利安德巴塞爾 (LYB) 2011 Q3 法說會逐字稿

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. (Operator Instructions). I'd now like to turn the conference over to Mr. Doug Pike, Vice President, Investor Relations. Sir, you may begin.

Thank you, Dorian. Hello and welcome to Lyondell Basell's third quarter 2011 teleconference. And I'm joined today by Jim Gallogly, our CEO, Kent Potter, our Principal Financial Officer, Karyn Ovelmen, our new CFO, and Sergey Vasnetsov, our Senior Vice President of Strategic Planning and Transactions.

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

Now, for more detailed information about the factors that could cause our actual results to differ materially, please refer to the cautionary statements in the presentation slides and our financial reports, which are available at www.lyondellbasell.com/investorrelations.

And reconciliations of non-GAAP financial measures to GAAP financial measures together with any other applicable disclosures, including the earnings release, are currently available on the Website, www.lyondellbasell.com.

Now, finally, I'd like to point out that a recording of this call will be available by telephone beginning at 1.00 p.m. Eastern time today until 11.00 p.m. Eastern time on November 28th by calling 800-789-9018 in the United States and 203-369-3337 outside of the United States. And the passcode for both numbers is 6798.

Now, during today's call, we'll focus on third quarter 2011 performance, the current environment, and the near-term outlook. With that being said, I'd like to turn the call over to Jim.

Well, thank you for joining our earnings call. As Doug mentioned, a set of presentation slides accompany this call and are available on our Website.

Before discussing results, I'd like to thank Ken for coming out of retirement to work with me again and help build the new LyondellBasell. Kent, we're sorry to see you leave. We wish you the best in your second retirement.

We're also excited to have Karyn join our team. Her skills and background will serve the Company and our investors well. Karyn is already actively engaged in her new role.

Let's take a look at page four and review a few financial highlights of what has been our best quarter ever. Net income was $895 million, and EBITDA excited $1.7 billion. This brings our year-to-date EBITDA to $4.7 billion and earnings per share $4.12. During the quarter, we had a few items that on a net basis negatively impacted EBITDA by $14 million and EPS by $0.02 per share.

All of our business segments continued to perform well during the quarter, and our plants operated well. Perhaps the best example of this was the Houston refinery, which operated at design throughput, benefited from smart crude buying, and generated record profits.

During the quarter, the only significant plant reliability impact on earnings was approximately $20 million from the residual impacts of the second quarter Morris plant power supply outage. Reliable operations typically go hand in hand with excellent safety performance and strict cost control. The third quarter was no exception. You can see on page five that our safety performance has surpassed prior-year results and is near the top of our industry.

As you know, we carefully track our fixed cost spending. Through three quarters, after adjusting for foreign exchange impacts, our costs continued to trend in line with prior-year spending at approximately $3.6 billion. Strict cost management remains an integral part of our strategy and success.

In summary, we had a great quarter. And year-to-date, we have continued to set both financial and operating records. While we face uncertainties in the global economy, I'm very confident that we have positioned ourselves to excel in any environment.

Let me now turn the call over to Kent to discuss our financial performance.

Thanks, Jim, and thank you, all, for joining us this morning. Before I discuss the quarter, I'd like to spend a few minutes on our recent financing announcement and my own retirement.

Regarding the financing, we reached the point when we felt that the timing was right to address the capital structure. You will note in this slide package, by the end of the third quarter, our cash position had grown almost $6 billion. And we finished the quarter with no net debt.

After deliberating for months and consulting with many others, we arrived at a plan that I believe is quite balanced and achieves our goals. Rather than reviewing all the details of the plan, I will refer you to the press release and the 8-K that we issued last week.

But, simply stated, and assuming that we proceed with all aspects of the program, we will reduce our debt and associated interest costs, relieve many of the constraints created by the covenants in our existing bonds. We'll release the security on the bonds. We'll issue a new unsecured bond, increase our pension funding, and return cash to our shareholders through an increased regular dividend and a special dividend.

This positions our capital structure very conservatively with attributes consisting with an investment-grade rating. This was one of my principle goals as the CFO of LyondellBasell as I firmly believe that a solid balance sheet is a requirement for the Company to become the top competitor in our industry.

At this time, I'm not going to say any more about the financing, as legally, we are limited in what we can say. For this reason, I would ask that you respect that we will not be able to take questions on the subject.

Now, regarding my retirement, many of you know I originally committed to a period of no more than two years, and I've actually overstayed that somewhat. But, being part of team that took this company out of bankruptcy has been without doubt challenging but professionally very rewarding.

I believe we have positioned LyondellBasell firmly on the road to being the best. We have some great people in this company -- and I have to add especially in the Finance Department -- who've accomplished some amazing things. Much remains to be done, but as I have gotten to know Karyn over the last couple weeks, I am convinced that she is perfect for the job and will be a key and valued member Jim's leadership team.

Now, let's go back to the quarter's results. Please refer to page six. As Jim said, this was a record quarter. And it's nice to see all aspects of the Company performing so well. I just want to highlight a few key items that have driven our performance.

First, within Olefins and Polyolefins Americas, we've benefited during the quarter from strong margins from both ethane and naphtha feedstocks. Our Midwest crackers were particularly advantaged.

In our Olefins and Polyolefins Europe, Asia, and International segment, our results benefited from the strength of our differential positions, such as polypropylene compounding, catalloy resins, and the JVs that we discussed in some detail last quarter.

In Intermediates and Derivatives, the continued strong and improving performance of our propylene oxide technology stands out to me. During the past four quarters, this segment has generated over $1.1 billion of EBITDA.

In Refining and Oxyfuels, the improvement in both the operating and commercial performance of the Houston refinery has been remarkable. In a world with generally poor refining results and numerous refineries either closing or for sale, this facility has clearly differentiated itself.

Finally, I think that the overall reliability of our operations highlights just how far we've come as a company.

During the second quarter call, I spent quite a bit of time discussing our joint ventures. I won't repeat that, but will say that this quarter equity income was $52 million, and dividends totaled $55 million.

Pages seven and eight summarize our cash flow, working capital, and liquidity. During the quarter, we generated nearly $1 billion of excess cash and built our cash balance to $5.9 billion, essentially equal to our debt.

Total capital spending in the quarter was $279 million. And within this was approximately $75 million related to the pipeline acquisition that we closed during the third quarter.

You might recall that we acquired approximately 200 miles of pipelines from BP. These pipelines are dedicated to our Channelview olefins business. And the acquisition reduces costs, ensures that we have control of these critical pipelines. We will operate these along with approximately 2,000 miles of pipelines within our existing system.

In terms of total spending for the year, I continue to anticipate 2011 capital spending will be approximately $1.1 billion.

On the chart on the right side of page seven, you can see our cash generation since emergency in May 2010. Since then, we have added $3.2 billion to our cash balance, reduced debt by $1.4 billion, and paid $171 million dividends. In total, approximately $4.8 billion have been generated over the span of the 17 months.

On page eight, you can see our working capital has been relatively unchanged across this year. On the right-hand side of the chart, we have plotted our cash and liquidity over the past 12 months. On September 30th, our cash balance was $5.9 billion. Liquidity was $7.9 billion, and we had no net debt.

With that, I'll now return the call to Jim.

Thanks, Kent. Let's step through a summary of third quarter results for each of our businesses. Page nine addresses the key results for the Olefin and Polyolefins Americas segment. The third quarter continued a string of strong quarterly results. EBITDA was $673 million, bringing year-to-date segment results to greater than $1.7 billion. The third quarter improved by $95 million versus second quarter.

Within the segment, Olefins provided the strength as EBITDA improved by approximately $155 million. The key drivers of the improvement were increased margins and strong operating reliability.

Additionally, you might recall that the second quarter included the impact of our Channelview turnaround, which we estimated to be approximately $75 million. Ethylene margins improved by approximately $0.04 a pound as our average sales price declined by $0.02 per pound.

The cost of ethylene production metric declined by close to $0.06 per pound. Approximately 75% of our ethylene was produced from natural gas liquids. However, there were periods during the quarter when naphtha economics were favored. And we incrementally shifted to feed slate in that direction.

Regarding reliability, our results were negatively impacted by the residual effects of the second quarter cogeneration supplier upset at our Morris site. This reduced the quarter's results by an estimated $20 million and was approximately equal to the second quarter impact. We have now completed all the repairs following this incident.

In Polyolefins, our results declined as spreads contracted in both polyethylene and polypropylene. Our average polyethylene and polypropylene sales prices declined by approximately $0.05 per pound. This resulted in a moderate margin decline in both polymers. Sales volumes for both polymers were relatively unchanged.

During October, sales volumes have not changed significantly from the third quarter sales pace. And we continue to operate our ethylene plants at or near maximum rates. However, there has been significant cost and price volatility. Co-product prices have been the most volatile, and the cost of ethylene from naphtha has increased toward global naphtha economics. This is similar to the situation that we experienced earlier in the year.

We have also experienced ethane cost increases. We believe that this volatility is attributed to a combination of pipeline disruptions and producers' efforts to optimize the economics of their natural gas liquids pipeline systems. The capacity of this infrastructure is being pressured by the growth in supply from shale development.

Having said that, our approximately 2 billion pounds of Midwest ethylene capacity has been significantly advantaged versus Gulf Coast due to lower regional ethane costs.

Let's move to page 10 and turn our attention to Olefins and Polyolefins Europe, Asia, and International. This segment also had a good quarter with EBITDA of $261 million. This was $14 million less than the second quarter EBITDA, which was negatively impacted by $61 million of accruals.

Olefins continued to be the primary contributor to EBITDA, although this business saw results decline by approximately $55 million. The decline was primarily attributed to a $0.07 per pound reduction in ethylene margin.

Polyolefins profitability declined by approximately $80 million, primarily due to lower margins. Our margin declines were generally consistent with industry data. The impact of the margin decline was partially offset by a 3% increase in polyolefin sales volumes.

Partially offsetting the declines in the base commodity products were increases in polypropylene compounding and joint venture dividends. Polypropylene compound results improved by approximately $15 million. Equity income for joint ventures reported in this segment was $37 million. And we received $45 million in dividends. Our HMC joint venture in Thailand paid $35 million, and one of the Saudi polypropylene joint ventures distributed $10 million.

Looking to the fourth quarter, the October ethylene price was unchanged from September, while the propylene price declined slightly, EUR10 per ton. Butadiene price remains elevated but has declined from record third quarter levels. Naphtha costs have been relatively steady since the end of September. We anticipate a decline in polyolefin volumes consistent with year-end seasonal trends and European economic uncertainties.

Please turn to page 11 for a discussion of the Intermediates and Derivatives segment. Third quarter EBITDA was $297 million, $17 million less than the second quarter, which benefited from a $41 million gain from the sale of silver and spent catalysts. Results in the propylene oxide and derivatives improved by approximately $70 million. The improvement primarily reflects higher margins. Solvents and butanediol were particularly strong.

In other product lines, we experienced slight declines in acetyls, styrene, and TBA intermediates. However, for perspective, I should mention that the third quarter was still outstanding. In fact, during the past three years, third quarter intermediates and derivative results were only exceeded during the second quarter of this year.

Fourth quarter results are expected to be somewhat below the third quarter as they will be impacted by, first, turnaround activity in acetyls at one of our Dutch sites, which includes a PO plant and butanediol plant; second, typical seasonal impacts.

Moving forward to page 12, I'd like to discuss the Refining and Oxyfuels segment. Third quarter EBITDA was $519 million, a $166 million increase versus the second quarter. The Houston Refinery results represented approximately 80% of the EBITDA.

The Houston Refinery had an outstanding quarter, as EBITDA increased by approximately $135 million over already strong second quarter results. Crude throughput slightly exceeded nameplate capacity, averaging 269,000 barrels per day.

The Maya 2-1-1 benchmark spread declined by approximately $2 per barrel. However, our spread improved versus the second quarter. This improvement was achieved primarily through the optimization of the crude slate and the acquisition of crude oil at discounted prices.

Last year, I promised we would improve the Houston's Refinery performance. Our people are delivering on this promise.

The Berre Refinery continued to post losses. During the quarter, we continued to limit crude runs due to economic conditions. A labor strike at the end of the quarter had a minimal impact on results. Oxyfuel results improved by approximately $20 million versus the second quarter, largely due to improved margins.

In general, the fourth quarter has started with industry margins following difficult seasonal trends. As you can see on the bottom right corner of the page, the Maya 2-1-1 spread has declined by approximately $5 per barrel.

Thus far, the reported industry MTBE spread has remained nearly unchanged due to warmer-than-normal weather in Europe at the beginning of the quarter. However, we expect the spread to follow typical seasonal patterns and decline as the quarter progresses.

Operationally, the Houston Refinery has continued to perform well. And the Berre Refinery has been restarted following the labor strike. The Berre Refinery will continue to operate while local management conducts consultations with the works councils for a project to cease production and mothball the facility at the end of the year.

Let's move to page 13 and the Technology segment. This segment posted third quarter EBITDA of $45 million. Catalysts remained strong during the quarter.

If you'd now turn to page 14, I'd like to step back from the details and summarize the environment. First, I should emphasize the third quarter results were the best that we have ever achieved. The strength of the quarter contributed to year-to-date EBITDA of approximately $4.7 billion and sufficient cash to move forward with our refinancing plans.

Our back-to-basics strategy and intense focus are bearing fruit. All aspects of the Company have performed well. Reliability has been strong. Our capital programs and growth plans have advanced, and cost management remains a priority. Our results continue to outperform our peers, and I hope that the strength and quality of the new LyondellBasell is apparent.

With respect to the fourth quarter, there are economic uncertainties. But, despite all the headlines and negative sentiment, the economy has shown some resilience of late. Though we don't know how the global situation will play out, I am very comfortable with our position. We have emphasized the basics, and this approach works in any economic environment. Our success has been quite obvious, and our strong assets, operations, and balance sheet will ensure competitiveness independent of the economic environment.

Additionally, the fundamentals that have supported our business remain intact. Low natural gas costs relative to crude oil create a global advantage for our US operations. Despite recent volatility in ethane prices, this trend is expected to continue for a number of years.

While the European business climate has weakened, our efforts to significantly improve our cost position there and to differentiate our products will allow reasonable returns. Our Intermediates and Derivatives segment has demonstrated specialty-like returns, which we expect to continue.

The Houston Refinery is highly competitive and is clearly demonstrating its earning power. We're addressing the Berre Refinery losses.

I'm not going to speak about our expansion and growth plans today, as I would prefer to preserve that discussion for Investor Day, when we have a better opportunity to discuss details. We have a number of significant growth projects with excellent returns, and we look forward to telling you more about them.

In summary, the quality of our results speak for themselves. We recognize that there will always be uncertainties and volatility in the economy. Our strategy, coupled with the flexibility and quality of our assets, ensures success, regardless of the economic environment.

Thank you for your past and future support. Dorian, we'd now -- we're now ready to take questions.

Thank you. (Operator Instructions). Our first question comes from David Begleiter with Deutsche Bank. Mr. Begleiter, please check your mute button. We'll go onto the next question. Don Carson, with Susquehanna Financial, your line is open.

Yes, thank you. Just a question on your outlook for feedstock cost and ethane specifically. I know earlier you'd been somewhat more constructive on the outlook for ethane supply starting to exceed demand. Just wonder if you can talk about your near-term outlook for ethane and when you would expect either additional supply or additional compression capacity to lead to a looser ethane balance.

Sure, Don. At present, ethane prices have spiked. They're over $0.90 a gallon. You've seen those prices move around a lot, sometimes moving a nickel, a dime in a very short period of time. We think there will be continued volatility. Some of that is due to logistics constraints. Some of it's due to the need for prop barrels, for instance, at the end of the month.

People have been cracking much lighter because that's where the margin is right now. That's put some additional pressure on things. We expect a lot of those logistical issues to be cured some next year. We're putting in some additional pipes ourselves as a company to source feedstock from Bellevue and into some of our Houston crackers to increase throughput.

You also see some seasonal issues. Some people are shipping some propane and butane on the same lines where ethane moves. Some of that is very seasonal. We expect that volatility to continue for a period of time. But, as you know, there's additional fractionation coming online. And we think this is more short term rather than long term. We remain extremely bullish on the opportunity to see this ethane advantage continue for multiple years.

And you've got a nice Midwest advantage. Do you think that's sustainable, or do you think that's temporary as well? And if it is sustainable, any plans to debottleneck further in Morris or in your other Midwest plant?

Yes, our Clinton and Morris facilities have both been very advantaged of late, sometimes in excess of $0.50. That's typically closer to $0.20 on a normalized basis. I don't expect it to continue at that extremely elevated level for a long period of time. But, it certainly is nice while it's there.

One of the things that hopefully you've seen is that our rates have come up in Morris and in Clinton. We've operated at record levels during multiple months. We're working on some very modest debottlenecks downstream to take full advantage of this slightly increased capacity in our crackers. But, we're really not looking at any significant debottleneck there, just slight pushes here and there in volume. But, longer term, we're hopeful that that $0.20 average will continue.

Thank you.

Our next question comes from Hassan Ahmed with Alembic Global.

Morning, Jim. A two-part question, if I could, one on product prices and one, again, digging a bit deeper into the ethane side of things. Obviously, the Midwest advantage [is obvious] through the growth of Q3. As sort of one thinks about the next year and the like, do you see a move towards sort of the historic trend levels?

At our Midwest crackers?

Yes, historically, if I look at trend levels, the delta between call it Conway and Mount Bellevue ethane pricing was call it close to $0.20 a gallon. Do you see that transpiring or that sort of spread being hit through the course of 2012?

Well, we obviously have a much better spread than that today. But, over time, it should average back out in that direction. The reason that it's that way right now because there's very significant excess production. But, there's also -- we should remind you of pipeline plan in 2013 that should reduce some of that extreme price advantage that we have.

Fantastic. Now, on the product pricing side of things, assuming, let's say, that crude oil and natural gas prices remain where they are today, there's a lot of chatter about Asian crackers really sort of making breakeven to negative profitability. So, if energy prices remain where they are today, do you see over the next couple of months a positive inflection call it in spot pricing on the olefin side of things?

It's always about the economy.

Sure. Sure.

If the economy improves some, you'll see those prices move up. But, right now, those Asian crackers, especially the smaller ones are the marginal cracker. And they are closer to breakeven. The good news is we don't have any of those.

Okay. And a final, final one, would you be able to quantify on the O&P Americas side of things how much off is sequential EBITDA boost you got from the Midwest advantage through the Midwest ethane advantage through the course of Q3?

Well, it's about 20% of our capacity, a couple billion pounds. So, you can put that in perspective, the price did run up of late. And that has been a help, but we kind of expect that to continue for awhile.

Yes, let me try to help you a little bit, Hassan, with some of the numbers if you think about it. Midwest EP mix has stayed in the $0.38, $0.40 range. Meanwhile, Gulf Coast ethane has moved from being in the 70s up to the low 90s. So, when you've got a $0.20 move on the Gulf Coast and no move in the Midwest, $0.20 a gallon translates upwards to $0.10 a pound in ethylene. That's sort of your recent sort of shift that you see.

Very helpful. Thank you so much, guys.

Our next question comes from Duffy Fischer with Barclay's Capital.

Yes, good morning.

Morning, Duffy.

I want to talk just the kind of the propylene molecule versus the ethylene molecule. Obviously, the propylene molecule and its derivatives have fallen off faster harder than people would've thought over the last month or so. How do you see the structural balance in the demand for the propylene molecule, both North America, where we've gone away from some of it, cracking lighter, and globally versus where the supply sits today? And how long do you think it'll be before that starts to tighten back up?

Duffy, a lot of this happens very much real time. Obviously, everybody is cracking lighter today, us included. That makes that propylene molecule pretty valuable. We have the flex unit, which helps us in our profitability because we can turn ethylene into propylene. But, I would expect that to normalize again.

About the time everybody's cracking really, really light, it brings co-product prices back up, and things normalize. So, you kind of have to watch it quarter by quarter. But, a lot of stuff that would -- has -- that could move out of propylene, polypropylene into polyethylene, a lot of that's happened in the substitution.

Okay. And then I just want to -- you had mentioned that you were putting some of your own pipes in to bring a little more capacity to your own plants. Roughly how big or how meaningful would those be?

Well, what we're looking at doing is debottlenecking some of our furnaces. We're running them lighter, and we were in certain instances ethane constrained. So, we're doing a little line looping and a few things like that to be able to run our furnaces at maximum. And so, that's about all I'd like to comment on at this point in time.

Okay. Good enough. Thank you, fellows.

Thank you.

Our next question comes from Bob Koort with Goldman Sachs.

Thank you. Good morning. Jim, could you talk a little bit about, in refining, there's been a lot of variation in your purchasing price or costs relative to when the [Pedibasic] contract was there. Is it a function of your premium disappeared, or you're buying it at a bigger discount to the market now? Or, what's sort of driven your cost position there?

Bob, there's several things that are going on. One, we're simply buying more distressed cargos than we used to. We've been in the market taking advantage of the flexibility that our outstanding refinery gives us. So, distressed cargos, we have varied the types of crudes that we've brought in. We're running far more efficiently. There are just a number of things that have caused us to improve the profitability.

So, these should be sustainable, Jim?

Well, there's been a very nice Maya 2-1-1 spread. And when you have that, you can take advantage of it. The spreads come down some. But, I'd like to say that our team is far more alert than it used to be historically about these kinds of things. And you should expect us to continue to do well.

And if I could follow up on ethane -- I'm sure you'll get a few more even -- but, there seems to be a variance between some of the expectations of the ethylene producers and maybe some of the consultants about when ethane prices might finally crack. Wondering if you can maybe give us some more granular view from your standpoint. And then as an oil and gas guy, is there any risk that there's not enough gas demand to merit pulling all that shale out of the ground and so maybe we don't actually get all those liquids out? Or, is that a deminimus risk?

Well, first, in terms of when the ethane price might moderate, it went up pretty quickly. It hasn't been at those elevated levels for a long time. Your guess is as good as mine when it comes back down.

As I mentioned, there were some issues with certain of our competitors needing prop barrels, some other things going on that created extra noise. When the price moves multiple cents in a day, you know there's some unusual market conditions going on. And that has been occurring.

I would expect that to moderate some. And again, as propylene prices and all that come up and as co-products become more valuable, there'll be some basic moderations.

Now, in terms of the gas price and the impact on ethane and whether the low gas price ultimately affects things, a few comments. First, I haven't drilled any gas wells for at least two-and-a-half years now. It wasn't that long ago when I had quite a lot of insight about the economics in those wells.

Depending upon the play, we start getting $3.50 to $4 and M gas price, and a lot of that stuff looks really good, nice returns. You see a lot of people spending billions upon billions of dollars drilling those wells.

A couple things that most people don't realize, and one is that people, according to their leases, need to drill to earn the acreage, otherwise take significant write-downs in their lease acquisition cost. So, I think that drilling is going to continue at a pretty elevated pace, despite where the gas prices are as we enter into November.

People, the producers typically look longer than a quarter when they start drilling those wells. The second is I think one of the trends you'll see is people start to do in-field drilling units in their spacing units. That typically happens. These are tight sands, big spacing units.

And typically, what happens is, as you don't drain the whole unit -- I know I'm talking a lot of the MP talk to chemical guys. But, what happens is you start to in-field drill within a 640 to a 320 to a 160, that kind of thing, and keeps the trends going. And once you've got the gathering lines and the fractionation in place, the economics get even better for the subsequent well.

So, I think this trend keeps going. I'm very excited about it. That's one of the reasons I came to a chemical company. I could see the long-term advantage in what's going on here in the United States and the shale play.

Thanks. That's very helpful.

Our next question comes from Laurence Alexander with Jefferies.

Good morning.

Good morning, Laurence.

Two quick questions. First, on productivity, can you give an update on your thinking about productivity run rates and how quickly you might be to flex your cost structure if margins come under pressure for a more sustained period?

Yes, I have to take that a bit geography by geography. I assume we're talking olefins and polyolefins and maybe refining because our I&D business is pretty stable and has nice earnings profile and kind of stays there quarter to quarter.

But, if you look at -- let's start with O&P Americas. Our volumes are staying up. But, we can literally change our rates almost on a dime. We buy a fair amount of prop barrels. And so, we can change rapidly if we wanted to reduce rates. But, I'll tell you at this moment in time, we're running our crackers full out. And our polymer volumes are holding up at this point in time. We mentioned there'd be some seasonality, but we can move very rapidly on that.

In Europe, we've already -- as you can see from the numbers, we've already reduced our rates. And that's been a trend that we've had for several months. Europe is definitely weaker. We've been controlling. And even there, remember we're net short. And so, we can flex up or down pretty rapidly.

On the refining side, I'm happy to report we're running really hard at the refinery. And it's very easy there to delay cargos, this or that, if we need to if we wanted to reduce run rates. But, the cracks are still pretty decent. And we see no reason to do that. And we've got foot on the floor.

And then if we could flesh out in a little bit more detail the strong results in the Houston Refinery, how much of the outperformance this quarter was driven by the sourcing as opposed to just higher crack spread capture? And has there been a structural improvement in crack spread capture -- sorry, the crack spread capture rate since -- over the last couple years? Or, how do you expect that to go, going forward?

Yes, I'll make a comment. Then I'll let Doug add a few additional comments. First, I personally think we have made a structural change. We typically underperformed the Maya 2-1-1. There were ways that we were running that refinery that in my view were not appropriate.

We have taken our lifecycle oil, for instance, and moved it to a third-party hydrocracker. We have been running our hydrotreaters at appropriate levels without the high severity. That's allowed us to, as you can see, bump up the crude rates that were running to the point where we had a quarter in excess of nameplate. That's pretty strong.

We also repaired our [cat] cracker at the beginning of the year. You remember we had a major turnaround there. And even at these rates, we have a second-stage compressor that isn't running on the cat that we have a little more juice yet that we can add and when we repair that.

So, we're running a lot better. We're buying a lot smarter. We have made some structural changes and we -- in the way we run the unit. And so, I feel pretty good about that asset.

Doug, did you want to add some comments?

Yes, Laurence, I just want to say, as Jim said, we've been making those improvements. They've been going forward. And there's more coming. So, some of it is in the yields. A good bit of it, though, is in the buying. And of course, that's going to be a little bit lumpy as we go forward.

And we've talked about each of the last several quarters. Kevin and his team have really beaten the benchmark and have been able to buy distressed crude because we've got a facility that gives us that flexibility. And we also have an operating model that gives us that flexibility. And I think that's something that we can't tell you it'll continue at the rate that you saw this quarter, which was higher than we've achieved in the past.

But, I think we feel very comfortable that the assets and the people that we have now are going to continue to achieve the ability to pull in some cargos, best utilize the assets. I think that's one of the key differences that we're seeing now versus, say, a year or so ago.

Thank you.

Our next question comes from Kevin McCarthy with Bank of America.

Yes, good morning. Jim, Lyondell shares have been trading at relatively low multiples of EBITDA and net earnings compared to peer companies in the chemical industry. In that context, would you comment on the decision to return cash to shareholders in the form of a special dividend as opposed to share repurchases or other applications?

Yes. First, Kevin, I was going to ask you why the shares trade like that. We've had back-to-back record quarters, and I think we're performing pretty well. I'd sure like to see our share price respond.

But, part of the reason that we're doing a special dividend versus share repurchases is frankly two things. One, there are some unique tax implications to buying back our shares, being the Dutch company at this moment in time, given our emergence from Chapter 11 a little over a year-and-a-half ago. There are some unique issues there.

And secondarily, we just pay a lot of attention to shareholder concentration. So, at this moment in time, we thought special dividend was the right thing to do. Obviously, we have our growth plans in place, paying down debt, a variety of other things. So, it was a -- simply put, we generated so much cash that it seemed the appropriate thing to do now. We'll look at share repurchases at a later day.

Just as a follow up, Jim, even following these actions, your balance sheet looks like it will carry modest financial leverage relative to EBITDA generation, for example. If we take a longer-term view, let's say the next three to five years, my understanding is that the Netherlands-related tax angles could change over time. And in that context, should we think about special dividends as a modis operandi, so to speak, for Lyondell over that period? Or, is it likely that you could shift tactics and favor repurchases as the tax angles change?

Yes, a couple things there, first, the tax angles will change. We know that. We'll have to watch the shareholding and see if that changes if our attitude changes. Generally, I would say, longer term, we prefer share repurchases versus special dividends. But, we'll just see how things set themselves up as time goes on.

We really don't want to comment on that too specifically other than to say that Kent and I, when we started this company and the new LyondellBasell, have consistently said we'd like to move toward an investment grade. We don't think the number one performing petrochemical company in the business can be that without an investment-grade credit. So, we're pushing really, really hard on that. I know Karyn will have that same view.

We're focused on growing free cash flow. And we're going to find economically attractive ways to return value to shareholders. I'll just simply say that.

All right. Fair enough. Thank you.

Our next question comes from Jeff Zekauskas with J.P. Morgan.

Hi, good morning. In the coming 12 months, do you see any industry olefins capacity reductions going on in Europe?

Jeff, that's a bit difficult to say. I know that a number of people have predicted it. There are some stresses and strains on the smaller units. Profitability hasn't been that good for multiple months. Europe is generally a high-cost platform. And so, there could be some of that.

In terms of us as a company, as I mentioned, we're net propylene short, a little -- reasonably balanced on the ethylene side. We run our crackers hard. We've got nice competitive positions. And remember that, during Chapter 11, we shut down our high-cost assets. So, we've done a lot of structural changing as a company. So, you shouldn't look for us to do much of that.

We think we're pretty well positioned. And what we remain focused on in Europe is reducing our back-room costs. We've been in discussions with a works council now for months and are moving forward on a significant cost-reduction program. More to come on that as the discussions progress with the works councils.

Okay. Secondly, how does the downward volatility in propylene prices affect the I&D operation?

Well, in general, I&D uses a fair amount of propylene and propylene oxide, some of the other products. Some of -- one of the things that people don't always realize is low natural gas prices here in the United States really a nice benefit to our I&D business. We call it getting a couple bites at the apple, not only in the olefins chain, but also in I&D.

So, propylene prices coming down can help us structurally across the globe. And propylene oxide is a global business. But, I would say that a fair number of that are just nicely structured markets with sometimes formula-based pricing. And you've seen us have nice consistent specialty-like returns in that business. So, our third and -- second and third quarters were our two best quarters in history in that business.

So, if it's formula-based pricing, is there a benefit that you'll get in the fourth quarter before the formulas adjust?

Well, not really. I don't think it's fair to say that. It's -- there is an element that relates to the propylene price. So, no, it doesn't really work like that. It's just basically nice stable returns.

Yes, we don't look at that business obviously monthly. I mean, we may pick up some in those changes. But, in general, Jeff, if you think about it, we've got a high propylene component. The other 20% of propylene oxide is free, is there.

So, it's been a good steady product. When you go downstream into the derivatives, one of the derivatives, butanediol, we're the only people that source from propylene. So, there's a place where the others are sourcing primarily from C4s, and we source from C3s. And so, that ratio can more improve as you see propylene move.

Okay. Thank you very much.

Our next question comes from P.J. Juvekar with Citi. Your line is open.

Yes. Hi, Jim.

Hello.

As your ethane prices went up on the Gulf Coast, how did you change your feedstocks late in the third quarter and I think you mentioned increase naphtha cracking. I would imagine that with propylene going down, that may not be as profitable. So, what happened to your feedstocks late in 3Q? And where do you think it goes in 4Q?

Yes, well, first, one of the things that people didn't realize is, in the third quarter, there were moments in time where naphtha cracking was favored. And we swung right around with some of our very, very flexible crackers at Channelview and took advantage of that almost immediately.

So, we'll watch the crack and pay attention to that. La Porte crack's pretty light to begin with. Channelview's got a lot of flexibility. We're cracking a lot of ethane NGLs at this point in time, both those facilities, and of course at Clinton and Morris. It's extremely light. And we have a very significant advantage right now.

One of the things that people are missing from time to time is Corpus has really moved up in terms of advantage because of the Eagle Ford play. We're taking a lot of inexpensively priced condensate, local product that people are bringing to there. So, we're cracking some methane. More has been available down there. We've lightened up the furnaces. But, we've also had some -- I'll call it distressed feedstocks that have really been advantageous to us because of the new production down there in Eagle Ford.

Sometimes, it's trucked in. We're putting a little bit of pipeline connection in from a few of the producers. But, some of that's just cross the truck rack at very distressed prices and really have helped us.

That's very helpful. And secondly, can you tell us what's happening to the US polyethylene exports with rising feedstocks and you've got the economy doing whatever it is doing? And then secondly, do you see some destocking in the channel as polyethylene prices decline?

Yes, first, on polyethylene exports, I think we've made the comment that, as a domestic producer of polyethylene, we have significantly reduced our exports. We've found ways to sell a lot of our product, about an extra 10% to 15%, depending upon the moment, of our total US capacity domestically instead of exporting it, particularly to Asia. We just basically shut off that channel because we had higher net backs at home.

Now, we still move some product into South America, into Mexico. And typically, these are some premium products with nice margins. We'll take advantage of that when we can. But, so, our exports are generally down. So, the fact that Asia is soft, that would've hurt us a lot a couple years ago. We moved out of that market simply because, as I said, in the early days, it's not only the cost position, but it's also the revenue. And we like to sell up. And I think you can see some of that in our results.

In terms of destocking, a lot of the downstream folks look at where oil prices and ethylene prices are going, and of course, in polypropylene, look where propylene prices are. And they try to buy opportunistically. There's always a slight seasonal decline around the end of the year. But, I think it really -- a lot of that near-term movement depends on what's happening day to day on -- or month to month really on ethylene and propylene prices.

Thank you.

Our next question comes from Bill Hoffman with RBC. Your line is open.

Thanks, and good morning. Just a follow on, the prior question, as we look at through the year end here with prices starting to coming down, you feel like it's an exacerbate, sort of a year-end effect as well as -- curious on what you're hearing from your customers with regards to their desires to go through year end with much lower than normal inventories.

Yes, Bill, there was -- typically, people try to carry less inventory. But, they're going to watch and see which direction prices are headed as to what their actual behavior is. And I think I made the comment before, and I'll repeat it. A lot depends on the economy. If we start to get a little economic improvement, you'll see people start to behave differently than at a point in time when they're worried about the economy.

So, there's always some seasonality. But, we have to remember that inventories really weren't high this year. And thus, when we start talking about destocking inventories, it should be fairly minor. Europe's a little bit different than the US on that. But, in the US, I don't think anybody's built a lot of inventory.

And what are you seeing right now in Europe?

Well, we were reducing our inventories over the last 45 days or so and think we're in reasonably good shape. And I expect some of the other producers did that. August is a pretty heavy holiday period over there. And people are waiting to see in September which way the markets were going. They were a little softer than people expected.

And so, people like us started destocking at the producer level. And of course, our customers are doing the same thing. So, again, Europe has some destocking or some slowdown at the end of the year as well. So -- but, it was already fairly weak. So, it's weak going into weak.

Thanks. That's helpful. And then just as we look in the fourth quarter as well, any sense on this year the deicer demand season and how things are looking there? Is that going to be something that's going to provide you a pretty decent offset?

Bill, I don't think we're going to be able to predict the weather here.

I got you there, but -- .

-- But, it did -- it already snowed in the Rockies, saw it on the news, big snow.

Okay.

Last year was a good year in deicers. And it's not a huge contributor to our business, but it's a plus. And so, we'll watch and see what the weather is.

Thanks. And finally, just as you look into 2012, any -- could you give us some thoughts on your capital spend next year and projects you got, big projects you got on target?

Yes, we're going to save some of that discussion for our Investor Day because I'd like to talk about our growth projects at that point in time. But, I'll say we have consistently said to everyone that we would spend about $1 billion a year plus or minus on safety and base spending with a bit of high-return profit generating. Now, we're going to add to that with some of our growth projects.

The nice thing is that the returns have been better than we predicted a year-and-a-half ago. We've mentioned some of these growth projects, like the port expansion, a few other things that -- again, without going into all the details -- and that'll take some capital investment. But, at Investor Day, we'll go in more detail about that. And I think you'll be very excited about the projects and the returns that we see.

Great. Thank you.

Our next question comes from Hamed Khorsand with BWS Financial.

Good morning. Just two questions here. How much of the Q4 decline that you're expecting do you think is related to seasonality compared to the price volatility and margin compression you've been talking about?

Hamed, let me take a first shot at that. I think, when we speak to seasonality, it's in a few different areas typically. The refining area, you typically see some seasonality and spreads around gasoline. And what we've seen is spreads -- the Maya 2-1-1 spread was about $24 in the third quarter. It's around $18 or $19 now.

Our oxyfuels business is a business that has been in a very good position because the raw materials are gas based. The product is gasoline based. But, as a result, profitability, because with butane as a raw material, is primarily second and third quarters. So, and I would expect to see normal seasonality there. And you've kind of seen it in our history. You can see that very clearly.

And the other piece of seasonality that we look at is principally polymers and where are converters going to go on Christmas, how much of a downtime. Typically, they will take a week or sometimes more downtime on their production side at Christmas. And that varies. But, we'll see that sort of as a week, week and a half, maybe even up to two in December on the polymer side.

So, those are the pieces of seasonality that are biggest. And although I was kidding Bill about we're not going to predict weather, we are hoping for snow because we'd like to sell more deicer in December.

Okay. And then how much of an impact do you think there is on the margins in the fourth quarter coming from competitors starting up production again?

No, I don't think -- are you saying from turnarounds and coming through? Well -- .

-- Yes.

I don't think that's what we're seeing. People worked pretty hard to balance themselves through a pretty -- a turnaround period. So, I don't think we're seeing much of that.

There's a bit of new production coming up in the Middle East that everybody's aware of. And then there's been a decent turnaround schedule over the last few weeks. And I know the first quarter of next year will have a pretty heavy turnaround schedule, including us taking OP1 down, then for a short period of time OP2 at the same time.

Dorian, in the interest of time, we're only going to be able to take a couple more questions. So, we'll try to move forward quickly, and if I could ask everyone to try to limit things to just one question, please.

Thank you. Our next question comes from Maggie Cheung with Wells Fargo.

Actually, this is Frank Mitch sitting in for Maggie. Hey, Kent, just wanted to wish you best wishes in your coming retirement.

Thanks, Frank.

And if I could come back to the Refining and Oxyfuels, the sequential increase was $150 million. As I'm listening to this call, I'm getting the sense that the vast majority of that was actions taken by Lyondell rather than the industry as a whole. Am I reading that correctly? How would you apportion the sequential improvement in profitability there to things that were unique to Lyondell as opposed to the industry as a whole?

Let me take a shot at that. I ran a very large refining system for another company in years past. And I made the comment when I came here that the biggest surprise I saw was how poorly we ran our refinery. I'll just put it that bluntly. We in 2008 left hundreds of millions of dollars of EBITDA on the table compared to a couple look-alike refineries that I previously ran.

I said that we would fix that, that we had some structural issues with our cat cracker, where we were reducing rates. We were not following what I would call Refining 101 principles in the way that we operated the asset. And frankly, we brought in some refiners. We did some work on some of the hardware. We've done a lot of commercial work. And we're very competitive again.

This is a very, very nice refinery that's capable of performing with the best in the industry. And we're now acting like that, and we're showing results like that. So, it's both the hardware -- and I'll tell you our people are performing very well. I'm extremely proud of the reliability and the safety record of that asset. There's been a significant turnaround in our individual performance on many fronts.

And so, expect us to act like a top-quality refinery in the future and put up some good numbers.

That's terrific. And then just curious, in terms of operating rates in O&P Americas and O&P Europe, can you give an average operating rate for the third quarter and where do you stand right now here in October?

I think it's based -- you can actually kind of look right there in the earnings release with the ethylene production data. But, we've continued to run the US side pretty full, and then we trimmed back a little bit, 5% or so probably in Europe during the third quarter.

But, remember our balances. I think that's a key thing to remember. We've made adjustments to the system with the idea of we want to run our olefins plants in Europe at -- pretty much at full rates. And we've got other places where we can take the swing. And of course, in Saudi -- I did mention Saudi -- we want to run that full at our joint venture partners.

Great. Thank you.

Our next question comes from Bill Young with ChemSpeak. Your line is open.

Thank you. I got a quick question on the ethane situation, a follow up here. I believe [NSIs] is reversing one of their pipelines in the Midwest and putting in some new connections from maybe West Virginia to ship ethane down to the Gulf Coast. Do you expect more of this going forward? And how do you see the balance, given the expansions that have been announced by Dow and Westlake and some of the others for their Gulf Coast olefin operations?

Bill, first, you remember we're also going to expand. I don't want to be left out of that phrase.

Well, we haven't heard too many details. I'm looking forward to Investor Day.

We're going to explain that in more detail, but yes, we are also a growing company on that front. And I think we're demonstrating we know how to run those kind of assets and make money with them. But, there are going to be some Marcellus-type pipelines bringing product down.

But, having said that, there's still a fair amount of production in that region. We think there'll be a continuing Midwest advantage, although it won't be as robust longer term as it is today. We mentioned that there is another pipeline in 20 -- or in '13 that will bring some products south. That's good for our other 80% of our US crack. So, either way, we feel pretty good about it (inaudible).

Okay. Great. And last, what are the main points in your view to explain the significant drop in margins in polyethylene in the third quarter?

Well, there has been some drop in the pricing. Some of that is simply squeezed from the olefin side. That price has been very high. And -- .

-- (inaudible) we've had a price increase (inaudible). The market just hasn't been strong enough to put it through. And so, we saw some late quarter decline in pricing. I think we'll see -- and Jim talked quite a bit about economic uncertainties and volatilities. And that has to affect the guy on the purchasing side, too, as he's looking forward. He's going to be a little bit cautious and a little bit conservative. And so, things are going to work through as we get (inaudible).

We're also seeing some pretty good economic data, much better than people anticipated in GDP and stuff. So, a key for us is Jim's got a path to a strict tight cost control. We're taking care of the balance sheet. And [we're offering] reliability's been great for us, so maybe a little bit bumpier or a little bit of this price volatility. But, we don't see anything really has gone through any major, major shifts down. It's a little bit on the edges everywhere.

We're still running pretty hard in polymers in the US. So, we're moving the volumes, and pricing will come. Again, it's about the economy. I've said that a couple times already. It still is.

Okay. Great. Thank you. Thank you very much.

I think we're going to take one last question I think if we can. I apologize for anybody else in the queue, but we can't get to them.

Thank you. Our final question comes from Gregg Goodnight with UBS.

Good morning, gentlemen. Great quarter. Actually, I have several questions. Doug, I'll be happy to take them offline in the interest of time.

(inaudible) time (inaudible) your key question.

Okay. Well, my key question was -- in the -- you mentioned the purchased distressed crudes and the optimization of your mix to the Houston Refinery. My main question was, were there some one-off purchases that are likely not to be repeated going further out? Was this quite an unusual quarter? Or, do you think your purchasing strategy now will be able to repeat this sort of a quarter in the future?

Gregg, it depends a bit on what margin we have to take advantage of and what crudes are available. I won't -- I will say that it's not a cargo or two. This is -- we've had a nice continuing pattern.

Let me give you an example. The (inaudible) of our refinery allows us to take some high (inaudible) crudes, for instance. We've got really good metal up on the front end. And so, we can take cargos that other people simply can't take. And when somebody turns back that cargo or there's an extra cargo of production from a particular geographic location, we're able to take it when many others can't.

Sometimes, we need to blend it down. Other times, we can run it straight. But, because of the flexibility we have, it gives us an opportunity to take cargos that there are very few buyers can utilize. And I think our people are paying a great deal of attention. And I think we're going to have some continuing performance. Will it be the same? No. The Maya 2-1-1 is down some. But, we're going to stay very alert to market trends.

Outstanding. Doug, could you remind us when the Investor Day is, please?

Yes, we're going to put that on in early December.

Thank you.

I think Jim's going to make a few comments. And then we'll close for today.

Yes, let me make a couple of comments. First, I'd like to, again, thank Kent for dedicated service. I can tell you that no one has worked harder to help turn our company around. So, thank you, Kent, for your dedicated service to us.

I also really look forward to working with Karyn. She's a great addition to our staff. And I think you all will realize that in the coming quarters.

We've had back-to-back record quarters, outstanding results. We're very proud of that. The market has been good. But, I think you've seen that we can operate these assets well. And we will take advantage of whatever market opportunities come our way.

You've seen that we're proceeding with our capital restructuring plans. I think that's a significant advantage. It seems like the right time to do that. We've generated a significant amount of cash, and we are investor friendly. And we'll return excess cash to our shareholders in a prudent fashion.

We've outperformed industry benchmarks. I've said that we intend to be the top petrochemical company in the world. And to do that, we have to continually outperform the peers. And I think you're seeing that we're starting to do that on a fairly regular basis.

Our strategy, back to basis is working well. Our asset flexibility allows us to take advantage of naphtha when that's favored or ethane when that's favored.

The final thing I want to say is that the industry is on a positive path. There aren't a lot of new assets being built. The economy does have some volatility at this point in time. But, we think we're extremely well positioned for the future. We're very, very excited about that, despite these short-term macro economic uncertainties.

Like to thank you for your continued support. We'll keep trying to do a good job for you.

Thank you for joining today's conference. That does conclude the call at this time. All participants may disconnect.