利安德巴塞爾 (LYB) 2012 Q2 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 would now like to turn the call over to your host, Mr. Doug Pike, Vice President, Investor Relations. Sir, you may begin.

Thank you, Brad. Well, hello and welcome to LyondellBasell's second-quarter 2012 teleconference. I am joined today by Jim Gallogly, our CEO; Karyn Ovelmen, our CFO; and Sergey Vasnetsov, our Senior Vice President of Strategic Planning and Transactions.

Before we begin the business discussion, I would like to point out that a slide presentation accompanies today's call and is available on our website at WWW.LyondellBasell.com.

I would also like for you to note that statements made in this call relating to matters that are not historical facts are forward-looking statements 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 results could differ materially from those forward-looking statements and 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/investor relations.

A reconciliation to the non-GAAP financial measures to GAAP financial measures together with any other applicable disclosures, including the earnings release, are currently available on our website, LyondellBasell.com.

Finally, I would like to point out that a recording of this call will be available by telephone beginning at 2 p.m. Eastern Time today until 7 p.m. Eastern Time on August 27 by calling 866-418-8384 in the United States and 203-369-0754 outside the United States. And the passcode for both numbers is 2378.

And during today's call, we will focus on second-quarter 2012 performance, the current environment and the near-term outlook. That being said, I would now like to turn the call over to Jim.

Thank you for joining our earnings call. As Doug mentioned, a set of presentation slides accompany this call and are available on our website. Let's begin by taking a look at page 4 and reviewing a few financial highlights. Net income was $768 million and EBITDA was $1.77 billion. The quarter included some charges and gains that are not reflective of the underlying business and exclusive of these, net income was $959 million. Our earnings per share were $1.33, or $1.66 exclusive of the charges and gains that I referenced. Karyn and I will discuss the quarter in detail, but I thought I would quickly summarize a few highlights and trends.

In North American olefins, we benefited from increased ethylene margins. Raw material costs declined as the quarter progressed. European olefins results exceeded expectations as raw material costs declined in advance of product price declines resulting in margin expansion. Polyolefins sales volumes declined reflecting weak economic conditions. Intermediate and derivative results remained strong and were consistent with the first quarter.

We have restructured our reporting. Oxyfuels are now part of the IND segment. Karyn will provide more color on this. Our earnings release also includes an attachment with additional details. Houston refinery spreads increased as the Maya 2-1-1 averaged approximately $23.15 per barrel. However, byproduct values remained weak. Our Berre refinery is now accounted for as a discontinued operation.

During the quarter, we resolved the past insurance claim related to Hurricane Ike and recognized a gain of $100 million. And we raised our interim dividend by 60% to $0.40 per quarter.

The second quarter was challenging for the entire chemical industry in terms of the sluggish economy and volatile energy costs. However, our Company met this challenge with highly focused, disciplined and effective execution and delivered very strong results. In fact, the second quarter was the all-time record underlying EBITDA quarter for the Company. We also had record quarterly profits for three out of four of our main segment --s America's O&P, EAI and I&D. However, there are some items such as the changes in reporting and premiums paid for our financing that may create some confusion. Karyn and I will address these during the call.

In addition to continued strong financial results, our environmental health and safety results have been very good. On slide number 5, we have updated our safety data and you can see a continuing trend. I believe that our safety record is very near to best in class.

Now I would like to turn the call over to Karyn to discuss some key elements of our financial performance.

Thanks, Jim. Please turn to slide number 6, which charts our first-quarter and last 12 months segment EBITDA. The almost $1.8 billion of EBITDA reflects a $550 million increase over the first quarter. From a segment perspective, during the second quarter, O&P Americas EBITDA was $776 million. The olefins products alone generated approximately $650 million, even while one of our largest plants was in turnaround for a month during the quarter. O&P EAI produced over $330 million of EBITDA, including $59 million from JV dividends.

The olefins plants benefited as declining naphtha costs outpaced product price declines. However, polyolefin operations were near breakeven and sales volumes declined significantly. Consistent with past quarters, differentiated polyolefin products in our joint ventures performed well.

Intermediates and Derivative segment results continue to be very good as both the chemical products and oxyfuels results were relatively unchanged versus the first quarter. The Refining segment generated approximately $160 million of EBITDA. This only includes the Houston refinery results as the Berre refinery is reported as a discontinued operation and oxyfuels are now included in the Intermediates and Derivatives segment. These results include $53 million from the Hurricane Ike insurance settlement.

The Technology segment performance was steady with EBITDA of approximately $50 million.

The bar chart on the right depicts the last 12 months EBITDA by segment recast to include the impact of the segment realignment and discontinued operations. Over the period, total EBITDA was approximately $5.6 billion. Approximately 45% was generated from O&P Americas while the recast, intermediate and derivatives segment generated $1.5 billion.

This might be a good time for me to discuss discontinued operations and the segment realignment. The logic behind moving the Berre refinery into discontinued operations is relatively straightforward and dictated by US accounting rules. We ceased operations in January, have mothballed the facility and have been selling inventory during the past months. We are in the final stages of our activities and as a result, meet the US GAAP criteria for discontinued operations presentation.

During the second quarter, the Berre refinery incurred costs of approximately $20 million and realized a gain of approximately $5 million on the sale of inventory. In an appendix to our earnings release, we have recast select financial information back through the second half of 2010. This will enable you to clearly understand the impact of the Berre operations on our historic financials.

We also realigned our Refining and Intermediates and Derivative segments moving oxyfuels from the former to the latter. This is consistent with the change in the internal management of this business following our exit from the European refined products business. Decisions around this business are closely associated with the propylene oxide and TBA chemicals businesses. For example, the raw material for oxyfuel production is derived from the PO TBA plans and the alternative use for this raw material is in through the chemical market as isobutylene. In the appendix, we have included selected information, which recasts data for this segment realignment.

I also want to point out that the O&P Americas segment includes a $71 million charge reflecting a lower of cost or market, or LCM, adjustment to our inventory. As a LIFO-based reporter, the majority of our inventory is held at the cost basis when the Company formed during May of 2010. As a result of market price declines, the market value of the inventory pool fell below its book value. This is partially related to low NGL costs. Therefore, we need to adjust the carrying value to the current pricing. An adjustment of this nature occurs because LyondellBasell is a relatively new company and the NGL market has changed considerably over the past two years.

Another item that impacted second-quarter earnings was the costs related to our refinancing. Specifically, the quarter includes $329 million of premiums paid in the write-down of our prior financing costs. These charges reduced our net income by approximately $210 million and earnings by $0.36 per share. Combining this with the impact of the lower of cost or market adjustment and the impact of the insurance claim, our net income was reduced by $191 million, or $0.33 per share.

Let's turn to slide 7 and take a look at the key elements of our cash flow. During the second quarter, cash balances increased by approximately $300 million closing the quarter near $2 billion. Given our strong earnings, this may fall somewhat short of your expectations. The key reason for this is that our working capital in the Refining and O&P EAI businesses increased.

In Refining, we were able to opportunistically secure favorably priced crude oil cargoes and this material was in our inventory at the end of the quarter. In EAI, we increased inventory in preparation for our third-quarter turnaround at our Wesseling site. Both increases are temporary and should reverse by year-end.

On the right side of the chart, you can see that, over the last 12 months, our cash balance has declined from $4.9 billion to $2 billion. Operations, including working capital, generated over $3.1 billion of cash, while uses included approximately $1 billion for CapEx, $1.5 billion of debt repayment and $3.2 billion in dividends.

While speaking of cash, it is a good opportunity to provide a brief update on our projected capital spending for this year. We entered the year expecting to spend approximately $1.4 billion. We currently believe that spending will be approximately $1.2 billion. The difference results from a combination of more efficient project execution and some changes in spending patterns. There are, however, no major changes in our overall capital plans.

Let's quickly turn to slide 8 and take a look at working capital and some other key metrics. On the left-hand chart, you can see the impact of the inventory items that I just mentioned. You can also see that both accounts receivable and payables declined, which is consistent with the decline in raw material costs and product prices.

On the right, we have summarized some key balance sheet and credit statistics. We finished the quarter with $4.35 billion of debt and $2 billion of cash. Our resulting net debt to EBITDA ratio remains under 0.5 times.

I will turn things back to Jim now for a further discussion of our business results.

Thanks, Karyn. Let's discuss segment performance beginning on slide number 9 with Olefins and Polyolefins America. Second-quarter EBITDA was $776 million, an increase of $178 million versus the first quarter. These results include $29 million from the settlement of a Hurricane Ike insurance claim and include the lower of cost or market inventory charge of $71 million.

Underlying Olefins EBITDA was approximately $650 million despite having significant downtime related to the Channelview turnaround, which reduced ethylene production by approximately 150 million pounds during the quarter.

I would like to discuss a few metrics that put the results in perspective. Relative to the first quarter, our average ethylene price decreased by approximately $0.06 per pound while the cost of ethylene production metric decreased by approximately $0.13 per pound. The latter decrease was related to the lower cost of both natural gas liquids and naphtha. Our average ethane costs declined by approximately $0.15 per gallon. Propane cracking was competitive with ethane. Naphtha costs declined by approximately $14 per barrel while, in aggregate, co-product values were relatively unchanged.

During the quarter, 85% of our ethylene was produced from natural gas liquids with ethane accounting for 66% of ethylene production. Our Midwest olefins plants were particularly well-positioned during the quarter. NGL supply has been very strong in the region and we have approximately 2.3 billion pounds of Midwest ethylene capacity.

At some points during the quarter, raw material prices declined to less than $0.05 a gallon making these plants some of the lowest cost in the world. Polyolefin results also strengthened versus the first quarter as EBITDA increased by approximately $60 million. Spreads over monomer improved by $0.03 to $0.04 per pound as ethylene and propylene costs declines outpaced polymer price declines.

Polyolefin volumes declined slightly primarily in polyethylene. However, both domestic and export sales trended upward as the quarter progressed. For example, June polyethylene sales outpaced April by approximately 100 million pounds. Overall, the second quarter was a very good quarter for this segment and although prices declined as the quarter progressed, the underlying fundamentals that benefited this segment remain intact. NGL prices have recently increased, but remain low relative with global crude oil prices. July polyolefin volumes have been somewhat stronger than June.

Before we move to the other segments, let's spend a few minutes considering the trends that have occurred within the olefins raw material environment. In the upper left of slide number 10, we have plotted benchmark pricing of NGLs and Brent crude oil. Since most of the world's ethylene production is based on naphtha with pricing tied to crude oil while our US production is primarily NGL-based, this chart provides a high-level indication of the growing advantage enjoyed by our US crackers. It is certainly notable that ethane prices declined by approximately 50% since the beginning of the year.

In the upper right, we have plotted IHS's estimated cost of ethylene production both for Asia and the US. This parity clearly demonstrates the advantage enjoyed by US producers and the impact of falling raw material costs. This impact was a key driver of our second-quarter results. You can also see that their preferred feedstock universe expanded in the US as propane cracking economics rivaled ethane. On the bottom of the page, we have plotted IHS ethylene margin estimates, which have been very strong.

So are low NGL prices sustainable? They are only related to the first half of the year industry maintenance activity. Undoubtedly, the latter has contributed, but we believe that NGL balances are fundamentally long. On chart number 11, we have plotted ethane and propane production and inventory statistics. During the final months of 2011 and throughout early 2012, both production and inventory data have been at or near peak levels. The situation has been and continues to be favorable for US ethylene producers. We believe that it will stay this way over the foreseeable future; although we will likely see periods of volatility.

Let's shift our focus to slide number 12 and the Olefins and Polyolefins Europe, Asia and International segment. Second-quarter EBITDA was $335 million, a $234 million improvement over the first quarter. The improvement was generated principally through increased European olefins margins and $59 million from joint venture dividends.

Our differentiated products, such as polypropylene compounds and catalloy resins, continued to perform well, generating results consistent with prior quarters. Even though June polyolefin volumes were approximately 70 million pounds higher than April, underlying business conditions within Europe were quite weak. This was seen in an approximate 13% reduction in our polyolefin sales volumes and continued weak polyolefin margins versus the first quarter 2012.

Resulting second-quarter polyolefin results were only marginally positive, relatively unchanged versus the first quarter. However, olefin results improved substantially. Our EBITDA per pound of ethylene produced increased by approximately $0.19 per pound versus the first quarter when we operated near breakeven. This margin increase was primarily attributed to declining raw material costs as the quarter progressed. On average, second-quarter olefin sales prices exceeded first-quarter prices by several cents per pound. However, the pricing trend within the quarter was downward. Ethylene and propylene prices finished the quarter approximately $0.10 per pound below March pricing.

Within Europe, the environment for olefins and polyolefins remains difficult and olefin prices declined further in July. As the third quarter progresses, we expect that olefin results will be more reflective of the weak economic conditions and uncertainties within Europe. We expect that our differentiated product positions will continue to perform much as they have over the past quarters. We will have a turnaround at one of our German ethylene plants. As previously mentioned, we have prepared for this and anticipate that it will only have a minor impact on our financial results.

Now, please turn to slide number 13 for a discussion of the Intermediates and Derivatives segment. First-quarter EBITDA was $455 million, an increase of $37 million from the prior quarter. Included in these results is $18 million related to the Hurricane Ike insurance settlement. Additionally, the results include $14 million of joint venture dividends as we received our first annual dividend from our Chinese propylene oxide joint venture.

Within this segment, underlying results for the propylene oxide and derivatives products, as well as intermediate chemicals were relatively unchanged. You might notice that we have added a graph of the spread between propylene and propylene glycol prices. Although this industry data only captures a subset of the propylene oxide industry, I think that it will help convey trends within the market. You can see the spreads have been relatively steady across the quarters.

As we previously mentioned, the segment now includes our oxyfuels business, which also generated results consistent with the first quarter. MTBE raw material margins remained strong near $1.25 per gallon.

Thus far during the third quarter, underlying business trends are largely unchanged from the second quarter. We have a turnaround at one of our US propylene oxide plants that starts mid-September. We do not expect a significant impact on third-quarter EBITDA results from this turnaround.

Let's move to slide number 14 for a discussion of the Refining segment. Second-quarter EBITDA was $161 million. This includes $53 million from the Hurricane Ike insurance settlement. Of course, under our new segment reporting, results only include the Houston refinery. Underlying EBITDA improved by approximately $60 million. Throughput at the refinery was near capacity at 267,000 barrels per day and the benchmark Maya 2-1-1 spread increased by approximately $3 per barrel to average $23.16 per barrel.

The refinery continued to realize a lower than historic yield on the benchmark as the value of byproducts such as petroleum coke remained depressed versus the price of crude oil. We estimate that lower byproduct values impacted our margin by approximately $2 to $3 per barrel versus historic yields.

Looking to the third quarter, July operations have been steady and the Maya 2-1-1 has averaged approximately $25 per barrel. We continue to pursue opportunities to optimize our crude slate. This includes actions such as the opportunistic crude purchases that we made late in the second quarter. We also sometimes lighten our crude mix to take advantage of Mid-continent pricing.

Let's step back from the details and summarize the business environment on slide number 15. Our adjusted second-quarter results were our best ever despite a challenging environment. The US business continued to benefit from shale gas opportunities. The magnitude and scope of this drilling and completion technology shift is becoming increasingly evident.

In our O&P EAI segment, the second quarter benefited from the timing of raw material cost declines. We took advantage of the opportunity, but clearly can't rely on this to be repeated under the uncertain economic situations in Europe.

Despite this and other macro uncertainties, the differentiated products within this segment continue their trend of study performance as did the I&D segment. The Houston refinery ran well and we continue to develop opportunities to exploit the quality of this asset.

The third quarter started with similar drivers across most of our business areas. But as I said, olefins and polyolefin prices have declined. We believe that this will manifest itself in weaker European olefins margins while US margins will continue to benefit from low-cost NGLs.

Before I take your questions, I want to discuss progress and opportunities reviewed at our Investor Day last year. First, the operational and financial improvement projects have proceeded as planned. Our refinancing has been completed. The Berre refinery has ceased operations and our European restructuring is proceeding.

Our capital projects are also progressing. Today, I will briefly review the ethane flexibility, methanol restart, European butadiene and La Porte ethylene debottleneck projects. First, the core of the ethane flexibility project was completed during the Channelview turnaround and this quarter, we are in position to increase ethane feed at the site.

The methanol plant restart project is progressing as planned. We have completed our discovery work, contracted the detailed engineering and ordered long lead items. Although we have not received environmental permits, the process is progressing as we had envisioned. We expect to be in a position to restart this 780,000 ton facility during the second half of 2013 at a capital cost of approximately $150 million.

At current natural gas and methanol prices, the benefit from the project would be approximately $200 million annually. The butadiene debottleneck project at Wesseling is the only significant growth project that we are pursuing in Europe. This is a 40% debottleneck of our German facility and the finished product has been contracted insuring a good economic return. Construction has begun and we plan to have the expansion online in mid-2013.

The La Porte ethylene debottleneck project is in a similar position to the methanol project. We have not yet received our permits, but the process is proceeding. Detailed engineering is in process and we have ordered long lead items. We anticipate completion of this 800 million pound plus expansion during the second quarter of 2014 in conjunction with the olefin plant turnaround schedule. If ethane cracking margins remain at current levels, this project will add more than $200 million to our annual EBITDA.

We have had an excellent quarter in a tough environment. Our back-to-basics strategy now coupled with discipline growth is working. We are well-positioned for a bright future. We are now pleased to take questions, Brad.

(Operator Instructions). Jeff Zekauskas, JPMC.

Hi, good morning. I have a question for Sergey Vasnetsov. So Sergey, you have been head of strategic planning at LyondellBasell now for almost two years. How has your view of Lyondell's strategy changed since you first took the position compared to how you see it now?

Jeff, when I joined the Company, I didn't have a view on the strategy, so I think my view has developed through the past couple of years in discussions with our management and with our Board. Clearly, this strategy must be based on realization, what kind of company we are and so that is a perception both internally and externally to also develop as you can see us in a stronger position than we were two years ago.

I think in terms of our deployment of cash, in a variety of different ways, the basic premises haven't changed for the past two years. We identified some specific opportunities that I didn't know about two years ago such as some debottlenecks and some restarts that Jim had mentioned.

But I think the underlying discipline and the approach to viewing the world -- trying to strive for the best -- really hasn't changed. So hopefully this will continue to evolve over the next few years and so longer answer, you'll see the results of it.

Okay, and for my follow-up, natural gas liquids prices have bounced up since the end of June. Do you read anything into that and do you have ideas of where natural gas liquids prices will be for the remainder of 2012?

Well, Jeff, it's always difficult to forecast NGL prices. You are right that they have come up recently, some in the Midwest, some in the Gulf Coast. But if you look at ethane and propane inventories, you're going to see that they are extremely high at this point in time. NGL prices have tracked up a little bit with gas prices and crude oil prices, but they are still so strongly advantaged in the United States that we are quite optimistic about the future. We will see short-term volatility, but ethane prices are still under $0.40 in the Gulf Coast and around $0.15 in the Midwest. So we are in a good position.

Okay, thank you very much.

David Begleiter, Deutsche Bank.

Thank you. Jim, just on that Midwest Conway advantage, is there a new spread we should think about between Conway and Mont Belvieu going forward given the constraints still shipping ethane down?

Well, I think next year you will see some product moving south, but I think there still will be an advantage in the Midwest. It won't be as great as we see today. At this moment in time, there is such an abundance of supply that the pricing has been as low as $0.02 a gallon. That price has moved up, as I mentioned, but there still is ethane rejection taking place, so that shows you just how long the market is.

And Jim, just on the June/July PE strains, is this mainly restocking in your view and is it coming to an end from your perspective?

Well, there is a couple things that happened when the overall complex of oil prices and gas prices start to increase again. People say, okay, we have hit that floor; it's time to go and buy again. But the other thing that is going on is we see a bit more exporting a little bit by ourselves and quite a bit more by our competitors according to industry data. The US is advantaged enough that we can move our product efficiently in other markets. LyondellBasell exported about 15%. Most of that was south versus to Asia. We had a very, very modest volume to Asia or Africa, just a couple percent. So the good news is that the pricing advantage that we have here allows us to be an export platform and so we expect rates to remain pretty high in the US.

Thank you.

Bob Koort, Goldman Sachs.

Thank you. Good morning. Jim, I guess it is pretty clear how you guys get an advantage on your costs. I am a little bit uncertain how do you get an advantage on your price? I noticed your ethylene price that you guys realized was better than the market price, or at least the change in price was.

Well, we just work it hard, Bob; I don't know what to say. I think some of that has to do -- we always watch our pennies and nickels and how we contract real long on ethylene. If you look at who we sell the excess volumes to, a lot of that goes spot and so that may be -- spot has been above contract a fair amount and so that may be part of that answer.

Okay. And then if I might follow up, in the spring, there seemed to be quite a bit of anxiety about this great wave of ethylene production rates that all the plants were going to come back on and it was going to squash this nice holiday in ethane prices, but that hasn't seemed to happen even though the global economy is kind of choppy. So I guess people were surprised in being too concerned this spring. What do you think people get wrong and maybe it would go the other way as we go into next year? What could cause a problem in feedstock costs?

Well, there is a few things. I think if you look at the demand side of the equation, because of turnarounds, it was light in the first quarter. But in the second quarter, most of the turnarounds were done. Most people are operating reasonably well. There is a couple of plants down at the moment, one in turnaround, one with an operational difficulty associated with the pipeline. But the volumes of demand are slightly down from where people would expect.

But one of the big positives has been propane has come into the mix in a big way and it is a comparable crack to ethane at this point in time. So with that going on, you are seeing very substantial builds in ethane and propane inventories, which have held prices down.

What could go wrong? Well, I am feeling pretty good about it near term and it is a bit hard to forecast this stuff, as you know. Ethane prices dropped -- NGL prices -- 50% since end of last year. Pretty amazing. So with that kind of movement, it is very unpredictable. There is a lot of chop, but when you look at the fundamentals, it looks good through the rest of the year.

Terrific. Thank you.

PJ Juvekar, Citi.

Yes, good morning, Jim.

Good morning, PJ.

Jim, you had talked about a condo cracker in the past. Now there are several other parties that are also interested in a similar cracker or partnering with somebody else. So are the discussions happening or is the structuring of the deal taking longer because the longer you wait, more crackers are likely to start ahead of you and so any thoughts on that?

Well, we are still thinking about it, PJ, but our basic strategy has been to get debottlenecks that are significant done early. La Porte is an $800 million plus expansion. We talked about the timing of that. I hope to have that one paid for before that first new cracker is built by any third party.

We are also looking at some debottlenecks adding furnaces at other locations and that has been our emphasis. The way we are thinking about it is if we can bring on these debottlenecks in the $0.45 an annual pound range versus $0.75 annual pound range for newbuilds and get them into the market a year or two earlier than other folks, we are going to have better than the equivalent of a new grassroots cracker when you look at your economic impact.

So we think our strategy makes sense. We are studying supply/demand NGL balances later in the period and trying to decide whether it makes sense for us to join the fray with the newbuild. There are certainly a lot of people who have come to us and said you are good operators and we would like to partner with you. But we have not reached a conclusion yet on whether that makes sense and would be the kind of return that we would want for our investors.

I really believe that some of these crackers are going to come later and be more expensive than people are talking about at this point in time and so our emphasis is debottleneck and get it done.

Thank you. And secondly, can you describe your propylene oxide demand sort of regionally Europe versus Asia and North America? And the reason I am asking that is one of your larger competitors saw weakness in polyurethanes and thermosets and I am wondering if you are seeing that in propylene oxide or are you likely to see that?

Yes, the propylene oxide demand has been a little bit weaker in Asia and there has been a new plant onboard and they have been trying to put volume into that market, which has affected pricing. Europe has been okay. The United States has been okay. PO is a little weaker, but it is a pretty steady performer and we have got some very sound customers with some pretty solid demand and we have been okay.

Don Carson, Susquehanna Financial.

Thank you. Jim, a couple questions on some of your initiatives that you outlined last year and thinking specifically on Europe. You talked about a restructuring potential that could deliver up to $200 million in annual cost savings and efficiencies. Just wondering where you are on that. Have you seen any bottom-line benefit and if not, what do you think the timing is?

And on a couple of projects, you mentioned that you haven't got environmental permits yet. Is permitting becoming increasingly difficult? Because I thought on methanol, for example, one of your advantages was that it was a restart of an existing facility and that you would be grandfathered on your permit.

Let me first talk about Europe. We said that we would take about $200 million out of the cost structure and that is on plan. We have had a pretty big reorganization. Now having said that, given the tough environment over there, we are increasing our initiatives to take costs out. It takes longer in Europe. We have works councils to deal with, but we are reinvigorated on that. More to come.

I didn't mention that Mike VanDerSnick is taking over our European manufacturing operations and I have asked him to look very hard at all of our costs and see if there isn't room for us to further improve. As you know, Europe is a fairly high cost environment in general and while we are very competitive, our goal is to be the top competitor and so we will be looking at everything in the way that we operate and the money that we spend there.

In terms of environmental permits, I think a few things are being missed in the US expansions. First, it does take a fair amount of time in any event to get an environmental permit. I think if you look at who has filed permit requests on these new crackers and some of the things you will find that a lot of the announced projects are not even at the stage where they have filed for a permit. We were first, second in line and a couple of others have now filed for permits, but we think there is an advantage to being early, so that was a key component of our strategy.

We are not behind at this stage. These permits take time. We have no reason to believe that we are going to be late in getting permits, but I will just say it is always a bit complex to do so. We are in non-attainment areas and we have to make sure that we are bringing the best available control technologies to the table. We have some credits, but we are very actively engaged in it and hope that we will be one of the first to get our permits. But again, if you look at who has filed and all, there is quite a few people who have announced capacity who have yet to file their first permit application.

Thank you.

Duffy Fischer, Barclays.

Yes, good morning and congrats on a wonderful quarter. Jim, a question for you around the change with oxyfuels going into I&D. When you think of oxyfuels and compare that to I&D, I&D has been a pretty stable business. I would argue should be a high multiple business. How does that change the volatility I guess moving oxyfuels into that business? And then does that change any of the decision-making now being wrung out of I&D as far as which of the byproducts the isobutylenes or the MTBE you end up making?

No, Duffy, it won't change our decision-making. Whenever we make a call on that, we actually compare our isobutylene margins, our MTBE, ETBE margins. We stack up the profitability by market segment by customer and make conscious decisions.

Even when that business was part of Refining in oxyfuels, before it moved to I&D, we still did that analysis and so I saw a comparison in a review earlier this week and the thing that I am excited about is that we have been able to move up a lot of the value equation into oxyfuels. Some of that goes into a very, very long Japanese contract that is a decent margin and so I think that business is being well run and the decision-making is very economic-based.

Great. And then a couple questions for Karyn. It looks like about a $750 million working capital use, you talked a little bit about the plant turnaround in Germany and then buying some distressed crude. But that seems like a pretty big chunk, $0.75 billion. Can you break that out a little bit more? And then just the second one is what effect did Channelview have on profitability when it was down for its turnaround had that not been down in Q2?

Yes, from a working capital perspective, the Houston refinery built about 4 million barrels of crude, 3 million of which were advantaged crude opportunities and then the build for EAI was approximately $200 million. The rest really relates to timing. So when you see the drop in feedstock cost is faster than the increase in pricing, you have got the accounts payable declining without that corresponding rate of change in accounts receivable. So this is a short-term impact and should stabilize or level out.

Duffy, this is Doug. Regarding the olefins turnaround, as Jim mentioned, there is about 150 million pounds of production that we didn't. So that is an opportunity that we really didn't have available to us in the quarter. So if you think of that and you think of the quarterly margins, that is a way to think about the impacts from the turnaround.

Great. Thank you, guys.

Laurence Alexander, Jefferies.

Good morning. Just to follow on the question about the 3 million barrels of advantaged crude in the inventory, how do you look at the frequency of being able to capture the opportunity crudes going forward? That is should we expect that to flow out or will that be replaced by a similar opportunity later in the quarter or next quarter? So how should we think about the oscillations quarter to quarter?

That has been something that has been very hard to predict. You know that there has been a WTI advantage compared to Brent. That has continued; it has been better than most people expected and that is why we have been starting to crack a little of the Midwest crudes. Some of the other crudes on a comparison to Maya, whereas last year they were Maya minus; this year, they have been Maya plus. Some of the distressed cargoes that we had last year have been less available earlier in the first and second quarter, but we did find a nice batch of crude at some very nice pricing that very few other refineries can take we are able to and we built inventory to take advantage of that and hedge away the basis risk.

It is very difficult to see how much of that will be available. There is one positive though and that is that one of our competitors have had significant operating problems and that was one of the reasons that some of these cargoes are less available because there was more heavy crude being sought because of additional capacity in the Gulf Coast. That capacity is now off-line and we are seeing some of those cargoes show up again. And so we will be opportunistic and try to put some money in the bank.

And then if you are thinking longer term, the frequency or the availability of the distressed cargoes, is it more a function of your relative balance sheet strength compared to competitors or is it a function of just industry utilization rates?

Well, we run our refinery very hard. You will see that we are running basically at capacity, some days over the nameplate and that has been a positive trend. That was not the case with our refinery a couple years ago, as you will remember. We have now been very, very reliable. So it is being able to take advantage knowing we will probably be running. We worked that part very hard, but we also just have a different buying philosophy than we did a couple years ago. We have changed out a lot of the team members in Refining and we are just a lot smarter in our crude sourcing.

Now going forward longer term, I am looking forward to crude coming from Canada whether it is synbit or dilbit. I think that is going to be very, very powerful for certain Gulf Coast refineries like ours that can take that crude and process it efficiently. We are very optimistic about that when it comes down in larger volumes.

Thank you.

Vincent Andrews, Morgan Stanley.

Thank you. And hello, everyone. Just a question, if we think about propane and go out a couple years and think about the potential for propane exports and leave aside whether it is going to happen or not, but if it does happen, are your European operations -- what would have to happen for you to be able to use that propane and how much -- how possible do you think that is?

Vincent, I think that there will be more propane exports going forward. At this point in time, the US industry is logistically constrained to move a lot more volume. There is a pricing reason to try to move the volume, but, like many things, as people solve the problems on logistics, there will be more propane exports that should start to clear closer to a world price. Our European operations can crack some of it. Generally, we have naphtha-based crude feed there, but we are starting to run more condensates. We will start to run more propanes and that should help us a bit.

But what is the opportunity to increase the amount of propane those operations could except or is there not one?

We can take some. We have not been able to quantify that specifically. A lot of times, you have to go in and run push tests and just see how things run and go from there.

Okay. And can I just ask a quick question on -- as the NGLs came down during the quarter and then picked back up, what is your capability -- can you remind us -- just sort of (technical difficulty)?

Hello? I didn't hear the remainder of that question. I am sorry.

Brad, I believe Vincent just lost his line.

Yes, one moment, sir.

Is the line available to others?

Mr. Andrews, your line is open again.

I will just pass it on. It's fine.

Barrett Eynon, Pentwater.

Hi, I just have a question, if you have a target leverage ratio in mind given how underlevered your balance sheet is today?

Yes, I mean there is no change to our existing policy. We are currently looking at, monitoring, reviewing our capital structure in the context of potential capital redeployment, overall market conditions, our working capital needs and our free cash flow profile. But today, we have an appropriate overall leverage and liquidity policy. So we continue to look at it. We review and assess our balance sheet position and capital structure, but as we continue to optimize our earnings potential with our existing assets balanced with how the overall market evolves. But today, there has been no change to our policy in regards to overall leverage.

Well given that commentary and how much cash you mentioned you would be generating and the fact you weren't able to buy back shares until next year given the tax implications, are you still thinking about returning share -- returning cash to shareholders through another dividend? A large one?

Again, in terms of our redeployment of excess cash, no change to our policy. We will continue to assess the environment and for the most leveraging use of our excess cash. But assuming there is no near-term executable investment opportunities beyond what we have already outlined and under the presumption of a sustainable outlook, our free cash flow profile maintaining our credit metrics, we would look to supplement our current regular dividend with the potential of returning excess cash.

This has been our policy. We have illustrated our commitment to returning value via the special dividend that we did in 2011. As I indicated on the call earlier, we have paid $3.2 billion in dividends over the last 12 months. Of course, today, I won't comment on timing or levels, but, as you indicated, when it comes to share buyback versus special dividend options, we do have tax implications in 2012 as it relates to share buybacks, but also as it relates to share buybacks, we do need to continue to consider our current PE ownership position and the consideration to not further concentrate our ownership profile and the overhang in our shares. So no change as we look forward in our approach or expectations on continuing to potentially return excess cash directly to our shareholders.

Thank you. One last question on the inventory distressed cargo purchases you did at the end of the second quarter. Can you give an indication of what kind of spread benefit that would be given where today's prices are?

Well, that is very much competitive data, so we don't provide that level of detail, but we should be running that crude here in the third quarter.

Great, thank you.

Kevin McCarthy, Merrill Lynch.

Yes, good morning. Thank you. A couple questions, Jim, on oxyfuels. First off, can you comment on your outlook for MTBE margins? I think there was a competitive outage earlier this year. It looks like margins have actually strengthened in recent months. Is that all butane cost-linked and what do you think the back half of the year looks like in that productline?

Kevin, octane has been pretty valuable. We have had some butane pricing advantage, natural gas pricing advantage and so we had an unseasonably strong first quarter that carried over into the second quarter. Margins are holding up very, very nicely at this point in time and so oxyfuels is looking pretty good. It always gets down to price of octane and relative natural gas butane prices. So far, so good.

And I guess just a clarification if I may with regard to your shift of oxyfuels into Intermediates and Derivatives. It makes sense to me given your TBA co-product generation, but is that shift a matter of convenience if you will or is there an anticipated economic benefit associated with that shift and if so, how large might it be?

Well, I think there is some modest personnel changes, but it doesn't really move the needle. Just every day we look for further efficiencies and this gave us an opportunity to achieve a bit of synergy. But having said that, there is such a good connection between our PO TBA business and oxyfuels now and since we are no longer running the Berre refinery and don't have all the people associated with marketing those products -- remember that a lot of our oxyfuels products go into Europe and so a lot of the marketing took place there and so it just makes more sense for us to do what we are doing today. And we will look at it that way from a management perspective.

Okay. And then final question if I may. Can you review for us any significant maintenance turnaround activity that you would have planned for the third quarter?

Yes, we have two items, Bayport PO TBA and Wesseling. One of our crackers in Germany is coming up for turnaround in the third quarter. As we mentioned in the call, we don't expect those to be significant financial implications because we built some inventory and thought through well in advance to be prepared for those.

Thank you.

Bill Hoffmann, RBC Capital Markets.

Thanks, good morning. Jim, you seem to be pretty constructive on the outlook on the demand side here in North America, as well as globally. I wonder if you could just talk a little bit about like how you are looking at the back half of the year and whether you think that we will have a significant inventory cycle as we get in towards the end of the year given all the uncertainties here, especially in North America.

Yes, let me -- I have to talk regionally and I think what I was saying is that Asia remains pretty weak. Whenever there is price-firming, volumes improve and we saw that at the end of the quarter. We will have to see what happens in Asia. There is some stimuluses planned and we will see how that affects volumes into the second half of the year.

Europe remains very weak. It was weak in both quarters so far this year. Kind of breakeven-type olefins changed margins. Except when feedstock prices fell so rapidly, we were able to capture some value particularly in olefins.

In the United States, there has been some firming of demand. Again maybe in part because of restocking as prices start to turn in the other direction. There are price increases on the table, which we expect to be implemented. NGL prices remain low and that gives us the ability to export. And so out of the United States, we have been able to run our plants very hard and move the volumes, but it is generally pretty tough economic times in the rest of the world, but as a company we have a good customer slate. We try to deliver value to our customers and we move our products pretty efficiently.

Thanks, that's helpful. And just if you can address the question about the year-end inventory build? Have you got any sense of what inventories are like downstream in the polyolefins?

At the end of the year?

Well, yes, towards the end of the year, right.

We try to stay in certain ranges and really look at that on an extremely regular basis. Every now and then, we will let our inventory build like we did for the turnaround in Germany, like we did opportunistically purchase crude oils for the refinery. But generally we stay in a pretty tight range on inventories and if we start to build some inventory, we will start to cut back rates. But we will just watch the economic conditions and go from there. I think Karyn mentioned that we should see that inventory build decline here into the third quarter and see that cash go back up on the balance sheet.

Right, thanks. And just a question for Karyn on the capital spend. You are cutting this year to $1.2 billion. Does that sort of push it into next year closer to $1.6 billion? Because obviously the projects are still on track.

Some of that is timing, but in terms of -- it was increased efficiencies in the capital program that we had outlined for 2012.

Okay, thank you.

I think given time, I think we will just be able to take questions from just two more people.

Nils Wallin, CLSA.

Good morning and thanks for taking my question. One of the things people have talked a lot about, of course, is this spread between Conway and Mont Belvieu. But there was also significant spread between Mont Belvieu ethane propane mix and Mont Belvieu ethane. So I was wondering if you would be able to talk about how much you were able to enjoy or exploit that spread and where do you think that might go over the next two quarters.

Yes, you are right that there has been some benefit to that. We do have some fractionation capability and we have done some work on our furnaces to be able to separate streams and optimize around unique furnaces as part of turnaround programs. So we are better equipped to take advantage of that mix than we were say a year ago. It has given us a little bit of a boost, but those market swings come and go within days. I will tell you though that we optimize our feed slate basically every hour. We are always looking to see where the market is going and what we ought to be running and switching our furnaces around and we think that agility is part of the reason we have some pretty good margins. We'll work that extremely hard and pay attention to those market dynamics at any moment in time.

Got it. Thanks. And then you mentioned also on the chance for heavy sour from Canada to come down to the US and I would assume the US Gulf Coast. How long do you think that will take and then would that ultimately push out Brent that is coming into the Gulf Coast?

Yes, well, right now, we really don't have Brent in our crack in the Gulf Coast and you don't see it a whole lot. You see some of the LLSes and things in the Gulf Coast. But in terms of what comes down from Canada, a lot of that has been moving into the Midwest because of pipeline availability. You have seen so much in the news about the Keystone pipeline and we really would like to see that built. We have been finding other ways to get a certain amount of crude down to us. You had Seaway get reversed. There is a few things we can do to get some barrels, but we certainly would like to see a lot more and frankly for the good of our country, we would like to see that investment made. 2014, you will see a little more of that crude showing up I expect, but two things have to happen politically to get that done.

Great, thanks so much.

Gregg Goodnight, UBS.

Hello, gentlemen. During the Investor Day, you mentioned that Clinton and Morris, you might be able to squeeze about 100 million pounds of additional capacity out of these two crackers. I note you might have a turnaround in the third quarter for Morris. Could you talk about the timing of these potential debottlenecks?

Yes, actually Morris did a big turnaround last year and as a result of that turnaround, you have seen the volume show up a little bit better. We are kind of limited sometimes on the back side by derivatives, the ability to use it all. And so some slight increment -- we are looking at about 2.3 billion between Clinton and Morris. Clinton has a turnaround next year. We don't have a turnaround in the third quarter of either of those two crackers.

Okay, very good. The second question, the Channelview, the 150 million, I assume that is design basis. Have you had a chance yet to demonstrate the additional capacity?

Gregg, this is Doug. The 150 million that I referred to was the downtime of one of the olefin plants for the turnaround. So that was the lost opportunity because we had that facility in turnaround really throughout April. So that is what that is.

What we did in the turnaround, of course, is we have had a project to increase our ethane consumption at Channelview and in each of the turnarounds last year, the first olefins plant, this year the second olefins plant, we have made changes so we can swing our mix and increase by about 500 million pounds of equivalent ethylene from what would have been naphtha over to ethane.

Okay, well, thanks for that clarity. The last question I had if I could is what is your view or your favorite consultant's view in terms of Refining margins longer term say over the next two to three years?

Well, various people have different views. I will just tell you that I am a little more optimistic than some on crude cracks. If some of the capacity that has been taken out stays out, that should speak favorably to US Refining dynamics. We will see how that happens. We have been able to export. The industry overall is competitive enough for various reasons that we have been able to export even a little bit of gasoline has moved by some of our competitors over to Europe. So that is kind of an unusual trend.

The crude oil from Canada can be a powerful thing for refineries that have the ability to crack synbit or dilbit like we have the ability to do. So longer term, I think that asset will see an increased advantage. Near-term refinery cracks and all are somewhat dependent on oil pricing volatility, a variety of things like that and the ability to pick up distressed cargoes in the meantime. So light heavy [dis] are okay right now. Co-product prices not very good at all. So this is a very tough one to predict, but I think longer term, the trend is positive.

Okay, well, thanks for taking a stab at that anyway.

All right. So let me make a few final comments. As I mentioned, this is the best quarter we ever had on an adjusted basis in a very tough economic environment. We ran safely. We ran reliably. We managed our costs. We took advantage of market opportunities that presented themselves. We are progressing very nicely the growth projects. We are trying to get those to the market early and take advantage of the conditions that we see, particularly in the United States. I think we continue to be on a path to becoming the world's top commodity petrochemical company and that has been our goal. We are starting to be really good at this business. We have some room to get better and it is our job to accomplish that every day. Thank you for your attention.

Thank you for your participation in the conference call today. At this time, all parties may connect.