioned during previous calls we are highly focused on shareholder returns a strong and progressive dividend plays a fundamental role in our capital deployment strategy and.
In addition to our dividend we also resumed share repurchases during the third quarter and reduced our share count by approximately $1 million.
We continue to invest in maintenance and growth projects with more than $500 million.
And capital expenditures.
Strong cash flows supported debt reduction of nearly $700 million <unk>.
Bringing our year to date debt reduction to $2 4 billion.
We closed the third quarter with cash and liquid investments of $1 9 billion.
And July S&P global ratings recognize the improvement in our balance sheet by upgrading our credit ratings and indicating a stable outlook during.
During the fourth quarter, we expect that robust cash generation and an anticipated tax refund will enabled continued progress on our goal to reduce debt by up to $4 billion during 2021, and further strengthen our investment grade balance sheet.
After the quarter closed we repaid an additional $650 million of bonds in late October we do not foresee the need for additional debt repayment in 2022.
Confidence around our deleveraging targets enabled us to resume share repurchases in September and we continued to opportunistically repurchase shares during October as of October 22, we have repurchased a total of $1 6 million shares.
Now I would like to highlight the results for each of our segments on slide nine in the third quarter of 2021, Lyondellbasell business portfolio delivered EBITDA of $2 7 billion.
Our results reflect strong margins supported by robust demand for our products and tight market conditions offset by higher costs, primarily in our <unk> Europe Asia International segment, and our IMT segment.
Let's begin the individuals' segment discussion on slide 10, with the performance of our olefins and Polyolefin Americas segment.
Robust demand drove EBITDA to about $1 6 billion.
Slightly lower than the second quarter.
Olefins results decreased approximately $75 million compared to the second quarter due to lower margins and volumes. Despite relatively stable benchmark ethylene margins are margins declined as we purchased ethylene to supplement production and meet strong derivative demand.
Volumes decreased due to unplanned maintenance, resulting in a cracker operating rates of 89%.
Polyolefin results increased more than $75 million during the third quarter as robust demand in tight markets drove spreads higher with polyolefin prices, increasing slightly more than moderate prices in fact, our polypropylene spreads reached a historic high.
We continue to see strong demand for our products as we begin the fourth quarter, However, higher energy and feedstock costs, along with typical seasonality demand softness towards the end of the year are likely to compress margins for our <unk> Americas businesses.
Now please turn to slide 11 to review the performance of our Olefins and Polyolefin Europe Asia International segment.
Higher feedstock costs and lower seasonal demand during summer holidays reduced margins and volumes in our EAA markets, resulting in a third quarter EBITDA of $474 million $234 million lower than the second quarter.
Olefins results declined about $50 million as margins decreased driven by higher feedstock costs, despite the higher ethylene and co product prices.
We operated our crackers at a rate of 92% of capacity due to planned maintenance.
Combined polyolefin results decreased approximately $120 million compared to the prior quarter lower seasonal band drove declines in polyolefin price spreads relative to monitor cost and reduced volumes.
Declining polyolefin spreads also affected our joint venture equity income by about $35 million.
During the fourth quarter, we expect to see further margin declines from higher energy and feedstock cost along with end of year seasonality. Our ethylene volumes are expected to decline due to planned maintenance.
Please turn to slide 12, as we take a look at our intermediates and derivatives segment.
Rising feedstock and energy costs drove margin declines in most businesses resulted in third quarter EBITDA of $348 million $248 million lower than the prior quarter.
Results were impacted by approximately $25 million.
Due to site closure costs associated with the exit of our ethanol business.
Third quarter propylene oxide and derivative results decreased about $15 million as margins declined slightly from the historical highs of the second quarter.
Durable goods demand remained strong resulting in increased volumes.
Intermediate chemicals results decreased approximately $140 million.
Margins declined in most businesses, primarily styrene and volumes decreased as a result of downtime in our <unk> business.
<unk> fuels and related products results decreased about $40 million as increased butane feedstock prices more than offset the increased volume from improved gasoline demand.
In the fourth quarter, we expect volumes to increase with the restart of our laporte asset yield facility and continued strength in demand for durable goods.
Margins are likely to moderate with fourth quarter seasonality and higher raw material costs for our <unk> segment.
Now, let's move forward and review the results of our advanced polymer solutions segment on slide 13 cut.
Customer supply chain constraints continue to hinder results with third quarter EBITDA of 121 million $8 million lower than the second quarter comp.
Compounding <unk> solutions results were relatively unchanged.
Margins were higher but partially offset by a decrease in volume due to restricted production and downstream markets, including the automotive sector appliance manufacturing and other industries affected by semiconductor shortages.
Advanced polymers results decreased about $10 million, driven by lower margins and volumes, primarily due to plant maintenance.
We expect results will be similar in the fourth quarter as it will likely take several quarters before supply chain constraints begin to improve.
Now, let's turn to slide 14, and discuss the result of our refining segment margins improved significantly in the third quarter, resulting in an EBITDA improvement of $122 million to a positive $41 million.
In the third quarter prices for byproducts increased cost for renewable identification number credits Rins decreased and the Maya 211 benchmark increased by $1 65 per barrel to $23 11 per barrel.
The average crude throughput at the refinery increased to 260000 barrels per day and operating rate of 97%.
Improved demand from increasing mobility should be supportive for our refining margins and could enable continued profitability during the fourth quarter.
Let's finish the segment discussion on slide 15, with a result of our technology segment increased licensing revenue drove third quarter EBITDA to a record 155 million $63 million higher than the prior quarter.
We expect our fourth quarter profitability for our technology business will return to similar quarterly levels as the first half of this year based on the anticipated timing of licensing revenue and catalyst demand with that I'll turn the call over to Bob.
Thank you Michael Please turn to slide 16 for a summary of the value driven growth initiatives that our company has developed since 2018.
Our approach is to pursue prudent and accretive investments that chart, a clear path for increasing EBITDA.
In 2018, we expanded our compounding business by acquiring a schulman and forming the advanced polymer solutions segment from both legacy and acquired businesses.
With integration complete we have a solid platform for future growth and synergies should become increasingly visible as volumes recover and the market served by this segment.
In the second quarter of 2020, we started a 500000 ton per year polyethylene plant in Houston utilizing our next generation hyper zone HDTV technology.
Full nameplate capacity and average margins from 2017 to 2019, we estimate this asset is capable of generating $170 million of annual EBITDA.
In September of 2020, we established a new integrated cracker joint venture in northeastern China.
This investment is capable of generating $150 million of annual EBITDA for our company again based upon full capacity and historical industry margins.
In December of 2020, we closed the transaction for the integrated polyethylene joint venture in Louisiana.
At full capacity and historical margins. This investment is capable of contributing $330 million in EBITDA for our company.
In our intermediates and derivatives segment, the combination of two new propylene oxide investments in China, and Houston, starting in 2022, and 2023 could together add almost $500 million of annual estimated EBITDA.
Taken together, we estimate these initiatives could add up to $1 5 billion of EBITDA to our mid cycle earnings.
Slide 17 provides a historical view of <unk> profitability over the course of the first complete business cycle for our company.
Over the period from 2011 to 2019, we delivered a little over an average of $6 5 billion of EBITDA, excluding LCM and impairment.
In fact, we reached $8 $1 billion in 2015 during my first year as CEO of our company.
In today's strong market and with many of our growth growth initiatives, providing strong contributions our last 12 months performance was $8 6 billion exceeding.
Exceeding our previous record and reaching nearly 30% above the historical average.
While no two cycles are exactly alike. Our performance during prior business cycles provides valuable context on how these growth initiatives might perform and reposition lyondellbasell during the next cycle with a larger asset base.
Let me summarize our view of current conditions and the outlook for our business with slide 18.
In the near to mid term further progress with vaccination Rollouts should continue to support solid demand and margin for our products with 7 billion doses of vaccines administered worldwide.
Approximately one half of the world's population has now received at least one dose of a COVID-19 vaccine.
New cases in the U S have fallen to less than half the level seen during the delta driven spike of August and September.
We are keeping a watchful eye on rising case rates in the U K and parts of Europe, but most virus indicators are trending in a favorable direction.
Over the coming months margins are expected to face headwinds from typical fourth quarter seasonality combined with increasing feedstock and energy prices, we anticipate some margin compression, but expect markets to remain relatively strong.
Logistics constraints and the pace of vaccination are currently hindering demand eventually consumers will have more options when purchasing a new car back order furniture will become available and all of us will find a way to resume traveling whether for business or leisure.
Pent up demand is tangible and consumers have ample liquidity to drive purchases of both services and manufactured goods.
Monetary stimulus may taper, but the unprecedented levels of stimulus deployed during the pandemic will have lasting effects that are typically supported for commodities.
Let me close with slide 19.
As I think about the coming weeks and prepare to pass the baton to the next leader of Lyondellbasell.
Draw comfort from the knowledge that the broader team we have in place is incredibly talented and has created great momentum that will endure for many years.
In the end our assets don't run themselves and decisions don't get made by spreadsheets.
Confident that this remarkable team will continue to take our company to greater Heights.
Our company has never forgotten, our core values built upon safety reliability and cost efficiency.
These attributes form the basis for a leading an advantaged positions in our industry.
With these strong foundations in place we are deploying our business model.
Ross a larger asset base with embedded growth through projects, such as IPO TBA facility and further expansion of our global joint venture partnerships.
In tandem with our investment to reduce carbon emissions. We're also building innovative business models that will increase our utilization of plastic waste as a circular feedstock.
My belief is that over the next decade, Lyondellbasell will become a global market leader in the exciting and rapidly growing market for sustainable plastics.
Strong markets and new sources of EBITDA, our team works diligently to maximize cash conversion.
And we are taking care to reinvest that hard earned cash into accretive investments that add value and drive future growth.
All of this work is underpinned by a disciplined financial strategy.
We stand by our dual commitments to a growing dividend and an investment grade credit rating through cycles.
We are confident that we can complete our deleveraging and achieve our target of reducing debt by $4 billion before the end of this year.
With strong cash flows and no need for further debt reduction we expect to continue reinvesting in our company through the opportunistic repurchase of Lyondellbasell shares.
I hope you share my sincere enthusiasm about the future of our company.
We are now pleased to take your questions.
Thank you at this time, we'll be conducting a question and answer session. If you'd like to ask a question. Please press star one on your telephone keypad.
Mason Hall indicate your lines in the question queue. You May press star two if you'd like to remove your question from the queue.
For participants using speaker equipment and may be necessary to pick up your handset before pressing the star keys.
We ask that you. Please limit your questions to one to allow time for everyone.
Our first question comes from Jeff Zekauskas with Jpmorgan. Please proceed with your question.
Thanks very much.
Bob.
What do you think the skill set.
The new CEO of Lyondell should be that is what what should he understand what should his particular strength space.
Okay. Thank you Jeff good morning.
Well I think to be successful in the business that we compete in.
Having a firm firm view about the importance of safety reliability and cost efficiency. It's what we did in the early days when we when we came out of the chapter 11 process.
That will be important and I recall as I seven years ago, roughly was named the CEO here.
I talked about the importance of strategy and culture and so my sense is if I were to think about the next chapter of the things that I would add would be focus on circularity and our sustainability initiatives.
And I think the uniqueness of our culture is that.
And the next CEO who's who is grounded rigorous.
<unk> works.
He works in service of the employees and the shareholders will be successful.
Thank you.
Our next question comes from Vincent Andrews with Morgan Stanley. Please proceed with your question.
Thanks, and good morning, everyone.
Alright, Thanks, Bob and good luck going forward.
If I could just ask you, it's obviously been an unusual year.
The weather and the outages.
And the chip issue if you could.
Help us think about utilization rates for your assets.
<unk> 22 I.
Assuming no unplanned activity when do you think you will see polyethylene rates get back over 90% in the U S.
Yes.
I noticed the polypropylene and the AI had very high volume in the third quarter is that a function of.
Less demand for compounding PPE because of autos, but just how should we think about P and keeping utilization rates in the U S and Europe for next year.
Sure. Thank you Vincent first of all R&D just mentioned a couple of words about Q3 and.
Kind of the slight Miss we had we had a couple of very atypical unplanned outages that were quite large first we had the asset yields unplanned downtime due to the to the incident we had.
At Q3 volumes and margins are the volume loss and in Q3 margins that outage impacted earnings by about $75 million.
We also had a couple of.
Larger atypical events in <unk> Americas.
At Q3 margins that loss volume impacted earnings by about $200 million. So we could take three or four incidents.
And those outages reduced Q3 by about 275 million and there were other kind of normal unplanned outages that we have.
In any given quarter, but those were it was quite an unusual quarter in that regards.
As I think about next year.
You said it well I mean I think.
There is still a lot of constraints in terms of demand today, we still see a global supply chain.
That is not operating as smoothly as what we've seen in the past chip shortages.
Shipping restrict constraints, whether it's <unk>.
High cost for containers or just ships being in the wrong place.
I think I believe firmly that that has impacted exports of finished goods out of China, which have in turn reduced demand for plastics in China. So as we look in next year.
We expect that by the middle of the year lot of these issues should should have normalized and we should see more typical global trade patterns and and with them stronger durable goods market, especially for auto and appliances those things that people have not had.
Both to purchase.
That should favor polypropylene, probably more differentially than polyethylene. So I think by mid next year, we should see operating rates sustained at over 90% and a lot of these constraints will have relieve themselves.
Thank you.
Our next question comes from Kevin Mccarthy with vertical Research partners. Please proceed with your question.
Good morning.
Bob I'd Echo many of the comments Michael made in his prepared remarks about you and wish you all the best of luck in the future.
My question for this morning is on the refinery.
Better operational results there in the quarter, but six or seven weeks ago. I think you also announced the intent to revisit strategic options there and so I was wondering if you could comment on both of those kind of the near term operational outlook as well as the options on the strategic menu in and progress on.
That front lately.
Yes, Thank you Kevin for your kind words.
So first on the on the business side on the refinery things are certainly turn positive.
We turned a profit in Q3 as we mentioned during the prepared remarks.
Q4 looks to be stronger than Q3.
Of late what we're seeing with high oil prices, we're seeing more Canadian sour crude coming down to the U S which is.
Causing the light heavy differential to widen that favors our refinery.
And I think that trend could continue.
For the next quarter at least.
On the product side distillate inventories are very low distillate cracks have expanded we're seeing air travel get back to about 80% of pre COVID-19 levels in the U S miles driven are back to pre COVID-19 levels now so all of the trends when you think about demand light heavy differential all indicate improvement.
Sequentially from Q3 to Q4.
And so we're pleased to be back back in the black in refining.
With regards to the process and the transaction, we're working through the process now and our aim is to move.
Towards the transaction in the coming coming quarter or two we still continue to believe that the best value for this that this refinery can create is by being part of a system, where it can be optimized from crude purchasing to logistics to to the co product processing.
Thank you.
270000 barrel a day refinery on the Houston ship channel.
As well placed and create tons of value as part of our system.
Thank you. Our next question comes from Edlin Rodriguez with Jefferies. Please proceed with your question.
Thank you good morning, guys.
Quick question for you Bob I mean, when you look over the next 12 to 24 months clearly your expectation is for margins to moderate.
You're not expecting a margin cliffs like some more bearish participants out there, but the question is one what can you be wong.
And two like what are the market dynamics that you believe should prevent like a worst case scenario.
Yes, great question deadline I mean, this has been the debate for the last 12 15 months and.
Many of you will recall that I talked about demand being stronger for longer.
Still believe that I think as you go quarter after quarter.
All of the market forecasters have underestimated demand growth and I think that will continue to play out I mean think about we still have reopening ahead of US there is a lot of buying power in the hands of consumers.
<unk> historic savings rates in the U S and in many other regions around the world yet still accommodative Central bank policies, even if tapering starts still have very low interest rate environment.
Here and abroad, and so much pent up demand from goods and services that we couldnt access because of shortages or because of limitations on travel. So I think this sort of scenario of moderating margins.
Based on continued strong demand and strengthening as reopening really takes hold and some of these <unk>.
Supply chain constraints relieve themselves like the chip shortages.
You think about the impact in our compounding business folk because auto production is low it's significant.
And when those chips are available, we think that our polypropylene business.
Our <unk> business and our compounding business will benefit materially from more automotive production.
You asked about what could go wrong.
I think in.
In the near term, we'll have to watch energy prices.
There could be points, where we could see potentially spikes in energy price, but I think sustained high energy prices are unlikely because at some point there'll be met with more supply.
So I think thats, what we have to watch and the other is the picture in China remains a bit murky and I'll try to address them through the upcoming questions.
Thank you our next.
Comes from Bob Court with Goldman Sachs. Please proceed with your question.
Okay.
Yes. Good morning. This is actually Mike here and then for Bob.
Well, if I could just.
You started down the path, but I wanted to ask about China just considered.
It's around the energy controls and perhaps carbonization effort.
Yes.
The future implications there are for petrochemicals and perhaps your strategy for <unk>.
And in that region.
Yes so.
I don't profess to have the exact picture of what could happen, but I'll give you a few of my thoughts about what could happen.
In terms of dual controls in the near term you do see some lowering of petrochemical production.
Ultimately that will require more imports, which benefits exporting regions like the U S. Whether it's in.
In the <unk> business or in the OSP business I think that's a net positive I think the reduction of coal use will likely turn off some of the CTO complexes, requiring more imports of polyethylene and polypropylene favourable for our global producers like us.
The shipping constraints I think have been a net negative in the near in the near term because they've not been producing for exports is March of finished goods. Two reasons. One is they can't get enough containers second because shipping costs in many cases our tenex.
You have to consider both the.
The sea freight plus the container cost Theres, just not able to pass that kind of increase on so I think as that normalizes I would think that demand should increase in China as they are able to export more finished goods next year and I think the longer term outlook is that.
As there is less coal consumption. It seems to me that the amount of.
Expansion that could take place in China could be less than what we've seen in the past certainly.
<unk> and CTO based technology based capacity will likely not be.
As as robust as what we've seen in the last 10 years.
So I think there are many bullish aspects to how this could play out.
But I think it will be choppy over the next couple of quarters until we get back to something more normal.
Thank you. Our next question comes from Hassan Ahmed with Alembic Global. Please proceed with your question.
Good morning, Bob and wishing you all the best.
Bob a question around net polyethylene dynamics in the marketplace. It seems there are two camps now.
The IHS guys talking about.
As much as 15 cents, a pound and margin compression for polyethylene in Q4, and you have Dow that's talking about 7% to eight cents a pound so just trying to figure out which lyondell.
Yes, so hassan.
In terms of PD price.
Moderation in price is kind of where we are and we have been for some time.
If you look back over the last 10 years. Most every year you see some moderation in Q4 and polyethylene price and I think this year will be will be very similar.
And at the same time, we do have feedstock costs that have come up.
Some here in the U S by sensors on the feedstock side that ethane is very abundant and available and what's setting the price for ethane as natural gas price and it seems that natural gas prices kind of settled out here in the high four $5 per million Btu range, if that's our assumption.
And of course, we can have a spike here or there, but let's say we get through the winter in that range and Frac spreads are 5% to seven a gallon for ethane.
I think the cost side is kind of where we are.
And there could be some moderation in margin 15 feels heavy to me.
I suspect that it will be something more modest than that.
Thank you.
Our next question comes from David Begleiter with Deutsche Bank. Please proceed with your question. Thank.
Thank you good morning, Bob as well again, all the best in your future endeavors.
Bob one of your competitors recently announced plans to spend $1 billion a year to decarbonize their asset base.
Do you think about <unk> efforts to Decarbonize their base your base and how much it will cost going forward.
Yes, Thank you David.
First of all let me talk more broadly about our sustainability strategy and how we think about that.
We've been very clear that we want to lead on circularity, and we want to be a fast follower when it comes to C. O. Two so that what that means is that on circularity, we want to lean into innovation and developing technologies.
As an <unk> reduction.
We're likely to we could co develop with others, but we may also combine that with licensing in technology.
So having said all of that when you think about our capex.
First of all we've been consistent that we believe our capex will be about $2 billion per year through 2025. So the next four full years, we expect to be around $2 billion of Capex in.
In the back half of the decade, as we look to implement technologies like electric furnaces or whatever it comes about.
We think the Capex could step up by about half a billion dollars a year in the back half of the decade.
So instead of two to five per year, maybe starting in 2006, but I don't expect that to be sooner than that.
$1 billion per year.
<unk> related capex.
That's not part of our plans as we sit here today.
And Dave when you think about next year, we have capex rolling off from the <unk> project as that gets completed so we do have room in within the budget that Bob outlined there.
Thank you. Our next question comes from P. J <unk> with Citi. Please proceed with your question.
Yes, good morning, and Bob we'll Miss you. Good luck in your next endeavor.
Thank you PJ.
Question on feedstock slate as natural gas prices natural gas liquid prices NGL prices are going up in the U S.
<unk> propane.
How do you how did you change your feedstock slate in North America, and what do you expect going forward and similar question in Europe, where NEP just spiked with natural gas prices also spiked. So how did the European feedstock slate change and what do you see there as well.
Yes, Thank you PJ.
Let me talk a little bit more broadly about energy prices as context, and then I'll get into the feedstock flexibility both here in Europe.
First of all.
As you look at kind of the outlook for oil prices, it's likely that oil prices will persist will be persistently high over the next two to three years, we don't see large IOC is coming back to drill the independents here are starting to drill more.
But the very large companies.
Presence in for example in the Permian, we're not seeing drilling come back.
High oil prices are good for Lyondellbasell.
So I think over the long run there will be plenty of ethane.
Think ethane.
As as there is more gas supply with more drilling.
<unk> should be plentiful gas price should be kept in check, especially with feedstock flexibility, we'll have a chance to rotate to other feeds in the near term.
We recently still find ethane to be favored.
Favored feed to propane and butane prices have run quite a lot. So they've been really out of the mix, we have been cracking some gas oil and heavies as well so think about like a barbell slate.
Light and heavy but in the middle we have not been cracking in the U S and Europe.
Because of high LPG prices, we've been cracking naphtha mainly.
And co product values have been pretty good I mean butadiene has run run well propylene has come off some but still at very healthy levels. So overall.
Propane butane I would expect we'll be out of the mix for most of the winter and we will focus on ethane.
And the heavy end here in the U S in Napa in Europe.
Thank you.
Our next question comes from Chris Parkinson with Mizuho. Please proceed with your question.
Great. Thank you very much can you sit on a current demand trends and intermediates.
<unk>.
Channel inventories are how do you see the setup for 2022 profitability evolving.
In the context of more normalized operates and maybe just a quick update on the oxy fuels as well. Thank you so much.
Sure. Thank you Chris So first of all on <unk> continues to be very strong propylene oxide demand is strong the market continues to be tight.
We will have a record year this year in our Apio business.
And we see that continuing as I mentioned earlier and one of the prior questions as auto demand comes back appliance demand comes back because of constraints being relieved we think that favors our continued strength in the business and I actually think that our new capacity in 23 could come on at a time.
When the market desperately needs more Po.
And I think it could be absorbed very quickly so we're very constructive.
Next year <unk> continues to be strong.
Our plant is back up and running as of early October where we're back to running at full rates and we're enjoying the benefits.
Have a very good market and we think that'll carry well into 'twenty two on.
Oxy fuels demand is back but unfortunately, the challenge today is higher butane price so butane as a percent of crude oil is kind of around 90%.
And likely through the winter months, we won't get much relief on that but.
But next year as we get into spring and LPG prices moderate after we get through the winter season, and the demand should continue to improve and be better as driving improves in Europe and other parts of the world think oxy fuels, we will get back to the typical contribution of 400 to 450.
Annually.
Prior to the new projects starting up <unk>.
Styrene likely mixed.
When there are outages, we see styrene get a bump when everyone runs styrene is.
Kind of either side of breakeven, but I think adding the the real kind of gems in the portfolio next year will be propylene oxide <unk> and oxy fuels likely starting in the spring.
Thank you.
Our next question comes from Steve Byrne with Bank of America. Please proceed with your question.
Yes. Thank you so Bob you made a comment that.
You want.
The lead on Circularity, and that's not a surprising comment coming from you given your.
Our leadership years ago in the alliance to end plastic waste, but.
Is that a is that an ethical issue or are you, saying that because your customers are demanding it.
You have these circulin products and my question for you is do you do you have significant demand for those products now that you can't meet the supply how long before you might have.
Paralysis based production or renewable feedstock based production how far away is that and is it meaningful.
Meaningful.
Yes, Thank you Steve.
So first I think there are two aspects to this.
First is the demand side and the second is playing to our strengths on the demand side, absolutely our customers are asking for more and more.
Our circular products and plastics, each year, which the demand that we can't meet and that's driven by their own commitments to increase recycled content and packaging. So the entire value chain is pulling.
Starting with the brand owners they are pulling more circular products.
And I think that will just grow.
As the years progress.
I think we should read on circularity is that we.
We have a strong technology base in polyolefin.
Polyol friends process technology catalyst technology also we are developing this martech technology, which is the molecular recycling that pilot plant should be operational in the coming weeks and I suspect by about March April we will know whether we have an investable technology.
<unk>.
My sense is that we will the question will be to what degree can.
Can we get the yields that we want of pyrolysis oil.
Our current plan is by end of next year to be in a position to.
To dedicate some of our Capex to building a more tech plant either in the U S or in Europe. So I think it plays to our strengths and demand the demand pull is there from there from the brand owners.
Thank you.
Our next question comes from John Roberts with UBS. Please proceed with your question.
Thanks, and just in case, we don't get another call with you Bob best wishes in the future.
Thank you John your license.
Licensing activity gets an early look into industry expansion activity I assume that new license discussions decline during the pandemic, but have discussions for new plant licenses increased significantly coming out of the recession and any differences between polyethylene and polypropylene.
Sure. So John we had a we had a gap.
During the pandemic as you said, so I think probably something around 12 15 months of much much lower activity. It has picked up in Q3.
More polypropylene and polyethylene.
And quite a bit of it in China.
I think thats a trend that we've seen.
Having said that pickup in demand in our activity in Q3, we're still not quite back to 2019 levels.
So I think still modest and as you think about where youre going with this question John is what does it mean for.
Supplied 345 years out I do think we're going to find a gap in supply new supply.
Three years from now because those decisions to expand were delayed are paused.
During the pandemic and then if you look further out and you think about operating rates to more fully kind of answer your question.
Beyond the couple of new projects that are coming in the U S. In some pace of capacity in China. It seems to me that polyethylene and polypropylene operating rates.
Likely reach some sort of a bottom in 'twenty two.
Or 23% and steadily increase and that bottom is very shallow if not maybe kind of sideways from where we are today given our outlook on demand. So.
I think we do see operating rates increase as we move through into the middle of the decade.
Thank you. Our next question comes from Erin just wanted <unk> with RBC capital markets. Please proceed with your question.
Great. Thanks for taking my question and I'll add my congrats.
Best wishes to you Bob as well pleasure working with you.
Just wanted to I guess ask about polypropylene and the asset deals chain.
So polypropylene I guess it was necessary.
Impacted by the automotive shortages do you see that kind of evolving to a better state.
Spot over the next few quarters and then similarly with asset yields was it mainly the downtime that.
How is that business back in the quarter and I guess.
I'm, just providing outlet there as well thanks.
Certainly cells or I'll start with <unk> definitely the downtime is what impacted us in Q3, and as I mentioned at Q3 margins that loss volume reduced our earnings by about $75 million backup.
Backup and running full rates now.
Outlook is very good for asset deals and our view is that.
From a margin should should be very healthy.
Even going into next year, so we're quite positive about that business.
Polypropylene.
Auto was weak with packaging was quite strong and we had a lot of kind of medical related demand. So that that that held polypropylene up now as we see auto will come back.
For our company, we have we have much more leverage to the to the auto recovery. If you think about our polypropylene sales to Oems or tier twos, plus what goes through compounding plus some of our polyethylene that goes into plastic fuel tanks.
Our company will benefit immensely from from the chip shortage hopefully alleviating as we go through the next few quarters.
And I think youll see that in the Aps business, there should be a meaningful step up.
Once we see auto come back and as a result of all of that.
I think pp business will remain.
Tight, it's frankly pretty tight today.
And demand continues to be really strong.
And Ah Rune and in our third quarter. It was more production shortfall because we had two weeks of downtime in Lake Charles for <unk>.
Facilities here in the United States as well.
Thank you. Our next question comes from Frank Mitsch Fermium Research. Please proceed with your question.
Hello, Ron Bob Hell of a run.
What are you most proud of during your tenure as CEO and what do you think is the biggest piece of unfinished business that perhaps the next CEO auto addressed early on in his or her tenure.
Yes. Thank you Frank it's really been great working with all of you and getting to know all of you better.
What I'm most proud of while it's been 12 years with the company almost joined a very different company back in.
March of 2010, and I'm proud of the employees, who stuck through it through thick and thin there. There are many many people here who stayed during the chapter 11 process and.
One they are company back.
And I'm really proud to have been a part of <unk>.
<unk> from where we were back in March 2010 to where we are today.
In terms of what's ahead I think it's really about continuing to capture value from all of these growth projects that we've implemented.
We've invested.
Round 9 billion and $5 five or six discrete sort of initiatives, both organic and inorganic and it provides an incredible runway for earnings growth. So I think it's really just capture the value from the growth that we've been through continue to lean into circularity.
Focus on an <unk> reduction and devalue minded when it comes to M&A.
Value like we have been and BLK with saying no win when the deal doesn't make sense. So I think I think we've built an incredible cash machine here at Lyondellbasell.
Thank you.
Our next question comes from Duffy Fischer with Barclays. Please proceed with your question.
Yes, good morning.
Two questions around Europe.
So when you look at your business one of your calling cards over the last decade was you guys going to lighter and more into LPG.
In the near term that doesn't seem to be as beneficial whats your view longer term LPG versus naphtha ratio, where does that go what does it do to the competitiveness of your business within Europe and then the second one is if carbon prices are just structurally going to be higher in Europe, whether that's natural gas or LPG coming in.
What does that do to the competitiveness of the European petrochemical business and should we look to see meaningful reductions in production there maybe over the next five years or so on the back of that.
Yep, Thanks, Duffy, both really great questions.
On the European LPG competitiveness I think this will ebb and flow we've seen periods when LPG became expensive in Europe, we've seen when.
Butane is traded at 45% of crude price. So I think that'll continue part of the part of sort of the lower prices.
Sort of scenario will be when.
U S exports of butane and propane increase.
As there's more oil production and associated gas and.
And the Ngls that come with that so.
I think having flexibility benefits companies like us because it's so hard to predict.
What will be favored win but if you have flexibility you tend to do well in a range of environments and I think our company has that both in the U S and in Europe.
And your second question about competitiveness in Europe.
And sort of the carbon initiatives.
Well I mean, there's a lot of legislation being considered the way I think about it is that.
First of all relative competitiveness is really important.
And I think within the region, we have one of the most competitive asset basis.
We've built that through all of the work we did earlier in the last decade.
Over time, you could see regulation that provides for a border adjustments or things that will help protect the industrial economy in Europe.
Think.
Industrial.
Employment is a very important part of the European economy, and I can't imagine that with just our trip away. So I always asked my team to focus on regional competitiveness and make sure that we're at we're at the most competitive end of the cost curve.
Regionally.
Thank you.
Next question comes from Matthew Blair with Tudor Pickering Holt. Please proceed with your question.
Hey, good morning, Thanks for taking my question.
Best Bob we'll definitely Miss you.
Was hoping you could expand a little bit on your ethane outlook. You mentioned that supply is abundant now we do have some new crackers coming online plus the potential ramp of ethane exports.
This incremental demand is that something that you think will be covered by incremental production just given the recent increase in the rig count or would it need to pull from I guess, either like rejection or inventory.
Yes. Thank you, Matt it's been a pleasure working with you as well.
I've had lots of discussions with some of our largest suppliers on this topic and I think with.
New capacity coming here in corpus.
And more demand for ethane my sense is that between the amount that is rejected today that could be recovered and incremental output from from the independents, who are starting to ramp up in the Permian.
I think there's enough ethane.
Price setter on ethane I continue to believe will be natural gas.
With a.
Modest frac spread to get to the ethane price.
We've done a lot of work on this and we think that that likely is the scenario.
So.
And then longer term.
I think the feedstock flexibility here in the U S.
We will serve us well.
As the various scenarios play out and you could you could make a good argument for the oil.
Oil to gas ratio of widening.
As we get get pass summer of 'twenty, two and into the next couple of three years.
Thank you.
Ladies and gentlemen, we have reached the end of the question and answer session and I will now turn the call over to Bob Patel for closing remarks.
Alright, well. Thank you again for all the thoughtful questions. Let me offer a few closing remarks.
First of all we continue to believe that demand will remain strong well into 2022 for all of our products and markets we serve.
While we are likely to face some margin pressure from rising energy and feedstock costs, we expect that our earnings and cash flow will remain robust.
<unk> is an array of options to create shareholder value ranging from a growing dividend share repurchases and value creating M&A.
It's been my sincere pleasure and honor to serve and privilege to serve as CEO and so part of our incredible employees and shareholders for nearly seven years, we've built an incredibly strong company over the past 12 years and I'm thankful to have been a part of it.
I've enjoyed getting to know all of you and working with you and I remain very optimistic about the future of <unk>.
Thank you and best wishes to all of you who are now adjourned.
Thank you all for participating in today's conference you may disconnect your line and enjoy the rest of your day.