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LYB > SEC Filings for LYB > Form 10-Q on 27-Jul-2012All Recent SEC Filings

Show all filings for LYONDELLBASELL INDUSTRIES N.V.

Form 10-Q for LYONDELLBASELL INDUSTRIES N.V.


27-Jul-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 second quarter 2012 operating results to our results in the first quarter 2012. 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 results of operation for the second quarter and first six months of 2012 reflect strong performance despite the continued uncertainties caused by the Eurozone crisis and the reduced growth outlook for China. We continue to focus on safe, reliable operations, cost reductions, particularly in Europe, and disciplined growth. We believe this strategy allows us to generate solid results even while facing challenges due to external factors. Significant items that affected our second quarter 2012 results include:

The continued benefit in the U.S. from an abundance of low cost, natural gas liquids ("NGLs") supply

Falling raw materials costs in Europe, which declined faster than our sales prices, helping to at least temporarily improve olefins margins in that region

Depressed by-product spreads relative to the price of crude oil, which negatively affected our refining results, although the impact was mitigated somewhat by strong operational performance, with the Houston refinery operating at near capacity

Other noteworthy items during the first six months of 2012, include the following:

We ceased the under-performing operations at the Berre refinery in early January 2012.

We completed the refinancing of nearly $3 billion of our debt with new debt issuances of unsecured senior notes, significantly improving our debt structure and replaced our $2 billion U.S. ABL Facility with an unsecured revolving credit facility.

We increased our interim dividend during the second quarter by 60%.

We expect that through the rest of 2012, we may continue to face challenges related to uncertainties in Europe and the negative effects on global economic conditions. 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.


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

                                                     Three Months Ended                     Six Months Ended
                                                          June  30,                             June  30,
Millions of dollars                                2012               2011               2012               2011
Sales and other operating revenues            $      11,248      $      13,306      $      22,982      $      24,686
Cost of sales                                         9,561             11,704             20,093             21,741
Selling, general and administrative
expenses                                                201                236                424                451
Research and development expenses                        37                 56                 76                 89

Operating income                                      1,449              1,310              2,389              2,405
Interest expense                                       (411)              (176)              (510)              (339)
Interest income                                           2                 13                  6                 20
Other income (expense), net                               8                 47                  7                 (3)
Income from equity investments                           27                 73                 73                131
Reorganization items                                     (1)               (28)                 4                (30)
Provision for income taxes                              306                388                607                651

Income from continuing operations                       768                851              1,362              1,533
Income (loss) from discontinued operations,
net of tax                                              - -                (48)                 5                (70)

Net income                                    $         768      $         803      $       1,367      $       1,463

RESULTS OF OPERATIONS

Revenues-Revenues decreased by $2,058 million, or 15%, in the second quarter 2012 compared to the second quarter 2011 and by $1,704 million, or 7%, in the first six months of 2012 compared to the first six months of 2011. Lower average product prices were responsible for revenue decreases of 9% in the second quarter 2012 and 3% in the first six months of 2012 while lower average sales volumes contributed 6% and 4% to the revenue deceases in the second quarter and first six months of 2012, respectively. Sales volumes averaged lower in the second quarter and first six months of 2012 for most products except those in the refining segment, which remained relatively unchanged.

Cost of Sales-The decrease in cost of sales of $2,143 million in the second quarter 2012 and $1,648 million in the first six months of 2012 primarily reflects lower raw material costs, compared to the second quarter and first six months of 2011. The lower prices of NGL-based liquid raw materials, particularly ethane, and to a lesser extent, heavy liquids-based raw materials, used in North American olefins contributed to the decreases in cost of sales in the second quarter and first six months of 2012. At the Houston refinery, the lower prices of crude oil in the second quarter 2012 substantially offset the effect of the higher crude oil prices seen in the first quarter 2012. The benefit of falling raw material costs, including ethylene and propylene, benefited cost of sales in the I&D segment, while the falling cost of naphtha benefited the O&P EAI segment's cost of sales.

Cost of sales in the second quarter and first six months of 2012 included a $100 million benefit associated with an insurance settlement related to Hurricane Ike, which affected the U.S. Gulf Coast in 2008. The benefit was partially offset by a $71 million lower of cost or market inventory valuation adjustment in our O&P-Americas segment. Cost of sales for the first six months of 2012 also included a $22 million charge 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 expenses in the second quarter and first six months of 2012 were lower by $35 million and $27 million, respectively, compared to the same periods in 2011, primarily as a result of charges in the 2011 periods related to employee compensation associated with the rationalization of certain functional organizations.


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R&D Expenses-Research and development expenses in the second quarter and first six months of 2012 decreased $19 million and $13 million, respectively, compared to the second quarter and first six months of 2011. The higher R&D expenses in the 2011 periods were a result of charges totaling $16 million in the second quarter and first six months of 2011 related to employee severance and asset retirement obligations associated with the relocation of an R&D facility

Operating Income-Second quarter 2012 operating income reflects the effect of higher operating results in all of our segments except for the Refining segment, which had lower results compared to the second quarter 2011. The slight decrease in operating income for the first six months of 2012 reflects lower operating results for our O&P-EAI, Refining and Technology segments, partially offset by higher operating results for our O&P-Americas and I&D segments, compared to the first six months of 2011. Results for each of our business segments are reviewed further in the "Segment Analysis" section below.

Interest Expense-The $235 million and $171 million increases in interest expense in the second quarter and first six months of 2012, compared to the same periods in 2011, were primarily due to the payment of premiums and the write-off of unamortized debt issuance costs associated with the repayment of the 8% senior notes due 2017 and 11% senior notes due 2018 in the second quarter 2012. In connection with the redemption of these notes, we paid premiums totaling $294 million and wrote off $18 million in capitalized debt issuance costs. In addition, another $17 million of capitalized debt issuance costs were written off as a result of the termination of the ABL credit facility in May 2012. These increases were partially offset by the lower interest expense that resulted from refinancing notes bearing interest of 8% and 11% per annum with our 5% senior notes due 2019 and 5.75% senior notes due 2024, both issued in April 2012, and our 6% senior notes due 2021 issued in November 2011.

Income from Equity Investments-Income from equity investments decreased $46 million and $58 million in the second quarter and first six months of 2012, compared to the second quarter and first six months of 2011. These decreases are primarily due to lower operating results of our joint ventures in the Middle East and Asia, which were primarily driven by lower average sales prices and in the six months of 2012, by higher raw material costs and unplanned outages.

Income Tax-The effective tax rate for the second quarter of 2012 was 28.5% compared with 31.3% for the second quarter of 2011. For the first six months of 2012, the effective tax rate was 30.8% compared with 29.8% for the first six months of 2011. Our effective tax rate fluctuates based on, among other factors, pretax income in countries with lower statutory tax rates, nontaxable income related to joint venture equity earnings, notional royalties, the U.S. domestic production activity deduction, changes in valuation allowance and unrecognized tax benefits. Compared with the second quarter of 2011, the effective tax rate for the second quarter of 2012 was lower due to deductible foreign currency losses offset with increases in unrecognized tax benefits. When comparing differences within the effective tax rates for the first six months of 2012 and 2011, increases to the effective tax rate related to unrecognized tax benefits were offset by deductible foreign currency losses and a reduction in non-deductible charges.


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Income from Continuing Operations-The following table summarizes the major components contributing to income from continuing operations:

                                                     Three Months Ended                     Six Months Ended
                                                          June  30,                             June  30,
Millions of dollars                                2012               2011               2012               2011
Operating income                              $       1,449      $       1,310      $       2,389      $       2,405
Interest expense, net                                  (409)              (163)              (504)              (319)
Other income (expense), net                               8                 47                  7                 (3)
Income from equity investments                           27                 73                 73                131
Reorganization items                                     (1)               (28)                 4                (30)
Provision for income taxes                              306                388                607                651

Income from continuing operations             $         768      $         851      $       1,362      $       1,533

Income (Loss) from Discontinued Operations, Net of Tax-The improvement in the results of our discontinued operations in the second quarter and first six months of 2012, compared to the corresponding periods in 2011, primarily reflects the liquidation of product inventory following the suspension of operations at the Berre refinery in early January 2012. Results for the second quarter and first six months of 2012 reflect pretax benefits of $7 million and $49 million, respectively, related to the liquidation of the Berre refinery's product inventory following the suspension of operations.

Comprehensive Income-Comprehensive income for the second quarter and first six months of 2012 decreased by $531 million and $764 million, respectively, compared to the second quarter and first six months of 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 value of the U.S. dollar relative to the Euro increased in the second quarter and first six months of 2012 but decreased in the corresponding periods of 2011 resulting in losses in 2012 and gains in 2011 as reflected in the Statements of Comprehensive Income.

Second Quarter 2012 versus First Quarter 2012-We had income from continuing operations of $768 million in the second quarter 2012 compared to $594 million in the first quarter 2012. Income from continuing operations in the second quarter included a $100 million pretax benefit related to an insurance settlement associated with Hurricane Ike and a $71 million pretax charge related to the lower of cost or market valuation adjustment for our O&P-Americas segment. First quarter income from continuing operations included pretax charges totaling $32 million related to the impairment of assets and the fair value adjustment of our outstanding warrants.

Apart from these items, income in the second quarter primarily reflected higher operating results in our business segments. The improvement in our second quarter operating results primarily reflected higher olefins margins in our O&P-Americas and O&P-EAI segments, higher margins for propylene oxide co-products in our I&D segment and higher refining margins. The improvements were partially offset by higher interest expense in the second quarter, primarily reflecting $294 million of pretax charges related to premiums and other fees related to the $2,676 million prepayment of debt in the second quarter. Interest expense in the second quarter also included a pretax charge of $35 million related to the write off of unamortized debt issuance costs.


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Segment Analysis

Our continuing operations are divided into five reportable segments:
O&P-Americas; O&P-EAI; I&D; Refining; and Technology. Beginning in the second quarter 2012, the operations of our Berre refinery in France are being reported as discontinued operations for all periods presented. In addition, beginning in the second quarter 2012, our oxyfuels business, which was previously managed in conjunction with our refining operations and included in our Refining segment, is included in our I&D segment. Accordingly, all comparable periods presented have been revised to reflect the results of our oxyfuels business in our I&D segment. For additional information related to the Berre refinery and the realignment of the oxyfuels business, see Footnotes 3 and 17 to the Consolidated Financial Statements.

                                                     Three Months Ended                     Six Months Ended
                                                          June  30,                             June  30,
Millions of dollars                                2012               2011               2012               2011
Sales and other operating revenues:
O&P - Americas segment                        $       3,283      $       4,010      $       6,632      $       7,582
O&P - EAI segment                                     3,575              4,292              7,473              8,280
I&D segment                                           2,285              2,536              4,770              4,867
Refining segment                                      3,496              3,996              6,699              6,863
Technology segment                                      115                126                234                265
Other, including intersegment eliminations           (1,506)            (1,654)            (2,826)            (3,171)

Total                                         $      11,248      $      13,306      $      22,982      $      24,686


Operating income:
O&P - Americas segment                        $         700      $         508      $       1,219      $         929
O&P - EAI segment                                       203                203                206                378
I&D segment                                             390                327                760                603
Refining segment                                        124                258                134                416
Technology segment                                       30                 23                 68                 89
Other, including intersegment eliminations                2                 (9)                 2                (10)

Total                                         $       1,449      $       1,310      $       2,389      $       2,405


Income (loss) from equity investments:
O&P - Americas segment                        $           4      $           8      $          10      $          11
O&P - EAI segment                                        29                 61                 69                112
I&D segment                                              (6)                 4                 (6)                 8

Total                                         $          27      $          73      $          73      $         131

Olefins and Polyolefins-Americas Segment

Overview-The U.S. ethylene industry continues to benefit from processing NGLs. Ethylene produced from NGLs in North America 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.

Ethylene margins were stronger in the second quarter and first six months of 2012 compared to the second quarter and first six months of 2011 primarily due to lower prices for ethane raw materials. While polypropylene ("PP") results in the second quarter 2012 were stronger due to higher margins, results in the first six months of 2012 were relatively unchanged compared to the same period in 2011. Polyethylene results were higher in the second quarter 2012 primarily due to higher product margins compared to the second quarter 2011, while results in the first six months of 2012 were lower than the prior year period primarily due to lower margins driven by lower average sales prices.


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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

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 throughout 2012. As a result, we have maintained our focus on maximizing the use of NGLs at our U.S. plants. Approximately 85% of our ethylene production was from NGLs during the second quarter and first six months of 2012.

During the second quarter 2011, approximately 80% of our ethylene production was from NGLs. A temporary disruption of NGLs deliveries by one of our suppliers in the first quarter 2011 modestly reduced the rate of utilization for the first six months of 2011 to approximately 75%. 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 reflects credits for co-product sales, is based on CMAI's estimated ratio of heavy liquid raw materials and NGLs used in U.S. ethylene production. Benchmark prices for polyethylene and polypropylene reflect discounted prices.

                                                                        Average Benchmark Price and Percent Change
                                                                             Versus Prior Year Period Average
                                                    Three Months Ended                                Six Months Ended
                                                        June  30,                                         June 30,
                                                   2012             2011           Change           2012            2011           Change
Crude oil - dollars per barrel:
WTI                                                   93.4           102.3              (9)%           98.2           98.5              (0)%
LLS                                                  108.2           118.3              (9)%          114.0          113.2                1%
Natural gas (Henry Hub) dollars per million
BTUs                                                   2.3             4.4             (47)%            2.5            4.3             (42)%
Weighted average U.S. cost of ethylene
production - cents per pound                          18.4            33.8             (46)%           23.4           33.2             (29)%
United States - cents per pound:
Ethylene                                              46.9            57.5             (18)%           50.9           53.4              (5)%
Polyethylene (HD)                                     63.0            68.7              (8)%           65.0           65.2              (0)%
Propylene - polymer grade                             64.2            87.3             (27)%           65.7           79.5             (17)%
Polypropylene                                         76.7            99.7             (23)%           78.9           94.5             (16)%


Table of Contents

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                             Six Months Ended
                                                                      June 30,                                      June 30,
Millions of dollars                                        2012                    2011                   2012                   2011
Sales and other operating revenues                   $            3,283      $           4,010      $           6,632      $           7,582
Operating income                                                    700                    508                  1,219                    929
Income from equity investments                                        4                      8                     10                     11

Production Volumes, in millions of pounds
Ethylene                                                          2,134                  1,929                  4,122                  4,018
Propylene                                                           615                    556                  1,148                  1,325
Sales Volumes, in millions of pounds
Polyethylene                                                      1,316                  1,377                  2,764                  2,782
Polypropylene                                                       634                    611                  1,284                  1,196

Revenues-O&P-Americas revenues decreased by $727 million, or 18%, in the second quarter 2012 compared to the second quarter 2011, and $950 million, or 13%, in the first six months of 2012 compared to the first six months of 2011. Lower average sales prices across most products in the second quarter 2012 were responsible for a revenue decrease of 12% and lower sales volumes, primarily in olefins, resulted in a 6% decline in revenues compared to the prior year period. In the first six months of 2012, lower olefins sales volumes decreased revenue by 8% while lower sales prices resulted in a 5% decrease in revenue compared to the first six months of 2011. Sales volumes for polyolefins (polyethylene and polypropylene) in the second quarter and first six months of 2012 were comparable to those in the same periods in 2011.

Operating Income-Operating income for the O&P-Americas segment in the second quarter and first six months of 2012 increased by $192 million and $290 million, respectively, compared to the second quarter and first six months of 2011. Operating results for the second quarter 2012 included a $71 million lower of cost or market inventory valuation adjustment. This charge and the negative impact resulting from reduced production during a turnaround at our Channelview, Texas facility, were partially offset by a $29 million benefit associated with . . .

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