Q2 2019 Earnings Call
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 at that time to ask a question. Please press star. One are you touched on the phone I would now like to turn over the conference to Mr., David any director of Investor Relations. Sir you may begin.
Thank you Angela Hello, and welcome to Lyondellbasell second quarter 2019 teleconference. Im joined today by Bob Patel, Our Chief Executive Officer, and Thomas Aebischer, Our Chief Financial Officer.
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 Dot Lyondellbasell dotcom.
I would also like for you to note that statements made in this call relating to matters that are not historical facts are forward looking statements. 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 actual results could differ materially from these forward looking statements.
For more detailed information about the factors that could cause our actual results to differ please refer to the cautionary statements in the presentation slides, our financial reports, which are available at www Dot Lyondellbasell Dot com Slash Investor Relations.
Reconciliations of non-GAAP financial measures to GAAP financial measures together with any other applicable disclosures, including the earnings release are currently available at our website.
Finally, I would like to point out that a recording of this call will be available by telephone beginning at two PM Eastern time today until 11 59, P.M. Eastern time on September Onest by calling 888 to 779385 in the United States and four to 980 509 outside the United States. The pass code for both numbers is 5713.
During today's call, we will focus on second quarter results. The current environment, our near term outlook and we'll provide an update on our growth initiatives.
That being said I would now like to turn call over to Bob.
Thanks, Dave Good day to all of you participating around the world and thank you for joining our second quarter earnings call.
Let's begin with slide three and review the highlights.
During the second quarter consumer driven demand for our products and lower feedstock costs improved profitability in four of our six segments.
Despite concerns about capacity additions in the industry and a challenging business environment integrated polyethylene profitability increased during the second quarter.
With industry margins of approximately $600 per tonne in Europe .
And $800 per tonne in North America.
Across the company, our second quarter EBITDA improved by approximately 11% relative to the first quarter.
Second quarter earnings were $2.70 per share, which represents a 23% improvement over the previous quarter.
Our second quarter income was slightly below the guidance range. We provided in June primarily due to compressed margins from our refining business.
Heavy oil as the price of oil fell by more than 15% from mid May to mid June we saw many of our customers holding back on June orders, particularly in markets that are driven by industrial demand such as automotive appliances and industrial and construction.
During July volumes for most products rebounded to levels, 10%, 20% above June and third quarter demand seems to be following typical summer seasonal strength.
Our company move forward on our disciplined value driven growth strategy by announcing a seconds fair zone polypropylene project and our joint venture in Thailand, and ending discussions regarding the potential acquisition of Braskem.
We are leveraging our innovative technologies by expanding our footprint in the growing southeast Asian polypropylene market.
We are completing construction on our first hyper zone polyethylene plant and building a new propylene oxide plant that addresses growing demand for polyurethanes.
These decisions demonstrate our disciplined approach to investments, which are focused on growth opportunities, where we see a clear path to value creation for our shareholders parse our strong cash flows and conservative balance sheet allowed us to launch a tender offer in June that resulted in the purchase of approximately 9.5% of our outstanding shares in July our actions in the last quarter are consistent with our balanced capital deployment strategy that positions us to grow cash flow and provide consistently strong shareholder returns in the form of both opportunistic share buybacks and a top decile dividend.
Let's turn to slide four and discuss our safety performance.
Our approach to the integration of the A. Schulman acquisition began by immediately instilling Lyondellbasell safety culture across our new assets employees and contractors.
Okay showman expanded our employee population by approximately 40% and through the end of the second quarter, we achieved considerable progress to sustain lyondell, Brazil's leading safety performance and now Thomas will provide more detail on our financial highlights for the second quarter.
Thank you Bob and good day to all of you. Please turn to slide five which illustrates developments within our company during the quarter and over the trailing 12 months.
As Bob mentioned during the second quarter four of our six business segments posted higher profitability relative to the previous quarter EBITDA for the entire company has continued to increase sequentially since the fourth quarter of 2018.
Our business portfolio continues to provide earnings resiliency through the diversity of our petrochemical products and markets and can often reduce volatility for the overall company performance.
Integrated polyethylene margins have expanded in both Europe , and North America due to favorable feedstock prices.
In addition, seasonally low butane the raw material prices drove benchmark northwest Europe , MTB oxyfuels margins to the highest level since 2015.
In the first quarter, we mentioned that we had a minor impact due to the service disruptions related to the March failure at the third party terminal on the Houston ship channel.
The impact overall sales volume and expenses extended to the second quarter and we estimate that results for our eye MP segment were impacted by approximately $50 million. During the first half of 2019, primarily in our oxyfuels and related products business.
We anticipate that third quarter results, we will have little to no impact due to this issue at the terminal.
Our used in the refinery continued to run well at 97% of nameplate capacity.
Unfortunately high prices on the portion of heavy sour crude oil we buy on the open use market reduced profitability relative to Maya 211, the reference crack spreads.
Our technology business delivered another quarter of outstanding results with several licenses, reaching revenue recognition milestones.
On slide six you can see that line, though brazils businesses generated nearly $1.2 billion of cash from operating activities during the second quarter.
We raised the quarterly dividend to one dollar and five cents per share in may making this the 11th dividend increase over the past eight years.
In addition to a strong dividend our strong cash flows provided ample capability to continue our investments in organic growth projects. We are progressing construction on our PVA plant and wrapping up construction, our hypersound PE plant, where we will begin commissioning activities during the second half of the year.
The quarter.
Closed with over $1.9 billion of cash and liquid investments.
Please turn to slide seven.
The chart on the left illustrates our cash flow performance over the previous four years and the trailing 12 months.
We believe that operating cash flow after accounting for sustaining capital expenditures provides visibility into our cash that is available for accretive investments in organic growth and M&A or for shareholder returns through dividends and share repurchases.
During the last 12 months Lyondell, Brazil generated $4.6 billion of cash from operating activities.
Capital expenditures during the second quarter were about $620 million reserve 30, 35% allocated to sustaining capex and to balance invested in profit generating projects.
This investment in growth has increased slightly during the second quarter and we expect a similar trend over the remainder of the year as we complete the construction of our Hypersound PE facility and accelerate the activity for building, our new Pos PEO PTA plant in Houston.
The chart on the right of the slide illustrates our total liquidity for the same period.
The decline in 2018 reflects cash used for the acquisition of A. Schulman.
As I've discussed in the first quarter earnings call liquidity improved during the first quarter of this year, primarily due to the new term loan facility.
We closed the quarter with liquidity, which total liquidity in excess of $8 billion at the beginning of the third quarter re utilized $3.1 billion of our available liquidity to fund the tender offer which closed on July 12.
The tender offer resulted in the repurchase of 35.1 million shares with low interest rates and Lyondellbasell strong dividend yield our tender offer is cash flow positive cash savings from the quarterly dividends on the lower share count will exceed interest payment on the incremental debt.
I would like to highlight the progress in reducing our effective tax rate for the quarter to slightly less than 15% and our cash tax rate for the year to date to slightly less than 12%.
These rates are the result of many initiatives to optimize our tax planning, which the largest benefits for this quarter rising from our success in obtaining incentives related to the company's targeted investments in research and development activity.
At the beginning of 2019, we provided guidance that our effective tax rate for the year will be approximately 20% and that cash tax rates will be slightly lower.
We now believe that our effective tax rate for 2019 will be approximately 17% and our cash tax rate will be several percentage points lower.
Our fundamental approach to capital deployment remains disciplined and unchanged slide eight is an illustration. We have used to contrast, the sources and uses of our capital in the past and going forward.
We are first and foremost committed to a strong and progressive dividend.
We will make capital investment that sustain and expand our asset footprint pursue value minded inorganic growth opportunities and returned a balance of our cash through opportunistic share repurchases.
With that I will turn the call back to Bob.
Thanks, Thomas Let's turn to slide nine and review our business results in our olefins and Polyolefins Americas segment second quarter, EBITDA was $635 million $119 million higher than the first quarter.
Results were driven by abundant and affordable natural gas liquids.
Olefins results increased by approximately $90 million compared to the first quarter. This improvement was driven by a higher margin as declines in the cost of raw materials outpaced declines in the price of ethylene.
Ethylene operating rates remained strong during the second quarter, averaging 91% exceeding industry rates by 5%.
We continue to optimize our cracker feed slate to benefit from lower NGL prices in our us Gulf Coast system.
We previously spoke about how much of our ethylene production was produced from Ngls.
It may be more useful to understand the composition of our phase three.
In the second quarter, we found advantage in low propane and butane prices more than 25% of the raw materials used in north American crackers, or propane or butane based and more than 55% was purity ethane.
We continue to increase our utilization of mixed Y grade Ngls has an advantaged ethylene feedstock.
During the second quarter mid single digit percentages of our North American Cracker feed slate.
Was composed of wide rate.
Polyethylene results increased more than $25 million during the second quarter.
Polyethylene margin improved with the spread increase in polyethylene over ethylene of about $65 per ton.
Spot prices of ethylene have risen during July due to industry downtime and continued delays in the commissioning of new capacity.
North American polyethylene production is increasingly serving global demand and more than one third of us and Canada industry production is now being exported.
Slide 10 depicts historical and forecast impacts from capacity additions on global polyethylene operating rates. The Green Dash line illustrates consultants forecast from 2016 for the impact of the current wave of new capacity coming into the industry.
Some observers believed back then that this turnaround in operating rates the downturn in operating rates was would result in a period of compressed ethylene chain margins similar to past cycles, when effective operating rates dipped below 90%.
However, delays in the start of plant capacity allowed robust global demand to absorb the new supply.
As shown by the dark Gray line in your industry maintain high operating rates and relatively strong integrated ethylene chain margins have endured.
The forecast from 2016 proved to be far more bearish than the actual outcome.
Similarly current consultant forecasts predict that next wave of planned supply additions will lead to a small decline in global operating rates during 2022.
Illustrated by the Gray Dash line.
Based on recent industry results, we expect that some of this plan capacity will also come in.
Come online later than expected and some projects might be cancelled.
These delays and reductions of planned capacity are likely to once again produce a flatter operating rate profile that extends todays relatively high rates for the years to come.
New industry capacity will create short term flux fluctuations, particularly in local markets, but we believe global markets will remain balanced to tight providing good profitability for advantage producers.
Now please turn to slide 11 to review the performance of our Olefins and Polyolefins Europe Asia and International segment.
During the second quarter, EBITDA was $331 million and $35 million increase over the first quarter.
Results were driven by continued seasonal improvement in polyethylene chain margins with polyethylene price increases keeping pace with rising ethylene prices.
Olefins results improved more than $55 million margin improved as the ethylene contract price increased nearly $65 per ton and volume increased with improved operating rates.
Combined Polyolefins results declined $15 million, primarily due to a decrease in volume.
During July we have seen strong polymer demand in the region as customers return to the market after taking a pause during the second half of June with the hope of four falling prices.
Looking at our olefins and Polyolefins from a global perspective in both Europe , and North America polyethylene sales volume for July are projected at levels that are 15%, 20% above June .
With six of our competitors Western European crackers are undergoing turnarounds during the third quarter.
Lyondellbasell will seek to capture opportunities in the market.
I'd now like to take a moment to highlight some of the products our customers are creating with recycled polyethylene and polypropylene that we produce at quality circular polymers Q CP, our joint venture with Suez in the Netherlands on Slide 12, you see our collaboration with Samsonite to create the first suitcase made using post consumer recycled plastic waste.
The outer shell is made from Q CP post consumer polypropylene resins and the inside fabric liner is made with PTC from post consumer bottles.
We have also collaborated with Unilever to supply recycled plastic for Dow and X. consumer product packaging.
Has the circular economy increases in prominence we believe that demand for premium recycled materials will continue to grow.
Our innovative joint venture with Suez harnesses, each partner strengths and deploys lyondellbasell deep knowledge of polymer technology to convert plastic waste into new materials and products that are valued by consumers. We believe that mechanical recycling will become an essential component of lyondell, Brazil's sustainable business model.
Please turn to slide 13, let's take a look at our intermediates and derivatives segment second quarter, EBITDA was $448 million, a $58 million increase over the prior quarter.
Results were driven by consistent performance of the IB business portfolio bolstered by seasonally strong oxyfuels profitability.
PEO and derivatives results declined by $35 million, primarily due to decline in volume.
Intermediate chemical results improved more than $25 million compared to the first quarter driven by an increase in volume for most products.
Oxy fuels and related products results improved by nearly $75 million as we saw strong seasonal margin increases driven by lower butane feedstock prices as Thomas mentioned, our Oxyfuels and related products results would have been even stronger if not for the disruption of the Houston terminal fire.
Fortunately, we expect Oxyfuel margins to remain strong during the third quarter and we anticipate a little to no impact from the terminal in incident on our business.
Now please turn to slide 14 to review the results of our advanced polymer solutions segment.
Second quarter, EBITDA was $120 million, a $28 million decrease compared to the prior quarter.
The seasonal strength that we anticipated for this business in the second quarter did not materialize results were lower due to diminished demand in both automotive and industrial construction markets.
Hey, showman integration costs for the second quarter were $19 million and impacted earnings by four cents per share.
As we discussed in prior earnings calls both transaction and integration costs related to the acquisition are included in the results for the third quarter of 2018 and only integration costs are included in the fourth quarter 2018.
Through the current quarter.
Compounding and solutions results for the first quarter declined approximately $20 million driven by softness in the automotive market.
Volume decreased for most products and margin decline for polypropylene compounds, primarily due to a lag in propylene pricing.
The advanced polymers results were relatively unchanged in the second quarter is typically the strongest for this business due to the summer industrial construction market.
That was not the case this quarter and volumes were down by 15% compared to the same quarter last year.
Our integration of A. Schulman is progressing very well at the end of the second quarter, we are capturing cost synergies in an annual rate of approximately $100 million and and we are well on track to meet the target of $150 million before August of next year.
We expect volumes to be fairly stable for the third quarter with some potential for seasonal demand improvement there with return of typical demand for the automotive market will be slow, particularly in Asia, where 17 Chinese cities and provinces have accelerated the implementation of stricter automotive emission standards that has reduced demand for non compliant models during July .
Customer applications for EPS products extend beyond automotive and construction to market, such as electronics and appliances packaging and agriculture.
On slide 15, we highlight a specific type of polymer compound called anti blocking masterbatches.
Masterbatches, our 'cause customize blends that can be mixed with commodity polymer resins during processing to improve both product production efficiency and the properties of the finished product.
Anti blocking masterbatches are used in plastic films to reduce friction during processing and prevent a roll of film from sticking to itself prior to use or during use.
Ken effective anti blocking masterbatch streamline the fabrication process and improves the usability of the film to minimize waste.
By customizing properties to meet customer needs, our anti blocking masterbatches serve a wider range of end products, including agricultural films food packaging and tape.
Turning to slide 16, let's discuss the results for our refining segment.
EBITDA for the second quarter was a negative $66 million, a $51 million decrease compared to the first quarter.
We continue to demonstrate the benefits of our reliability program at the Houston refinery with crude throughput increasing to 261000 barrels per day.
And operating rate at 97% of nameplate capacity for the quarter.
The Maya 211 crack spread improved significantly in April and averaged approximately $19 per barrel for the second quarter.
Unfortunately, we were not able to capture the full benefit of that crack spread improvement because our refinery does not source all of its crude oil and a Maya price basis.
The heavy sour crude oils processed at our refinery are sourced from Mexico, Canada and other locations high prices on the portion of heavy sour crude oil we buy on the open Houston market created a challenging end market for our refining business. During the second quarter. We continue to anticipate that margin benefits from the IMO 2020 regulations will bolster our refining results during September and October of this year.
On Slide 17, let me summarize this quarters highlights.
During the second quarter, we achieved earnings of $2.70 per share.
Low feedstock costs and resilient consumer demand for our products drove EBITDA improvement in four of our six segments, resulting in an overall EBITDA increase of 11% for the quarter.
Over the 12 past 12 months, our company generated $4.6 billion of cash from operating activities that contributed to funding for increased capital investment.
Paying and top decile dividend completing $1.9 billion in share repurchases and acquiring A. schulman.
We move forward on our value driven growth strategy by announcing a second spares on polypropylene project at our joint venture in Thailand, and we exhibited our disciplined approach by ending discussions regarding the potential acquisition of Braskem.
We are advancing construction of our LTB eight facility and more commissioned our new hyper zone polyethylene plant during the second half of this year.
Going forward, we expect that our business will continue to benefit from Brazilian consumer demand.
In North America, low cost NGL feedstocks should provide advantage for both our own NP and high end. These segments in our R&D segment strong oxyfuels profitability should persist for the remainder of the summer driving season with northwest Europe benchmark margins, reaching the highest level seen since 2015.
Additionally, as refining markets adopt new marine fuel regulations.
We will be ready to capture improved margins with high operating rates.
Our global portfolio of businesses provides confidence in our ability to remain advantaged resilient and poised to capture opportunities across a range of market environments.
Before we open the line for your questions I want to make you aware of our upcoming investor event.
On Tuesday September 24th we will hold our next Investor day here in Houston, Texas, We are planning a full day event when a plant tour of our Channelview site as well as our Houston Technology Center, you will have the opportunity to talk with members of our executive leadership team and learn more about our plans for the future. Please watch your email for invitations or contact our investor relations team for further details.
With that said we are now please take your questions.
Thank you we will now begin the question and answer session and I'd like to ask a question. Please press star one and you touched on the phone one moment. Please for the first question.
Thanks.
Our first question comes from around this one at Don with RBC capital markets. Your line is open.
Great. Thanks, good morning.
Just wanted to ask about <unk>.
The outlook for the rest of the year.
He mentioned that July .
Some improvement from that that the weakness in June .
Conversely in polyethylene looks like there was some movement up in May June and then that kind of looks like it's going to recede in July August I mean that could be typical seasonality too, but and weakness given us your thoughts on.
Both the polyethylene as well as R&D and related to your earlier comments.
About July improvement thanks.
Yes. So early in the main we continue to see the consumer demand driving demand for our products.
Where we see a little bit more tepid buying is on the industrial side.
As as you know there is a lot of.
Concern about trade and tariffs and Brexit and the direction of interest rates.
Hi, Harvey who is that thats, all causing industrial sentiment or industrial buyers to be cautious in what they buy.
Having said all that we still see in the case of polyethylene demand growth for this year.
Of of at least 4%.
Year over year.
And as far as new supply comes on we think that that the demand is there to to to meet it.
As a reminder, please limit yourself to one question. Our next question comes from Duffy Fischer with Barclays. Your line is open.
Yes, good morning, guys.
Question just on your P.O. project, the polyurethane chain has been weak.
Recently.
When you look out how does that impact your appeal when it comes online do we need to see kind of an acceleration in growth in the polyurethane chain for that to be a healthy launch when that plant comes on can you just kind of walk through maybe how the economics look to you today versus when you pull the trigger on that plant.
Yes, Duffy that they haven't changed considerably I mean, it's really what we're seeing today is a slowdown in the automotive market that we think is more temporary.
Oh for a variety of reasons summary, economic some hard because of the standards for example in Europe .
You know diesel standards are changing and emission regulations are changing so frankly speaking and I mean, I think consumers in Europe don't know today, what type of car. They should buy so they're just foregoing purchases until there's more clarity on the in the regulatory environment around around emissions and so on so our belief is that as as the middle class grows in India, China and the rest of the world and we think that you know automotive demand, although its cyclical longer term, we believe that.
More automotive ownership and generally the middle class buying furniture and all the other things that that Polyurethanes go into.
Really will underpin that investment.
So our view has not changed in terms of our ability to price placed the product or to deliver the returns that we expect.
Thank you. Our next question comes from Bob Koort with Goldman Sachs. Your line is open.
Good morning. This is Don Kim on for Bob earlier. This year, you guys talked a little bit.
And Dean in terms of contract improvements, maybe adding a $100 million of EBITDA, starting essentially around now.
Do you guys have any update on on this contract improvement.
Having those are real and those are coming through our PML now.
And you see those in the results and there is a lot of kind of moving parts, and I, envy, which styrene and methanol and and.
So on but I can tell you, we see it and our oxyfuels business and and even more importantly.
The advantage butane, especially here in the U.S. has been done a really good positive driver for our R&D earnings. So it isn't the BNL. Phil. This is Dave I would remind you of Thomas' comments around a 50 million dollar hit that we've taken in the first half this year related to the ITC fire.
That's primarily been felt in that in that segment.
Hello.
Thank you. Our next question comes from Kevin Mccarthy with vertical Research partners. Your line is open.
Good morning.
In the data that you provided in the supplemental section of your release it looks as though your polyethylene sales volumes declined 15% year over year in Olin PPI.
I know you mentioned June was soft and just wondering if you could elaborate on that was it due to the monthly sales patterns or did you have any operational or other issues.
That would explain that.
Yeah, Kevin and good morning.
We did have some operational issues and one of our crackers, where we can't really by ethylene to supplement so.
That was most of that of that change in volume that you see.
And then some of that was just kind of managing our inventory so.
But most of it was unplanned maintenance.
Okay.
Thank you. Our next question comes from Vincent Andrews with Morgan Stanley . Your line is open.
Thank you very much Bob on the Viper Zone project could you give us a little more definition on on the timing of the startup and the ramp and then also what's your view on the export markets.
Pricing in sort of the ability to move that volume and into which regions will you go.
Yes, so VIX and where we're going to start to.
We're starting to get systems turned over to us now.
We're not mechanically complete yet, but the commissioning process will.
Really begin in earnest here in the coming month or two.
And you know our idea is that we would we would have.
Production in Q4 on the on the hoppers on project in terms of export markets.
Yeah, the way to think about it is that we're going to export from from the system on the Gulf Coast. So it's not that all of the product that comes out of hyper zone will be exported will export. Some also from from other segments are early indications from work, we did with customers in Europe and some in Asia was that indeed, the products that will come off from Hypersound are expected to be unique and provide unique characteristics for for example, large part blow molding.
And ER and so we have a we have a very good detailed marketing plan that that includes all regions and aims to capitalize on the uniqueness of the products that come off by personal.
Thank you. Our next question comes from David Begleiter with Deutsche Bank. Your line is open.
Thank you good morning.
Bob with Braskem not happening are you thinking about perhaps wrapping up your organic growth activities.
And as part of that or can you discuss maybe your ethylene strategy going forward, you've been prudent not any ethylene capacity, but you are.
Naphthalene company. So you might at some point I'm sure you will thank you.
Yes, Thank you David.
First of all as we think about organic and inorganic our.
Capital allocation strategies really geared around funding organic growth from operating cash flow and ER and so I wouldn't make it direct tied to not pursuing braskem with increasing our organic programs are and we'll provide more of an update at the investor day.
But our strategy around organic growth has not changed.
After we complete PEO TB, a we potentially can can do one or two more derivative plants.
I actually think that our our.
Organic.
Growth program in terms of the funds required will scale down somewhat after PEO TB and we don't anticipate that changing.
So so I think you know, we'll continue to reserve balance sheet capacity for a primarily inorganic which as we've demonstrated quite patient.
Thank you. Our next question comes from PJ Juvekar with Citi. Your line is open.
Please check your mute button, where are you on mute perhaps.
Hey, sorry about that Bob Yes that was broken.
Hi.
Quickly on you know Buchenwald your cheapest feedstock and you know how much Max do continue go and was there any benefit of lower butane in oxyfuels.
And then you mentioned a Y grade Ngls, how should we think about why good engineers.
The margins there would be.
Your regular cracker margins, plus capturing frac margins as well is that the way to think about it.
Yeah. So first of all your question on butane really we should think about propane and butane together, we can crack up to 40% or 40% of our ethylene can come from propane and butane stuffy actually 40% of our fixed rate sorry for 40% of our fleetrite can be a propane and butane.
Yes, indeed, it did benefit our oxyfuels as well, especially here in the U.S. So.
So I think there was a you know it again it highlights our feedstock flexibility and our ability to be resilient in a range of.
Energy price environments or in terms of Y grade, we're continuing to increase our demonstration of our ability to crack y grade so.
Soon we'll have demonstrated on four of our crackers on the Gulf Coast and we can crack lightweight so when ethane prices were a bit higher Y grade made a lot of sense for us today with where ethane is ethane as ethane is far better read from an economic perspective, So I think PJ the way to think about Y grade is that its one more lever in our ability to flex feedstocks to maximize value.
And I think now we're very confident that we can do this at a at meaningful rates.
Thank you. Our next question comes from Hassan.
Ahmed with Alembic Global Advisors. Your line is open.
Wanting Bob.
Morning, well just wanted to focus on the near term you know been dead and gone draws relative to the back half of last year. You know it just seems that into U.S. In particular, you know it's exactly the opposite you have ethane, which is great thing you have spot ethylene, which is bumping and you know like you said in your prepared remarks, there's still about 30% increment not a 30% increment, but 30% of the remaining capacity you know that was expected between 16 to 19 is yet to come. So what are you guys seeing underground.
Okay, well, there's a lot there is on so I'll kind of take it in pieces first of all when we think about the feedstock environment, you'll recall that given six months ago, we were concerned about or another run in ethane prices and that hasn't materialized. So why is that well first of all there is a lot of wet gas coming out of the Permian Theres been more pipeline capacity added more fracs have been added. We've also had the turnaround season and project delays. So all of that has led to ethane prices falling below even even frankly, our expectations have had recent conversations with a couple of a midstream company Ceos and impression I get is that there's a lot of ethane available that's going into rejection now wouldn't take much of a price increase to bring that ethane out of rejection. So our view is that even with new crackers startups, and a and turnaround season, ending and so on.
There's plenty of ethane and we think that no ethane price could could perhaps return to recent levels before this latest decline, but we don't see a large runner.
On the polyethylene side demand is still growing it reasonably good rates globally, even with the backdrop of of all these concerns that are on People's mind.
So my sense is that that I don't think inventories are terribly bloated and some confidence returning to the market.
Could boost the operating rates and the firmness in the market.
Lastly bank as you think through these new plants that start up you have to remember that in our business. The supply comes on in a very lumpy fashion and demand grows over time. So generally you know when I look at our business I step back and look at quarterly operating rates and I look at annual operating rates and that's where I'd take you back to the chart that was in our in our presentation that you know annual operating rates are still very high and I think that should be a good guide in terms of how we should think about profitability. So we're very constructive even in this environment, where there's a good bit of uncertainty I think some of this uncertainty clears confidence will come back to markets.
Thank you. Our next question comes from Frank Mitsch with Pharmedium Research. Your line is open.
Good morning, Bob and good luck with getting that uncertainty cleared up anytime soon with with Brent down 7% today.
Hey, listen I was I was interested in your thoughts on the Exxon Baytown accident, the unfortunate accident, there and what the impact might be on the propylene business and and just in general what your outlook is for for propylene into into Poly pro.
Yes, so Frank.
Certainly the uncertainty will have to it won't be solved overnight.
And there will be.
Respect.
More news flow on that.
On the X. on fire first of all I was really pleased that the.
There were no significant injuries.
And that that's the first thing that I look for when I see incidents like that so really pleased to see that in terms of the impact on the propylene market. It could have a modest impact I mean, I think we need to see how that how this plays out but if you look at propylene prices they've dropped a good bit compared to where they were a year ago.
So to give you some kind of some round numbers propylene was about 60 cents on average in Q3 last year about 50 cents in in Q4 last year, and we dropped down to 38 cents in Q1 and.
This year and then 37 in Q2, so so I cite all of that only to say that it seems that you know.
Propylene prices are kind of.
It seems they wouldnt go too much lower.
And we'll have to see how this exxon.
Fire and Theyre disruption impacts prices, but I would suspect there'll be some modest impact.
Thank you. Our next question comes from Jonas Oxgaard with Bernstein. Your line is open.
Good morning, guys.
Good morning.
Well return to your comment around the demand has been growing well this year I find it hard to square with Asia margins now being down to four year lows.
Even though we haven't added any real capacity in the last six months, so what am I missing here.
Well I think part of that Jonas is that new car, while new capacity has come into the market.
Over the last 12 months.
And and I think that.
Buying patterns are more more.
More dynamic now than they were before because of the trade trade news in the tariffs and so on.
But but again our perspective is that we're seeing growth in all three regions.
In in Polyolefins generally so.
Yes, I mean, I think that this is just a reflection of oil price movements and and buyers sort of.
Anticipating the directional prices.
Okay.
The.
But what we've seen there was the demand has been declining in practically every petrochemical in Asia over the last six months.
So why would polyethylene media exception here.
Well, our our view is that that said because of the consumer consumable nature of a lot of the end users and.
Our.
Our assumption has been that.
With a growing middle class you you have more consumption of those sorts of.
And uses.
Thank you. Our next question comes from Steve Byrne with Bank of America. Your line is open.
Hi, Good morning. This is actually Luke washer on for Steve I was wondering if you could give us an update on the progress you've made on your footprint and headcount consolidation in Asia.
Yes, so as I mentioned earlier in my prepared remarks, our synergy run rate that we've captured thus far.
As of the end of Q2 worried about a $100 million.
Synergy run rate, we've announced some closures of sites.
With with.
We're good we're working through our plans on that.
And the restructuring on the business side is a is moving very swiftly. So we've made lots of progress.
I won't get into specifics about each site, but generally we had when we announced the transaction. We said that we would reach a run rate of synergies of $150 million per year.
About 18 months after the transaction was completed.
We're not quite at the 12 month, but we're about at the 12 month point this month.
And we're we're at a run rate of 100, So I think we're well on track.
Thank you. Our next question comes from Alex promo with Nomura Instinet. Your line is open.
Thank you good morning.
Your refining I read your refinery has been running well recently and yeah. It lost money last quarter or is there a structural uses ambition crude purchasing and how long do you think it will continue and other investments you can make to overcome this disadvantage.
So on the refinery I think you have to look at both sides of the increase equation than the crude side on the product side. So on the crude side.
We do we do purchase Canadian crude.
By pipeline, so we processed about 25% of our of our crude slate in Q2 was Canadian crude.
As we buy.
Other like crude by rail or other sour crudes, those those do tend to be higher priced than the pipeline crude so.
As I mentioned in my prepared remarks, I think the way you think about our crude slate.
He has added a we don't buy at all on my end basis.
And and what we've had is a situation with Venezuela going out is that.
The supply of sour crude has shrunk and with the Permian doing so well supply of light crude has increased and that's what's caused this light heavy differential to narrow just to give you. Some idea that light heavy differential was about $5 dollars per barrel in July .
It should be more like eight to $10 per barrel.
It's extremely leveraging I think the other thing that probably is not on on investors radar is that on the product side.
Because the propylene prices have declined so much.
Thats impacted profitability I cited some of those numbers we've dropped from from the 50 to 60 cents per pound range down into the high Thirtys. So thats had an impact and lastly at our refinery. Our configuration is such that we don't convert naphtha into gasoline, but we don't have a reformer.
And then with a lot of light crude processing in the industry Theres more naphtha available, which has impacted the price of naphtha. So so I think you know all of this has it could normalize here with with IMO approaching as sour crude gets pushed back into the market and some of these.
Product.
Markets normalize.
Thank you. Our next question comes from John Roberts, You May ask your line is open.
Thank you Bob It seems like every earnings call has more discussion about sustainability in more of your efforts in recycling and new products do you have any overarching targets longer term say five years in terms of sales that you want to get too or any other metric confusing.
No. We haven't stated targets nor will we but the idea John is that.
We do see a business model here in terms of capturing the value that exists in plastic waste and it's going to come through in a range of form so its kind of be mechanical recycling. We're also doing some research on chemical recycling.
And I think this is going to be a growing area for us and one that will create value over time.
We've not set hard targets as you know, we're very sort of return minded company and as we think through investments, we think about the value creation potential on each investment, but I do see this growing in our portfolio overtime.
Thank you. Our next question comes from Matthew Blair with Tudor Pickering Holt Your line is open.
Hey, good morning, Bob maybe just to circle back to refining it looks like do you eat data indicates that your Houston refinery is running perhaps a little bit more domestic crudes. This year than the same point last year, we've seen from other Gulf coast refiners lighten up their slate over the past few years is that an option that youre thinking about are considering and if so any any thoughts on what kind of spending that would take.
Yeah, Good morning, Matthew.
We have increased slightly our light crude processing.
We can go up to about 10%.
In our in our light crude cracking.
It would require significant investment for us to increase the flexibility to do more than 10% and our current plan is not to do that so.
You know, we think again that.
With IMO.
2020 around the corner here, we think that some of these markets are going are normalizing and.
And move in favor of the configuration of our Houston refinery and and and as I've mentioned in prior calls.
But we are ready to meet the specifications.
And Weve completed really well our turnaround pretty support to run.
Full rate.
Through 2020.
Thank you our last question.
Okay. Okay. Thank you.
Yeah.
Yes, Bob one other question on the recycling well first of all you're a commendable.
And you can see product, but is quite good.