利安德巴塞爾 (LYB) 2014 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'd now like to turn the conference over to Mr. Doug Pike, Vice President, Investor Relations. Sir, you may begin.

Thank you, Holly. Well, hello and welcome to LynondellBasell's second quarter 2014 teleconference. And I'm joined today by Jim Gallogly, our CEO; Karyn Ovelmen, our CFO; and Sergey Vasnetsov, our Senior Vice President of Strategic Planning and Transactions. But before we begin the business discussion, I'd like to point out that a slide presentation accompanies today's call and is available on our website at www.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 the management, which are believed to be reasonable at the time made, and are subject to significant risks and uncertainties, and 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 statement in the presentation slides, and our financial reports, which are available at lyondellbasell.com/investorrelations.

Reconciliations of non-GAAP financial measures to GAAP financial measures, together with any other applicable disclosures, including the earnings release, are currently available on our website at www.lyondellbasell.com.

And finally, I'd like to point out that a recording of this call will be available by telephone beginning at 2 PM Eastern Time today until 11 PM Eastern Time on August 25th by calling 800-839-1171 in the United States, and 1-203-369-3030 outside the United States. And the pass code for both numbers is 3675.

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

Thank you for joining our earnings call. As Doug mentioned, a set of presentation slides accompanies this call, and is available on our website. Let's take a look at slide number 4, and review a few financial highlights.

Second quarter per share were $2.22, with EBITDA of approximately $1.94 billion. Both represent record quarterly results. Every segment contributed to our strong earnings. Underlying oil and natural gas fundamentals continued to provide a strategic advantage for North America businesses.

However, the quarter could have been even better had we not experienced various internal operating issues and third-party disruptions. These issues particularly impacted our O&P Americas and Intermediates & Derivatives businesses. I will speak more about those in a moment.

Turning to slide number 5, you will see that our safety statistics continue at the level that we established over the past several years. We were recently recognized by the American Chemistry Council as the Responsible Care Company of the Year in our size category. We are very proud of this award, as it demonstrates our strong commitment to safety and environmental stewardship.

I'd like to now turn the call over to Karyn to discuss our financial performance.

Thanks, Jim. Please turn to slide number 6, which charts second quarter and last 12 month segment EBITDA. As Jim said, our results have been strong and steady. Within the segments, the O&P Americas business established a new record, as EBITDA was slightly less than $1 billion.

In O&P EAI, our EBITDA of approximately $320 million was slightly higher than the strong underlying first quarter result.

Intermediates & Derivatives continued to follow normal trends. Oxyfuel results improved as we entered the summer gasoline blending season. Exclusive of this seasonality, results were relatively unchanged from the first quarter.

Refining posted results similar to the last two quarters. The technology segment continued to report consistent strong earnings.

Slide 7 and 8 provide a picture of our cash generation and use. During the second quarter, we generated $1.6 billion from our operations. Our cash and short-term securities balance declined by $850 million, as we devoted $2.2 billion to share repurchases and dividends. Capital spending was consistent with our full-year guidance of approximately $1.6 billion.

During the past 12 months, we generated $5.3 billion in cash from operations and raised $2.5 billion from bond issuances. This cash was devoted to share repurchases and dividends totaling $6.1 billion. Another $1.5 billion went toward capital investment, with approximately 50% towards growth projects.

I'll turn things back to Jim for a further discussion of our business results.

Thanks, Karyn. Let's discuss segment performance, beginning on slide number 9 with olefins and polyolefins Americas. Second quarter EBITDA was $978 million, a record quarter, and $242 million greater than the first quarter.

Operationally, our La Porte olefins plant was down throughout the quarter, versus the planned mid-June startup. The plant operated briefly during early July, prior to shutting down to address a compressor issue. We restarted over this past weekend.

Second quarter sales were met through inventory, new purchases, and some operating adjustments across our system. However, July sales have been impacted by the equipment issue. In total, the turnaround and subsequent equipment-related delay, have reduced annual ethylene production by approximately 600 million pounds. We estimate the delayed restart impacted the second quarter by approximately $50 million.

Despite the delayed restart, olefin results significantly outperformed the first quarter, increasing by approximately $220 million. This was partially related to the impact of first-quarter ethylene purchases, and inventory build in preparation for the turnaround.

The second quarter benefited from a lower cost per unit of ethylene production, due to both lower raw material costs, and increased co-product values. During the quarter, ethane accounted for 72% of our ethylene production, and NGLs represented 85%. Our average ethylene price decreased by approximately $0.01 per pound. Contribution from our (inaudible) unit was relatively unchanged.

Within polyolefins, the polyethylene spread over ethylene, increased by approximately $0.02 per pound. Polyethylene sales were steady, with exports representing approximately 13% of the volume. Our 200 million pound per year polyethylene expansion at Matagorda operated to expectations throughout the quarter. However, during June, tight ethylene availability impacted polyethylene sales volumes. Polypropylene results were relatively unchanged.

Thus far, during the third quarter, industry conditions have remained relatively strong, and are benefitting from lower ethane prices. The delayed La Porte restart is expected to impact third quarter ethylene production by approximately 100 million pounds. The delay will also impact ethylene derivative sales.

We expect to increase ethylene production at La Porte to the expanded capacity during September. This 800 million pound expansion will increase our US ethylene [system] capacity to 10.7 billion pounds annually.

Work continues on the 250 million pound-per-year Channelview expansion. Additionally, we are beginning construction on the 800 million pound Corpus Christi expansion, following receipt of our environmental permits.

Let's turn to slide number 11, and review performance in the olefins and polyolefins Europe, Asia and International segment. Second quarter EBITDA was $319 million. Exclusive of a first-quarter environment indemnity settlement, this was approximately $15 million better than the first quarter.

Olefin results improved moderately versus the first quarter. Naphtha cost increases and a $0.02 per pound ethylene price decline were more than offset by increased co-product prices, and the benefit from processing advantaged raw materials. Approximately 55% of our ethylene production was sourced from advantaged raw materials such as propane, butane and condensates.

Our ethylene plants operated at approximately 95% of capacity, significantly above reported industry rates, and slightly above our first quarter rate.

Results for both polyolefins and joint ventures also improved from the first quarter. Combined polypropylene compounds and PB1 results were unchanged.

Following normal seasonal trends, third quarter polyolefin and polypropylene compound volumes are expected to be slightly lower than the second quarter. Naphtha prices have fallen somewhat, which is expected to improve olefin margins, at least temporarily.

During the third quarter, equity earnings are anticipated to be impacted by the scheduled turnaround at two joint ventures. Now, please turn to slide number 12 for a discussion of our Intermediates & Derivatives segment.

Second quarter EBITDA was $430 million, $55 million higher than the first quarter. The primary contributor to this improvement was a typical seasonal increase in oxyfuel margins and volumes. Propylene oxide and derivative results declines by approximately $20 million, versus the strong first quarter results. A portion of the decline can be attributed to seasonal propylene glycol demand into the aircraft deicer end use. Lower solvent margins also contributed to the decline.

The quarter finished with tight market conditions, following a fire at a European competitor's facility. Intermediate chemical performance improved by approximately $10 million. Styrene results improved by approximately $20 million, from higher volume and margins, following first-quarter maintenance. This helped to absorb lower EO/EG results driven by lower margins.

Within acetyls, lower methanol margins were offset by increased acetic acid and vinyl acetate monomer results. During the second quarter, we experienced some planned and unplanned downtime at our Channelview and La Porte acetyls complexes.

The seasonal increase in oxyfuel margins and volumes led to an approximately $65 million increase in results. The majority of the improvement can be attributed to lower butane raw material costs relative to gasoline prices. The change in the industry benchmark can be seen in the chart on the lower right.

Across the segment, overall July business conditions have been relatively similar to the second quarter. We anticipate that the incident at our competitor's propylene oxide styrene monomer facility will benefit propylene oxide during the quarter. However, styrene margins have temporarily declined due to increase benzene costs.

It is typical for oxyfuel margins to decline late in the third quarter, but it's difficult to forecast either the timing or the magnitude of the decline.

Let's move to slide number 13 for a discussion of the refining segment. Second quarter EBITDA was $137 million, slightly better than the past two quarters. During the second quarter, the Maya 2-1-1 spread averaged $27.01 per barrel, and crude throughput averaged 257,000 barrels per day. The spread at the refinery decreased following a trend similar to the Maya 2-1-1 benchmark. Crude oil throughput increased versus the first quarter, contributing approximately $10 million to second quarter results. Fuel product yields improved versus the first quarter, but this was largely offset by lower byproduct values.

During the quarter, Canadian and light crudes represented almost 25% of our throughput. Exports accounted for approximately 5% of finished fuel product sales. July benchmark spreads have averaged approximately $26 per barrel, in line with the second-quarter spread. Thus far, RIN costs for the quarter are relatively unchanged.

Operationally, during the third quarter, we have a scheduled HDS catalyst change, which is expected to negatively impact product yields.

EBITDA in the technology segment continued to be strong at $71 million.

In summary, during the second quarter we generated record EBITDA and earnings, but results could have been even better due to equipment and supplier problems. We completed our initial 10% share repurchase program, and initiated purchases under the second 10% authorization granted in April. We finished the quarter with 515 million shares outstanding, a reduction of 62 million shares since the program began, or approximately 11%.

Apart from the delayed La Porte turnaround, business conditions during the first weeks of the third quarter have been similar to the second quarter, with some typical industry volatility. We have now restarted the La Porte ethylene plant, and expect to implement the ethylene expansion later in the quarter. The Channelview and Corpus Christi expansions are progressing as planned.

We're now pleased to take questions, Holly.

(Operator Instructions) Bob Koort, Goldman Sachs

Good morning. Jim, I'm curious on your latest and greatest thought on the NGL complex. We can look out now. It looks like through 2016, and see sub-$0.30 ethane prices. I think there had been some concern maybe as units came back online this summer, you'd get a rally in ethane. But it doesn't seem to be happening. So I'm wondering if you can just give us an assessment of maybe ethane and propane, and if you have any thoughts on butane.

Bob, ethane prices have fallen quite a bit in the last couple of weeks. They're down in the low 20s at this point in time. I think most people did expect them to rise in the summer, but they're doing exactly the opposite. Some of that is due to various operating issues. As you're probably aware, there's a complex at Port Arthur, an olefins cracker that's down due to a fire. There's been a variety of operational issues. Our turnaround went long. And so as a result of those things, and then very, very strong supply, the prices have fallen. I think that's very, very positive for our business.

Propane prices have come down some, butane prices. That's been helpful for us, in Europe particularly in butane. We've been cracking lighter there, particular at our Berre facility. So all of this has been positive for our results. And natural gas prices have also fallen, and so things are looking good.

I know it's not huge business, but certainly helped incrementally in the last couple quarters in the methanol?the industry's seen prices drop to about a two-year low. Is that just an echo of gas? Or do you think there's incremental supply that's pressuring prices? Or what's happened there, and what's your outlook on methanol?

Methanol has come down, as you say. Natural gas prices have come down. That's part of it. People have operated a bit better. There were some turnarounds earlier, so my impression is that we bounced off the bottom there. It seems to be firming a bit. So we'll see how that develops.

Very good. Thank you.

Duffy Fischer, Barclays

Yes, good morning. The first question is just around La Porte. How should we think about the effect of the July shutdown, and then how should we think about the ramp for that 800,000 pounds coming on in September? When will that kind of get the full run rate?

Yes. First about the turnaround, we had originally thought that turnaround would take us about 80 days. It took us about 115 days. We had a considerable amount of work to do. It took longer than we had expected. And then we had the fifth-stage compressor of our crack ash machine blow a seal there when we restarted. That took us a couple more weeks to get back online. That certainly wasn't expected. But our people have worked incredibly hard, and I'm proud of what they've done. It just took so much longer than we expected.

I indicated how much that impacted our first quarter, our second quarter, and in our prepared comments, about 100 million pounds here in July.

In terms of the 800 million pounds, we've got two furnaces that are almost mechanically complete. They're on schedule. We had increased the budget for that project, as you know. In part because we could see the turnaround costs probably going up with labor costs increasing, productivity going down a bit. So it's about at the cost that we had forecasted recently. Taking a bit longer will bring one of the new furnaces up, then the second, and it shouldn't take us very long to line them out.

We haven't operated them before. They're big furnaces, but we're pretty hopeful we'll get those on stream, and bring them up rapidly. Once we had this equipment item taken care of, the startup of La Porte was pretty smooth.

Great. Thanks. And then on the tax rate getting better, some of that I'm assuming is just because Europe is contributing more profitability and you've got some NOLs and lower tax rate there. But is there some other structural stuff, and how should we think about the tax rate going forward?

Yes. With regards to the effective tax, it is a change in the mix of the earnings. It's lower primarily due to increases in non-taxable income, some internal financing, and partially offset by changes in our evaluation allowances.

Going forward, for the remainder of the year, we expect the effective tax rate to be around 28%.

Great. Thank you, guys.

John McNulty, Credit Suisse

Yes, thanks for taking my question, and congratulations on a really solid set of numbers. I wanted to check. With regard to your European business, clearly you're really processing a lot of advantaged raw materials at 55% of your slate. How much farther do you think you can push at this point, and are there other opportunities, maybe adjustments that you can make with a little bit more investment that even further broaden that opportunity?

John, our European crackers are running lighter than they used to, to be sure. Whether it's propane or butane, we've been able to crack lighter. Our folks over there are learning from what we've done here in the United States, and the way to take those flexible crackers and take them to new levels. We have very modest capital that we're putting in to help, but it's minor. It's more of a learning as we go.

Obviously, we've improved there. We've also cracked more condensates, and that's been positive for us. So we're running at great rates. 95% utilization is so far above what's happening in the rest of the industry, that that's a plus for us. I think between the cost structure changes that we've made, 1,000 people or so less than we used to operate with in that region, lining out our operations and working hard on the revenue side. We've been able to post quarter after quarter good, solid results in Europe.

Great, thanks. And then just a quick question. We've seen?with some of the outages we've seen ethylene really moving north pretty solidly over the last month or so. Yet we haven't really seen much on the polyethylene side in terms of movement. I guess if you can give us an update on your thoughts on that and what may be holding it back, or if it's just a timing issue.

Polyethylene margins are very strong right now. And while the price increases haven't happened, our perception is that market is extremely tight. Some of these ethylene outages have an impact on those derivatives, and we've seen some competitor announcements of force majeure. We've been in force majeure. I think the market's tight and I think some of the forecasters are saying polyethylene prices should go up in the United States.

Great. Thanks very much for the color.

Kevin McCarthy, Bank of America Merrill Lynch

Yes, good morning. Jim, there's been tremendous M&A activity recently across the chemicals industry. I'm just wondering if you could comment on whether you see anything in your pipeline that might be tempting, or whether it's more likely we'll continue on the current path of returning cash through meaningful repurchase activity that you've done.

Kevin, we've been very active in the M&A sphere, but buying our own shares. We still think we're the best investment out there, and we completed our first 10% program, commenced a second 10% program. We watch every asset that comes to market. We evaluate it. So far, we haven't seen something that's been attractive to us. But we remain open to accretive transactions if they appear.

We obviously have a great balance sheet, and the ability to execute should something appropriate appear. But again, today, we like ourselves as the best investment. And in terms of whether we'll return cash to shareholders, I think we've demonstrated year to date that we're very willing to do that in a significant way.

Certainly. And then as a second question, can you provide us any updates on your timelines for expansions at Channelview and Corpus? How is that tracking?

Yes. The Channelview and Corpus projects are tracking as we expect. The last time we talked with everyone on an earnings call, we did update the cost profile. That was primarily related to Corpus. The Channelview expansion is two furnaces. We already had the tie-ins ready, so that should be a fairly simple transition to bring those assets online. That's expected to be early 2015 for Channelview for those couple of furnaces. And then at Corpus, late 2015. We expect it to progress as we earlier indicated.

Thanks very much.

PJ Juvekar, Citi

Yes, hi. Good morning, Jim. There seems to be a targeted effort to export more hydrocarbons from the US, with the approval of these condensates exports, recently. So how does that impact your Corpus Christi operations where you were buying some distressed cargos, and then also your refinery?

Yes. So far, PJ, we haven't seen much impact at all on condensates. They're very long in South Texas, and seem to be increasing instead of decreasing. What we're working on right now is getting some of that pipeline up into the Houston region, instead of barging, to reduce our costs even further. But so far, that's been in the mix.

I think when the original announcements of a couple people moving some condensates offshore, and that was approved by the Department of Energy, when that was approved people thought, gee, maybe that's a C change step. I think after that's been evaluated, people maybe don't believe that so much. And we still think that these discounted South Texas condensates show up in our mix, primarily in cracking, more at Channelview and some at Corpus. But not so much in our refinery at this point.

Thank you. And have you seen any progress on ethane exports from the US? Mainly have you heard of any new contracts being signed? Or what are your thoughts on spiking LNG with ethane? Thank you.

Well, so far I haven't heard of any new things. There's been an announcement that Reliance is looking at building some tankers. But how that's sourced and all, there hasn't been a lot of detail. But still, based on maybe a future of 300,000 barrels per day of things that we're seeing, that's still in the 2020 period, something 10% to 15% of the volume. So we think it's manageable. Of course, we'd rather it stay home, but it's a competitive world, and some volumes could be exported.

Thank you.

Jeff Zekauskas, JPMorgan

Hi, good morning. I was surprised at how strong your EBITDA was in the olefins business in the United States. In that, I would have thought the benchmark margins year over year were lower, both on the NGL side and the Naphtha side.

So my guess is that there might have been a positive artifact from the purchases of ethylene in the first quarter. Was there a material benefit? Or could you quantify that benefit that you might have received?

Yes, Jeff, there's arguably some benefit, movement from first quarter to second quarter. But we already talked about that in our prepared remarks. I actually was disappointed in our olefin results in the second quarter, as I said. The turnaround went longer. I wish we would have been up in the middle of June with our cracker and posted some more numbers. So it was a record quarter for that business, but as I've tried to be very clear, we could have done even better.

I don't recall the quantification that you provided.

Well, Jeff, maybe I can help you out a bit. If you recall, what we've done is with the turnaround at La Porte in the second quarter, we were preparing for that in the prior quarters. So as we spoke about in the first quarter results, we talked about $150 million impact. Basically it was from purchases and inventory. So some of that moved forward.

Now when you think about that, so that impacts the first-second quarter comparison. But in the second quarter, what we have is really the turnaround running a couple of weeks longer. That required us to go into the market and purchase some additional inventories, and that's the $50 million that Jim spoke about previously.

Right. And I can follow up on that. And then secondly, the crack spreads seem to be moving lower. Can you talk about prospects for your refinery operations in the third quarter? And do you plan to provide methanol production volumes in your I&D segment in the future, as you provide so many of the data for the things you produce?

Let me comment a bit first on refining, and then I'll talk about methanol volumes. On refining, the 2 on 1 crack spread is down a bit. We're running very well at the refinery at the moment, well above nameplate. That's positive. We haven't done that recently, but I'm quite pleased that Todd and his team are doing a nice job running the asset hard like we should.

We've had better yield structure. I think we've been doing a pretty good job of purchasing crude, and so while the 2 on 1 is a bit lower, we've been able to make up for that. We've now been able to post a few quarters in a row of decent refining margins, and I'm happy to say that that business operationally is doing better.

On I&D and methanol, we had some time. We had some supplier interruptions in one of our sites, and then some of our own downtime at Channelview. We don't typically give those volumes, but they have been?there's room for improvement there as well.

Okay, great. Thank you so much.

Edlain Rodriguez with UBS

Thank you. Good morning, guys. Just one quick question. I mean of course given that fundamentals are very strong, I'd just like to change the subject a little bit to something that investors seem to be focusing on, that's MLPs. Can you remind us again why or why not it's like more of a challenge for you to do something similar that your competitor in Houston is doing? And what assets are available for you to potentially do something with?

Well, we're continuing to study the possibility for an MLP. We're watching very closely our competitor and how that transaction goes over the next days. And we obviously could do the same thing. Our asset base is dramatically larger, and so that opportunity is greater. We're not sure that the market's that big. But certainly we could do that.

Olefins is a core business for us. It's very, very key. As we talk to investors, some favor this. Some don't. But we will continue to study it. One of the difference is we went through bankruptcy in 2009, early 2010, and our assets are written down. So the tax basis is quite different. So I suspect our economics are different than that particular transaction in a variety of ways.

Okay, thank you. That's all I have.

Frank Mitsch, Wells Fargo Securities

Good morning, folks, and congrats on the record, and obviously a record in O&P Americas despite the issues at La Porte. As I think about it, you're going to continue to have some issues here in Q3 in La Porte, but the order of magnitude is going to be lower than what it was in Q2. And it sounds like margins are trending in the right direction for O&P Americas in Q3.

So would it be surprising if we sit here three months from now, talking about yet another record in O&P Americas in Q3?

Well, we try not to give those kind of forecasts. But the market is very tight right now. Ethane prices are low, and we're running better. I mentioned that the refinery is running above nameplate. We've got all that horsepower now at La Porte and we're running above nameplate there, despite the fact that we don't have the extra couple furnaces. So we'll try to put product in the pipe, and we'll see what margins are.

All right. Fair enough. And then still looking at I&D, you mentioned that the acetyls business margins were improving in the VAM area. Obviously there were some operational issues that probably contributed to that. Can you update us on where that stands and the force majeure stands in that area?

Yes. VAM margins are strong right now. We're back running, but we've got to rebuild inventories. So assuming we can continue to run well there, we should be in good shape. We've got the issues that we had lined out at this moment, and some of those were third-party issues as well. Occasionally there are things that happen on our equipment, but in some of that, it was third party.

All right. Terrific. Thanks so much.

Don Carson, Susquehanna

Thank you. Jim, a question on some of your future growth projects. As you complete Channelview and Corpus Christi next year, you'll have the bulk of your expansions behind you. I know in the past you've talked about perhaps 400 million of growth projects that you identified beyond that. Have you identified more? And if not, as your CapEx starts to wind down, because your expansion spending declines, should be expect an acceleration in return of cash to shareholders?

Don, we'll continue to work potential growth items. I did mention that we have an opportunity at Channelview to do some backend work. It looks like a very good project, the economics, as we do our preliminary engineering. It looked like maybe a 400 million pound expansion there in addition to what we already have, is a possibility at what we think are reasonably low costs. So we'll keep working that.

We've talked about a polyethylene plant. We're studying a couple other growth projects. We're always aware that capital costs are going up in the timeframe of '16-'17-'18, because of all the work going on. So we're going to be hopefully smart about what we bring on, and when we do it. But some of these debottleneck opportunities and expansion opportunities still look pretty good to us.

In terms of return of cash to shareholders, I think since we've been a new company, regardless of whether it's been special dividends, regular dividends, share repurchases; I think we've set a very nice track record of being shareholder friendly.

So would that [$400 million] basket you've identified as possible growth projects beyond 2015, is that number now growing with some of these other things you've identified?

Well, we're continuing to work. We're right now in the capital budget cycle, at the front end of that, and looking at a variety of things that we began to do the initial engineering on. So it's a bit early for me to comment on what all we'll include, but we've been spending roughly $1.5 billion to $1.6 billion in capital. We should expect something like that next year, although that budget isn't finalized. And then after that, we'll see what else we can add to the portfolio.

Great. Thank you.

Nils Wallin, CLSA

Yes, good morning, and thanks for taking my question. With ethane in the low $0.20 range and natural gas below $4, it seems like ethane prices are actually below their fuel value. I know you said that there were some turnarounds, so that probably affects it. But is there anything else? Is there an incremental supply that is contributing to this below fuel value price for ethane, and do you think that's going to continue through the rest of the year?

Well, you know the ATEX line is running now. That helped bring in some supplies. As a result of natural gas prices being higher, I think there was a drill bit response. Having formerly been in that business, they have prospects that are ready to drill typically when the prices are there, recognizing that you get a decline curve of something like 60% to 80%, depending upon which play you're in.

They're going to drill those wells when the gas prices are elevated like they were over the winter. And so I think some of this is a response with the drill bit. Overall, it's shaping up very nicely for the petrochemical industry, though.

Understood. Thanks. And then just on your crude slate, I know at one point you talked about having Western Canadian almost 20%. Would you remind us if that's still the number you're looking for, and whether you've started to receive any shipments from Flanagan as yet?

Yes. At this moment, our crude slate is about 75% foreign, mostly Maya and a variety of other crudes, about 16% Canadian, 8% domestic. We expect that once Flanagan's running and it isn't at this point in time, we're hoping late third quarter-early fourth quarter that we can get our slate up to about 35% Canadian.

Obviously today, depending upon dislocations in crude, we also did some work on our crude units so that we can have light crude capacity of about 50%. But we do hope to have more Canadian later in the year, and that should help our refining results.

Well, thanks very much.

David Begleiter, Deutsche Bank

Good morning. This is Ram Sivalingam. I'm sitting in for David. You guys obviously had a strong performance in O&P EIA for the last two quarters given elevated operating rates. Do you sort of view a $300 million-plus run rate for the back part of the year and into '15 as reasonable?

Well, we've obviously had a few quarters that have been in that range. Remember that EIA has about half of its portfolio that's pretty stable, between our compounding business, PB1, and some of our joint ventures. There's an element of EIA that's nice and stable.

We've now seen some contribution on a fairly steady basis from the more commodity-oriented olefins and polyolefins business. Our inventories have been tight. We've been running very hard. We have had some operational bobbles there, too. And I think our results could have been better in the second quarter in Europe as well.

We've got a nice structure there, our cost structure. And we're monomer short. So we can run our crackers hard. We're doing everything we can to improve the feedstock slate. So Bob and his team keep delivering. And we told them we'd like that to be a normal trend.

Understood. Thank you very much.

Vincent Andrews, Morgan Stanley

Hi, thank you. Just a quick question, if you take out the issue at La Porte, what was your capacity utilization in the US this quarter?

We ran without La Porte at about 96-97% utilization. But you'll remember that this is the same company that ran over 100% utilization for a solid year. So our expectations of ourselves are pretty high.

And what, if you know, is the delta between running at 96-97% versus over 100%-- is it something within your control or it's just the way the quarter played out?

Well, we're running mechanical equipment, but we work our maintenance hard, and we've got some people who know this business inside and out. I'd like to say that our La Porte turnaround was not representative of what we typically do.

Having said that, it was not for a lack of effort. We had people working amazingly hard to get all of that work done. It was a huge amount of work that we had in front of us, given that we're reworking a bunch of towers and everything else for this increase in capacity.

So most of the industry can do a 95%, something like that. It depends on the moment, whether you includes turnarounds or not in there, but we typically are operating multiple percentage points above our competition. And when you look at some of the Solomon data and all of that, we benchmark extremely well.

Okay. Thank you very much.

Arun Viswanathan, RBC Capital Markets

Hey guys. Thanks for taking my question. I guess I just wanted to ask a question about how you look at the industry and overall projects. I mean (inaudible) then you guys with the brownfield and Dow with Freeport in a couple years. I mean how are you looking at ethylene supply generally, and is there any risk to being oversupplied in the US?

Generally, there's a?at the same time ethylene capacity is being added, derivatives are being added. We're long ethylene. We have a portfolio of customers that we sell to. We're in constant discussions with them about the years following our expansions. And so for now we're feeling comfortable that we'll be able to move the product.

The United States is in such a nice advantaged cost position that if we need to export, we can. And I think that's been a realization of all the competitors, and gives them confidence to go ahead and expand capacity.

So just along those lines; can you just talk a little bit more about the potential for greater PE capacity addition as well? You said you're considering a product there.

Yes. We've been talking about a polyethylene expansion with a brand new technology. We think that will be a very competitive line, both in term of the product it makes, and the value it brings, the capital costs. But also very importantly, this should help us a significant amount in our licensing efforts.

We're going to build serial number 001 of a new technology, and we're already very strong and low density polyethylene, the best in polypropylene in our view, and this will add another leg to our technology stool that we think is very positive.

I'm sorry. What's the potential timing on that?

Well, that project is supposed to come about 2017, middle part of the year, especially?we can predict at this moment.

And have you disclosed how much that's going to add to your PE capacity?

Yes, it's about a billion pounds, maybe a little more than that.

Laurence Alexander, Jefferies

Good morning, two quick ones. Can you give a sense for the rhythm of outages over the next four quarters, so how the back half compares to the first half of the year, but also how you think the first half of next year might look by comparison?

Laurence, are you talking about industry-wise or us?

Just for yourselves, just for yourselves.

Okay. Yes, we have a PO/TBA turnaround coming at Bayport. There's a couple JV turnarounds coming. But otherwise, we expect to be running, and I'm hoping that we get ourselves lined out there shortly, and the second quarter was an anomaly.

And then I guess secondly, just a longer-term question, if (inaudible) step conversion of methane to ethylene becomes viable, I guess there is?one of your competitors is doing a plant that's supposed to come on next year. Is that something that would be significant for you in terms of potential extra feedstock, or how do you look at? Because I know it's been talked about for a few decades, but?

Yes. I haven't been too worried about that one way or the other at this point. There's always something new like that that is a maybe. But I've been around the industry a long, and I haven't seen many of those maybes turn into reality. So we'll see. I just don't know yet.

Okay. Thanks.

One of the things I failed to mention, but I did in my prepared remarks, is we do have an HDS unit at the refinery that will go down in a turnaround, too. That will affect yield, but not volume very much.

Hassan Ahmed, Alembic Global

Good morning, Jim. Question around the sustainability of these good results that you are seeing at O&P EAI, good Q1, another good Q2; and as I took a look at your presentation slide for the segment, your July margins were even better on the ethylene side than Q2 margins. And I was talking to one of your competitors in the US with a large sort of European asset base, and they were telling me that they're running their ethylene facilities at 90% plus operating rates.

So now is this a sign of, call it an evolving sort of tightness in the broader cycle, in your mind?

Well, I think it's too early to say that. The rates have been higher. Our inventories are low, and polymers, we've been running our crackers hard. Some of the product that had been coming into Europe from the Middle East is going to Asia. There's been some new duties and things like that. But there has been a bit more strength in Europe than there's been in the past. But it's still an oversupply condition, in my mind, still near bottom of the cycle type economics. But one of the things that happened in July was Naphtha prices came down, and that always builds a little bit of margin. So that's a positive.

Sure thing, sure. Now changing gears to the methanol side of things, a couple of moving parts over there obviously. Pricing had come down, but I just noticed this morning, Methanex posted their August prices, which were flat with July level. So it seems to be some semblance of a bottoming out there.

But then again, towards the end of the year, Methanex itself will bring online some incremental capacity. So how much sort of comfort do you have in your earlier sort of comment about a bottoming out or maybe even potentially an uptick in methanol pricing near term?

Well, we've got to watch what happens in natural gas pricing. But at this moment, our sense is that we hit a bottom, and we're headed a little bit up instead of down again. We'll see how the market develops. Some?of all of the?we have to watch and see what happens in China, too. If there's strength there or not strength, later in the year or so. But we also could do a bit of self-help. We could have run better.

Fair enough. And I mean just adding on to that, I mean Q1 seemed to be a bit of a quirky quarter where you had some [DME] outages. Obviously the acetyl outages were there as well. I mean but did you see a fundamental sort of improvement in demand in Q2 and where we are right now, call it in July, for methanol?

Well, for instance, in VAM I think there's a structural change going on. There was some capacity taken down in Europe because it simply wasn't competitive on a cost basis. And as a result of that, the United States capacities had increased margins and able to ship to different places in the world. So VAM I think it's structural. Acetic acid is pretty strong right now. And again, the same theme, if we run a bit better, those businesses can do better.

Perfect. Thanks so much, Jim.

(Operator Instructions) Charles Neivert, Cowen and Company

Just?well, actually sort of a series. When you looked at the turnaround that you made at La Porte, is that going to improve cost structures to that, or is just something?I mean versus where is was whenever you took it offline, forgetting the expansion that's going to come with it? Or does it improve throughput on top of the expansion? And the same would go for the other expansions that you're looking at in ethylene. Is there going to be a little bit of a cost benefit once you make the turnaround?

Yes, on a unit basis, that will be a plus for us. Because we've got a 1.7 billion pound a year cracker already. We add 800 million, that'll make it one of the biggest, most efficient crackers, in the United States. So we hold ourselves accountable to get our cost structure on a continuous basis, lower. La Porte's in a good position to do that.

Corpus, the same thing. It's a different kind of turnaround. We're re-tubing furnaces and a variety of things down at Corpus. But both of those will be far more competitive assets.

We have Channelview that's already a very competitive asset, add a couple more furnaces there. We're very well-positioned cost structure wise, within our olefins assets in the United States.

I didn't mention so far in this call, our Midwest assets, Morris and Clinton. You probably have noticed that ethane prices have fallen rather rapidly there as well. And they're extremely well-positioned despite being smaller assets, and they're running nice and hard.

Okay. And then just to reiterate, on the refinery, the changes you're making or the turn you're going to take on the refinery. Your throughput shouldn't change, just the mix of products will?I mean for the time while you're doing that?

Yes, that's generally a proper statement. The yield structure will change. Crude units should run hard, but when you've got an HDS unit down, it'll affect the yield structure just a bit.

Okay, so you ran 258, you say you're now at nameplate on the refinery, which is in the 260s. So given everything, we should see an increase overall, quarter over quarter, in the refinery throughput number.

Well depending upon?

Okay, the crack spread may change, but?

Yes, depending upon what we're cracking. I mean we've gotten real close to 300,000 barrels a day with our refinery in some of the recent days. So we can run that thing harder now that we've done some work on the units there. So we haven't been able to sustain above nameplate in any of the quarters, but I certainly have a challenge out to the team to accomplish that. I think some of them are probably listening to this call, and they've heard that before. They just heard it again.

Okay. Thanks very much.

PJ Juvekar, Citi

When you talked about M&A and you said that you're looking at every opportunity, are you willing to get into new chemistries or new molecules from what you have in your portfolio?

Well, I never rule that out, PJ. It is a possibility. But it has to be the right value. I wouldn't say we're actively engaged in M&A activity. We evaluate everything that comes to market, and see if it will make us better. One thing that we generally bring to the table is the ability to run assets. And so even if it's different chemistry, we would have to look at it and see if we can contribute to improvement to whatever the structure is today. But again, our focus remains on our own share repurchases, ever increasing regular dividends, and being shareholder friendly.

Thank you. And one more question for Karyn. (Inaudible) instead of buying your stock regularly?

I'm sorry PJ. This is Doug. You broke up in your question.

Sorry. Do you see accelerated repurchases as an option instead of buying your stock on a regular basis?

You broke up again but you said- do we see extended stock purchases?

Accelerated repurchases versus how we're buying today? Our view and approach to buybacks really hasn't changed. We had a few more shares that we purchased this quarter than we have historically, and that had to do with really just a bit of overlap as we were wrapping up the first 10% 2013 authorization, as we began executing on the second 10% 2014 authorization.

So we've outlined that capital strategy, and we've been executing on that. Broadly speaking, nothing has really significantly changed in our view of the buyback. And oil and gas ratio and our own operating fundamentals to drive the strong cash flow remain in place. Our growth plans and actions should grow our future earnings. And so we're in a position where we'll continue to execute.

We won't speak prospectively, as market factors could change. However today, no change in our capital deployment policies, and we'll continue to report what we've done each quarter on our activity.

Thank you.

And I am showing no further questions at this time.

All right. Well thank you, Holly. Let me make a few final comments. We did have a record quarter, almost $2 billion of EBITDA; earnings per share of $2.22. We completed our first 10% share buyback program. In the last six months, we've had $6.1 billion of share repurchases and dividends.

While these are very good results, we could have done better. We've built a reputation for operational excellence with strong safety performance, environmental stewardship and reliability. We didn't deliver fully on that last leg. We had a long, difficult turnaround at La Porte. It's completed. We're running above nameplate. Our people worked incredibly hard, but we didn't get it done within an acceptable timeframe.

We had other operational bobbles. We will get ourselves back on track. We will continue to earn your trust and faith in our operational excellence, and the markets have been kind. Ethane prices are lower. The US advantage is very strong at the moment, and we'll hopefully continue to surprise you to the upside. Thank you.

Thank you. This does conclude today's conference call. You may disconnect at this time.