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LYB > SEC Filings for LYB > Form 10-Q on 30-Apr-2012All Recent SEC Filings

Show all filings for LYONDELLBASELL INDUSTRIES N.V.

Form 10-Q for LYONDELLBASELL INDUSTRIES N.V.


30-Apr-2012

Quarterly Report


Item 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

GENERAL

This discussion and analysis should be read in conjunction with the information contained in our Consolidated Financial Statements and the accompanying notes elsewhere in this report. When we use the terms "we," "us," "our" or similar words in this discussion, unless the context otherwise requires, we are referring to LyondellBasell Industries N.V. and its consolidated subsidiaries.

In addition to comparisons of current operating results with the same period in the prior year, we have included trailing quarter comparisons of our first quarter 2012 operating results to our results in the fourth quarter 2011. Because many of our businesses are highly cyclical and also subject to some less significant seasonal effects, trailing quarter comparisons may offer important insight into current business direction.

References to industry benchmark prices or costs, including the weighted average cost of ethylene production, are generally to industry prices and costs reported by CMAI. However, references to industry benchmarks for refining and oxyfuels market margins are to industry prices reported by Platts, a reporting service of The McGraw-Hill Companies, and crude oil and natural gas benchmark price references are to Bloomberg.

OVERVIEW

Our performance is driven by global economic conditions generally and their impact on demand for our products. Additionally, raw material and energy prices significantly impact our operating results. Finally, industry-specific issues, such as our own production capacity and capacity within the chemicals and refining industries, can have material effects on our results of operations.

Our first quarter 2012 results of operations reflect the continued economic uncertainties caused by weakness in Europe and uncertainty surrounding the growth outlook for China. Notwithstanding these uncertainties, we saw improved conditions in the U.S. Our O&P-Americas and Refining & Oxyfuels segments continued to benefit from raw material cost advantages generated by the spread between global crude prices and the North American prices for natural gas and natural gas liquids. Our North American refining business began the first quarter 2012 with low margins that improved over the course of the quarter, which in part reflected our flexibility to purchase heavy crude oil at discounts to the price for Brent crude oil.

We ceased operations at the Berre refinery in early January 2012, exiting an under-performing business. In April 2012, we also refinanced nearly $3 billion of our debt with new debt issuances of unsecured senior notes, significantly improving our debt structure. In addition, we expect to refinance our $2 billion U.S. ABL Facility with an unsecured revolving credit facility during the second quarter of 2012.


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Results of operations for the periods discussed in these "Results of Operations" are presented in the table below.

                                                        Three Months Ended
                                                             March 31,
       Millions of dollars                              2012           2011
       Sales and other operating revenues             $  11,879      $ 12,252
       Cost of sales                                     10,670        10,943
       Selling, general and administrative expenses         224           211
       Research and development expenses                     39            33

       Operating income                                     946         1,065
       Interest expense                                     (99 )        (163 )
       Interest income                                        4             8
       Other income (expense), net                           (1 )         (43 )
       Income from equity investments                        46            58
       Reorganization items                                   5            (2 )
       Provision for income taxes                           302           263

       Net income                                     $     599      $    660

RESULTS OF OPERATIONS

Revenues-Revenues decreased by $373 million, or 3%, in the first quarter 2012 compared to the first quarter 2011. The suspension of operations at the Berre refinery on January 4, 2012 resulted in a revenue decrease of 8%. Excluding the Berre refinery revenues, higher sales volumes, mainly at the Houston refinery and in oxyfuels, were responsible for a revenue increase of 2% in the first quarter 2012, while higher average sales prices for most products were responsible for a revenue increase of 3%, compared to the same period in 2011. Sales prices averaged higher in the first quarter 2012 for most products except for those in our O&P-EAI segment, which averaged lower compared to first quarter 2011.

Cost of Sales-The $273 million decrease in cost of sales for the first quarter 2012 primarily reflects the suspension of operations at the Berre refinery in early January 2012 and lower raw material costs for North American olefins. The lower price of NGL-based liquid raw materials used in North American olefins in the first quarter 2012 more than offset the higher price of heavy liquids-based raw materials. The higher prices of crude oil contributed to higher raw material costs, particularly at the Houston refinery and in the O&P-EAI segment. These higher costs partially offset the decreases in raw material costs at the Berre refinery and for North American olefins. Cost of sales in the first quarter 2012 also included charges totaling $22 million for impairment of assets, primarily related to damage to our LDPE plant in Wesseling, Germany resulting from an explosion in a reactor bay in January 2012.

SG&A Expenses-Selling, general and administrative ("SG&A") expenses in the first quarter 2012 were higher by $13 million compared to the first quarter 2011. The increase reflects higher costs related to employee compensation and benefits.

Operating Income-The decrease in operating income in the first quarter 2012, compared to the first quarter 2011, reflects lower operating results for our O&P-EAI, Refining and Oxyfuels and Technology segments, partially offset by higher operating results for our O&P-Americas and I&D segments. Operating results for each of our business segments are reviewed further in the "Segment Analysis" section below.

Interest Expense-Interest expense was $64 million lower in the first quarter 2012 compared to the same period in 2011 primarily due to the repayment of debt. Since the beginning of the second quarter 2011, we repaid $1,407 million and 234 million ($324 million) of our 8% senior notes due 2017, $1,319 million of our 11% senior notes due 2018 and the remaining $5 million outstanding under our Senior Term Loan Facility. The reduction in interest expense resulting from these repayments was partially offset by interest expense on our 6% senior notes due 2021 that were issued in November 2011.


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Other Expense, net-Other expense, net, in the first quarter 2012 included the negative effect of a $10 million charge related to the fair value adjustments of warrants to purchase our ordinary shares, partially offset by $7 million of income, related to the gain on sale of railcars and refunds on sales tax, and a $2 million gain on foreign exchange. In the first quarter 2011, Other expense, net, included the negative effect of $59 million for the fair value adjustment of the warrants, partially offset by $10 million of foreign exchange gains.

Income from Equity Investments-Income from equity investments decreased $12 million in the first quarter 2012, compared to the first quarter 2011, primarily due to lower operating results at two of our joint ventures in Saudi Arabia, SPC and Al Waha, our HMC Polymers joint venture in Thailand and our Polymirae joint venture in South Korea. These decreases were partially offset by higher operating results at our SEPC joint venture in Saudi Arabia. The lower operating results primarily reflected lower polypropylene margins resulting from increases in propane prices, planned maintenance turnaround activities at HMC and an unplanned outage at Al Waha resulting from a power failure. Higher first quarter 2012 operating results for our SEPC joint venture primarily reflected the effect of higher sales volumes compared to the first quarter 2011, which was negatively impacted by unplanned outages.

Income Tax-Our effective income tax rate of 33.5% for the first quarter of 2012 resulted in a tax provision of $302 million on pretax income of $901 million. Our effective income tax rate for the first quarter 2011 was 28.5% resulting in tax expense of $263 million on pre-tax income of $923 million. The first quarter 2012 effective income tax rate is higher than the first quarter 2011 effective tax rate primarily due to an increase in earnings in higher tax jurisdictions and taxable foreign currency gains.

The 2012 effective income tax rate was lower than the U.S. statutory 35% rate primarily due to the effect of pretax income in countries with lower statutory tax rates and favorable permanent adjustments related to equity earnings, notional royalties, release of valuation allowance, and the U.S. domestic production activity deduction, which were partially offset by unfavorable permanent adjustments related to the increase in uncertain tax reserves and taxable foreign currency gains. The 2011 effective income tax rate was lower than the statutory 35% rate primarily due to the effect of pretax income in countries with lower statutory tax rates and tax deductible foreign currency losses which were partially offset by the non-deductible accrual of expense related to stock warrants.

Net Income-The following table summarizes the major components contributing to net income:

                                                 Three Months Ended
                                                      March 31,
              Millions of dollars                2012           2011
              Operating income                 $    946        $ 1,065
              Interest expense, net                 (95 )         (155 )
              Other income (expense), net            (1 )          (43 )
              Income from equity investments         46             58
              Reorganization items                    5             (2 )
              Provision for income taxes            302            263

              Net income                       $    599        $   660

Comprehensive Income-Comprehensive income decreased by $233 million compared to the first quarter 2011 primarily as a result of currency translation adjustments arising from the financial statements of our non-U.S. subsidiaries with functional currencies other than the U.S. dollar. The predominant local currency of our operations outside of the United States is the Euro. The decrease of the value of the U.S. dollar relative to the Euro in the first quarter of 2012 was lower than that experienced in the first quarter 2011 resulting in a lower gain as reflected in the Statements of Comprehensive Income.


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First Quarter 2012 versus Fourth Quarter 2011-We had net income of $599 million in the first quarter 2012 compared to a net loss of $218 million in the fourth quarter 2011. Net income in the first quarter included pretax charges totaling $32 million related to the impairment of assets and the fair value adjustment of our outstanding warrants. The fourth quarter net loss reflected pretax charges totaling $614 million related to the early repayment of debt, reorganization items, the anticipated cost of the social plan related to the suspension of operations at the Berre refinery, corporate restructurings, environmental charges and fair value adjustment of our outstanding warrants. These fourth quarter charges were partially offset by a $15 million pretax settlement related to the 2008 crane collapse at our Houston refinery.

Apart from these items, net income in the first quarter primarily reflected an overall improvement in the operating results of our business segments and lower interest expense, compared to the fourth quarter. Our first quarter operating results reflected higher margins for ethylene and ethylene co-products in our O&P-Americas segment, and in our Refining and Oxyfuels segment, higher refining margins at the Houston refinery and unseasonably strong oxyfuels margins. First quarter operating results for our I&D and O&P-EAI segments reflected higher sales volumes across most products. These volume improvements reflected the completion of planned maintenance activities by the I&D segment and for the O&P-EAI segment, an improvement from the fourth quarter economic slowdown that particularly affected Europe. Our first quarter interest expense was significantly lower than the fourth quarter, which included premiums and other fees related to the $2,802 prepayment of debt. The effect of the improvement in our pretax income was partially offset by a $302 million provision for income taxes in the first quarter compared to a $92 million tax benefit in the fourth quarter. The $394 million increase in tax expense was primarily attributable to higher actual earnings.


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Segment Analysis

Our operations are divided into five reportable segments: O&P-Americas; O&P-EAI;
I&D; Refining and Oxyfuels; and Technology.



                                                       Three Months Ended
                                                            March 31,
        Millions of dollars                            2012           2011
        Sales and other operating revenues:
        O&P-Americas segment                         $   3,349      $  3,572
        O&P-EAI segment                                  3,866         3,944
        I&D segment                                      1,699         1,692
        Refining and Oxyfuels segment                    4,261         4,720
        Technology segment                                 119           139
        Other, including intersegment eliminations      (1,415 )      (1,815 )

        Total                                        $  11,879      $ 12,252


        Operating income (loss):
        O&P-Americas segment                         $     519      $    421
        O&P-EAI segment                                      5           179
        I&D segment                                        245           234
        Refining and Oxyfuels segment                      140           164
        Technology segment                                  38            66
        Other, including intersegment eliminations          (1 )           1

        Total                                        $     946      $  1,065


        Income from equity investments:
        O&P-Americas segment                         $       6      $      3
        O&P-EAI segment                                     40            51
        I&D segment                                         -              4

        Total                                        $      46      $     58

Olefins and Polyolefins-Americas Segment

Overview-The benefit experienced by the U.S. ethylene industry from processing natural gas liquids continued through the first quarter of 2012. Ethylene produced from natural gas liquids is currently lower in cost compared to that produced from crude oil-based liquids, which is the predominant feedstock used in the rest of the world. Slightly lower industry volumes for ethylene in the first quarter of 2012, compared to the same 2011 period, reflects scheduled maintenance turnaround activity at some ethylene crackers during the quarter.

Ethylene margins were stronger in the first quarter 2012, compared to the first quarter 2011, primarily due to higher average sales prices coupled with lower prices for ethane raw materials. In the first quarter 2012, market demand for polyethylene decreased compared to the first quarter 2011, while market demand for polypropylene increased.

Ethylene Raw Materials-Benchmark crude oil and natural gas prices generally have been indicators of the level and direction of the movement of raw material and energy costs for ethylene and its co-products in the O&P-Americas segment. Ethylene and its co-products are produced from two major raw material groups:

crude oil-based liquids ("liquids" or "heavy liquids"), including naphtha, condensates, and gas oils, the prices of which are generally related to crude oil prices; and


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natural gas liquids ("NGLs"), principally ethane and propane, the prices of which are generally affected by natural gas prices.

Although the prices of these raw materials are generally related to crude oil and natural gas prices, during specific periods the relationships among these materials and benchmarks may vary significantly.

In the U.S., we have significant capability to shift the ratio of raw materials used in the production of ethylene and its co-products to take advantage of the relative costs of heavy liquids and NGLs.

Production economics for the U.S. industry have continued to favor NGLs through the first quarter 2012. As a result, we maintained our focus on maximizing the use of NGLs at our U.S. plants. Approximately 82% and 70% of our ethylene production was from NGLs during the first quarters of 2012 and 2011, respectively. The utilization of NGLs in the first quarter 2012 was affected by maintenance turnaround activity at our Channelview site, while the 2011 rate of utilization was affected by a temporary disruption of NGLs deliveries from one of our suppliers. Based on current trends and assuming the price of crude oil remains at a high level relative to natural gas, we would expect production economics in the U.S. to continue to favor NGLs for the near and mid-term.

The following table shows the average U.S. benchmark prices for crude oil and natural gas for the applicable periods, as well as benchmark U.S. sales prices for ethylene and propylene, which we produce and sell or consume internally, and certain polyethylene and polypropylene products. The benchmark weighted average cost of ethylene production, which is reduced by co-product revenues, is based on CMAI's estimated ratio of heavy liquid raw materials and NGLs used in U.S. ethylene production.

                                                    Average Benchmark Price and Percent Change
                                                         Versus Prior Year Period Average
                                                        Three months ended
                                                            March 31,
                                                    2012                  2011              Change
Crude oil (WTI)-dollars per barrel                      103.03                94.60                9 %
Natural gas (Henry Hub)-dollars per
million BTUs                                              2.65                 4.19              (37 )%
United States-cents per pound:
Weighted average U.S. cost of ethylene
production                                                28.5                 32.6              (13 )%
Ethylene                                                  54.9                 49.3               11 %
Polyethylene (HD)                                         92.0                 87.7                5 %
Propylene-polymer grade                                   67.2                 71.7               (6 )%
Polypropylene                                             93.7                100.8               (7 )%


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The following table sets forth the O&P-Americas segment's sales and other operating revenues, operating income, income from equity investments and selected product sales volumes.

                                                       Three Months Ended
                                                            March 31,
         Millions of dollars                            2012          2011
         Sales and other operating revenues          $    3,349      $ 3,572
         Operating income                                   519          421
         Income from equity investments                       6            3

         Production Volumes, in millions of pounds
         Ethylene                                         1,988        2,089
         Propylene                                          533          769
         Sales Volumes, in millions of pounds
         Polyethylene                                     1,448        1,405
         Polypropylene                                      650          585

Revenues-O&P-Americas revenues decreased by $223 million, or 6%, in the first quarter 2012, compared to the first quarter 2011. Lower olefin and olefin co-products sales volumes in the first quarter 2012 due to planned maintenance were primarily responsible for a revenue decrease of 10%. The decrease was only partially offset by higher average sales prices for most products, which increased revenues by 4%. First quarter 2012 revenues for polyethylene reflect sales volumes and average sales prices that were relatively unchanged from the first quarter 2011. For polypropylene, higher North American sales volumes in the 2012 period were substantially offset by lower average sales prices. Market demand in the first quarter 2011 reflected the negative effect of rising propylene prices on customer buying patterns.

Operating Income-Operating income for the O&P-Americas segment in the first quarter 2012 increased by $98 million compared to the first quarter 2011. Operating results in the first quarter 2012 reflected higher ethylene margins, partially offset by lower polyethylene margins. The increase in ethylene margins primarily reflects the effect of higher average sales prices for ethylene and fuel co-products coupled with lower raw material costs. In the first quarter 2012, price decreases for the NGL-based raw material, ethane, more than offset the price increases for crude-oil based liquids raw materials. The lower polyethylene margins reflected the higher price of ethylene, which more than offset the increase in higher average sales prices during the first quarter 2012. Polypropylene results in the first quarter 2012 were comparable to the first quarter 2011.

First Quarter 2012 versus Fourth Quarter 2011-The O&P-Americas segment had operating income of $519 million in the first quarter 2012, compared to $328 million in the fourth quarter 2011. First quarter operating results include the impact of a major turnaround at our Channelview, Texas site, while fourth quarter operating results were negatively impacted by increases in raw material prices. The increase in operating results for the first quarter 2012 reflects higher product margins across most major products, particularly ethylene and ethylene co-products. The higher product margins primarily reflect higher average sales prices across most major products and the lower cost of ethylene production from ethane. Sales volumes in the first quarter 2012 were higher compared to the fourth quarter 2011.

Olefins and Polyolefins-Europe, Asia and International Segment

Overview-Market conditions improved during the first quarter 2012 compared to the latter part of 2011 which was challenged by a slowdown, particularly in Europe, amid uncertainty and poor economic conditions. European demand for ethylene and polyolefins improved in the first quarter 2012 to the levels seen in the third quarter 2011. Margins in the commodity ethylene chain continued to be challenged by higher raw material costs coupled with weak local economic conditions. Despite higher benchmark average sales prices for ethylene, industry margins decreased in the first quarter 2012 as the benchmark weighted average cost of ethylene production increased more than the benchmark average sales price primarily due to the higher cost of naphtha raw materials.


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Although first quarter 2012 operating results for the O&P-EAI segment reflected an improvement over results for the fourth quarter 2011, compared to the first quarter 2011, results were lower across most businesses. These lower results reflected lower product margins for olefins and commodity polyolefins and lower sales volumes, particularly for polypropylene. Results for PP compounds remained steady over the periods.

Ethylene Raw Materials-In Europe, heavy liquids are the primary raw materials for our ethylene production.

The following table shows the average West Europe benchmark prices for Brent crude oil for the applicable periods, as well as benchmark West Europe prices for ethylene and propylene, which we produce and consume internally or purchase from unrelated suppliers, and certain polyethylene and polypropylene products.

                                                    Average Benchmark Price and Percent Change
                                                         Versus Prior Year Period Average
                                                         Three months ended
                                                              March 31,
                                                     2012                  2011             Change
Brent crude oil-dollars per barrel                       118.31                105.65            12 %
Western Europe - 0.01 per pound
Weighted average cost of ethylene production               45.4                  34.7            31 %
Ethylene                                                   55.1                  52.0             6 %
Polyethylene (high density)                                65.1                  62.1             5 %
Propylene                                                  50.1                  50.8            (1 )%
Polypropylene (homopolymer)                                62.9                  66.6            (6 )%
Average Exchange Rate-$US per                             1.31                  1.37            (4 )%

The following table sets forth the O&P-EAI segment's sales and other operating revenues, operating income, income from equity investments and selected product production and sales volumes.

                                                       Three Months Ended
                                                            March 31,
         Millions of dollars                            2012          2011
         Sales and other operating revenues          $    3,866      $ 3,944
         Operating income                                     5          179
         Income from equity investments                      40           51

         Production Volumes, in millions of pounds
         Ethylene                                           947          997
         Propylene                                          577          608
. . .
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