利安德巴塞爾 (LYB) 2014 Q3 法說會逐字稿

Hello, and welcome to the LyondellBasell teleconference. At the request of LyondellBasell, this conference is being recorded for instant replay purposes. Following today's presentation, we will conduct a question-and answer session. (Operator Instructions)

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

Well, hello, and welcome to LynondellBasell's third 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 www.lyb.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 statements in the presentation slides, and our financial reports, which are available at www.lyb.com/investorrelations.

And reconciliations of non-GAAP financial measures to GAAP financial measures, together with any other applicable disclosures, including the earnings release, are currently available on our website at lyb.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 November 24th, by calling 800-947-6627 in the United States, and 1-203-369-3974 outside the United States. And the passcode for both numbers is 3675.

During today's call, we'll focus on third quarter results, the current environment, and the near-term outlook. And 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 first take a look at slide number 4.

During the third quarter, we generated EBITDA of $2.04 billion. This led to income from continuing operations of $1.26 billion, and diluted earnings per share of $2.46. These results mark our best quarter ever, and the second consecutive quarter of record results.

I'd like to summarize a few highlights. Olefins and Polyolefins Americas achieved EBITDA of almost $1.2 billion, the first time this has been achieved. European olefins continued their above-industry operating rates, and the EAI segment again delivered EBITDA in excess of $300 million.

During the quarter we declared a regular interim dividend of $0.70 per share, and repurchased approximately 12 million shares.

The strength of our results may be best reflected in our last 12 months EBITDA and earnings. During the period, we generated EBITDA of approximately $7.2 billion, net income of $4.6 billion, and had earnings per share of $8.49. We'll discuss individual business details later in the call.

Turning to slide number 5, you'll see that our year-to-date safety performance is in line with results from the last several years, and remains among the best in the industry. Operating safely is our first priority, and always will be. Our goal is zero injuries and zero process incidents.

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

Thanks, Jim. Please turn to slide number 6, which charts third quarter and the last 12 months segment EBITDA.

As Jim said, we are pleased to be reporting our second consecutive quarter of record results. Within the segments, the Olefins and Polyolefins Americas business established a new record EBITDA of nearly $1.2 billion. This marks the first time the business has exceeded $1 billion of EBITDA after almost $1 billion during the second quarter.

Compared to the second quarter, third quarter results benefited from strong ethylene prices, low raw material costs, and higher sales volumes.

In Olefins and Polyolefins EAI, our EBITDA of $343 million was $24 million higher than the second quarter. This quarter results continues the trend of strong earnings, and further demonstrates the progress made by our European team.

Intermediates and Derivatives EBITDA of $383 million declined $47 million versus the second quarter. PO and derivatives continued to benefit from healthy demand and constrained supply in the market due to competitor outages. Oxyfuel results declined primarily from lower volumes. Styrene margins were compressed as a result of higher ethylene, and persistently high benzene raw material cost.

Refining posted lower results than the second quarter with EBITDA of $110 million, or $27 million lower than the second quarter. In addition to a declining Maya 2-1-1 during the quarter, our results were impacted by scheduled maintenance on our hydrodesulfurization units.

Technology segment EBITDA of $41 million was lower than the second quarter, due to lower licensing revenue.

During the quarter, we incurred a $45 million non-cash lower cost or market inventory charge. This is generated from a decline in inventory valuation. GAAP accounting requires this to flow through the P&L. We are somewhat differential in that the majority of our inventory is value-based on 2010 market values.

Slide 7, slide 7 provides a picture of our cash generation and use. During the third quarter, we generated $1.8 billion from our operations. Our cash and short-term securities balance decreased by approximately $600 million. We devoted $1.6 million to share repurchases and dividends. Capital spending remains consistent with our full-year guidance of approximately $1.6 billion.

Our cash and securities balance at the end of the quarter stood at $2.9 billion, lower than the prior year by $1.5 billion, as we continue to fund one of the largest share repurchase programs in the industry.

Please turn to slide 8. During the past 12 months, we generated $5.7 billion in cash from operations, and raised approximately $1 billion [from] bond issuances. We devoted $6.7 billion to share repurchases and dividends, another $1.5 billion went toward capital investment, with approximately 50% toward growth projects.

Before I turn it over to Jim, I also want to highlight that during the quarter we took steps to initiate a commercial paper program. This program is a low-cost way to increase flexibility within our cash management program. The program size enables borrowing up to $2 billion. But we anticipate starting the program at more modest levels.

The commercial paper program has been rated by Moody's and S&P as Prime-2 and A2, respectively. 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. Third quarter EBITDA was approximately $1.2 billion, a record quarter, and $175 million higher than the second quarter. This segment realized the LCM inventory charge.

Olefin results drove the upside, increasing by approximately $220 million from the prior quarter. Much of this upside was driven by higher ethylene prices, resulting from tight industry supply, driven by industry downtime.

During the third quarter, our average price of ethylene increased by $0.08 per pound, versus an industry benchmark that increased by nearly $0.05 per pound. We managed this by capitalizing on favorable market conditions, and sold approximately 15% of our total ethylene volume at strong spot prices during the quarter.

Additionally, the cost of NGLs declined during the quarter. Ethane accounted for approximately 75% of our ethylene production, and NGLs represented 89%. The restart of our La Porte ethylene site, following planned maintenance, also contributed to the results through volume upside.

Within polyolefins, the polyethylene result decreased by approximately $50 million. The polyethylene spread over ethylene decreased by approximately $0.07 per pound. The spread decline was a result of the significant increase in our price of ethylene. Polyethylene prices increased late in the quarter, leading to a $0.01 per pound increase in the quarterly average price. Demand for polyethylene continued to be strong, and volume increased approximately 9%.

We are seeing the full benefit from the Matagorda expansion that was completed earlier in the year. Exports represented approximately 14% of the volume. Polypropylene results improved by approximately $10 million, on 11% higher sales volume.

We restarted our La Porte ethylene plant on July 20th, following a second-quarter turnaround. You'll recall that this restart was delayed, and resulted in 20 days of downtime during the third quarter. We estimate that this impacted our third quarter production and subsequent sales by approximately 100 million pounds. Following the restart, La Porte ran at 106% of its original capacity for the remainder of the quarter. Our five other ethylene plants produced at 96% of capacity during the quarter.

Late in September, our team started up the new furnaces at the La Porte plant. This adds 800 million pounds of annual ethylene capacity to our ethylene system, or approximately 8%. This new capacity is the first in the series of expansion projects that will add nearly 2.5 billion pounds to our annual capacity.

Current global economic and crude market volatility is limiting visibility on future industry conditions. So far, falling crude oil prices have not materially impacted the US market. We continue to benefit from ethylene industry downtime resulting in tight industry conditions, and depressed ethane demand.

NGL supply and inventories remain abundant. And the US ethylene industry continues to be significantly advantaged in the global market. However, if lower oil price persist, this should tighten US olefin margins over time.

It should also be mentioned that we typically see declines in polyolefin demand around the holiday season. Winter weather usually impacts NGL prices as well.

Let's turn to slide number 10, and review performance in the Olefins and Polyolefins Europe, Asia, and International segment. Third quarter EBITDA was $343 million, an increase of $24 million from the second quarter.

Olefin results improved approximately $35 million versus the second quarter. A lower cost of naphtha was responsibility for most of the margin increase. Approximately 55% of our ethylene production was sourced from advantaged raw materials such as propane, butane and condensates. This was in line with second quarter result.

Overall, the feedstock advantage benefited results by approximately $70 million versus naphtha. Year to date, we estimate that advantaged feedstocks have contributed approximately $180 million over naphtha cracking.

Our ethylene plants operated at approximately 95% of capacity, significantly above reported industry rates, and consistent with our second quarter rate. We believe the ability to run our European assets hard with advantaged feedstocks is a distinct advantage over industry competitors.

Polyolefin EBITDA results increased by approximately $15 million. Both polyethylene and polypropylene margins improved slightly. Seasonal demand and buying patterns contributed to volume declines of approximately 4%.

Combined polypropylene compounds and polybutene-1 EBITDA declined by approximately $15 million. Volumes declined following typical seasonal patterns and auto industry schedules.

Results for our joint ventures declined from the second quarter by $7 million. Scheduled and unscheduled maintenance contributed to the decline.

October demand has been relatively consistent with the third quarter. However, it's typical to experience holiday-related slowdown later in the fourth quarter. During the fourth quarter, advantaged feedstocks are a smaller contributor than during the summer months. We would expect to see a higher proportion of naphtha cracking in this period.

Now please turn to slide number 11 for a discussion of our Intermediates and Derivatives segment. Third quarter EBITDA was $383 million, approximately $47 million lower than the second quarter. Propylene oxide and derivative results increased by approximately $25 million versus the second quarter result.

We continue to benefit from tight propylene oxide and derivative market conditions, following downtime at a European competitor's facility. PO derivative margins increased as a result. Combined PO and derivative volumes increased approximately 4%.

Intermediate chemicals performance declined by approximately $50 million. Styrene results were lower by approximately $35 million. Margins declined as a result of rising ethylene costs, and persistently high benzene costs.

Our methanol assets operated at 74% of capacity during the quarter, as we continued to experience equipment issues. We will conduct scheduled maintenance at the Channelview methanol plant during the first quarter of 2015. Additionally, results were impacted by unplanned downtime in our ethylene oxide facility. Neither asset operated to LyondellBasell's standards.

Turning our attention to oxyfuels, results declined by approximately $20 million. Sales volumes declined in favor of higher C4 chemical sales. Declining gasoline prices lowered margins. However, we benefited from an increased octane premium.

Looking ahead to the fourth quarter, thus far conditions in our propylene oxide and derivative businesses are relatively unchanged. We anticipate that the incident at a competitor's propylene oxide styrene monomer facility will continue to benefit us.

During the fourth quarter, our propylene glycol business typical benefits from the beginning of the winter de-icer season. Conversely, we typically experience a seasonal decline in our oxyfuel results. However, through last week, we had not yet experienced a decline.

During the fourth quarter we are conducting planned maintenance on one of our Bayport PO TBA plants. We have taken actions to minimize the fourth quarter impact.

Let's move to slide number 12 for a discussion of the refining segment. Third quarter EBITDA was $110 million, a decline of $27 million from the second quarter. During the third quarter, the Maya 2-1-1 spread averaged $24.35 per barrel, down $2.66 from the $27.01 spread from the second quarter.

Due to favorable crude purchasing, our corresponding refinery spread declined by about half of the Maya benchmark. Crude throughput averaged 264,000 barrels per day during the third quarter. This throughput increased versus the second quarter, and contributed approximately $10 million to third quarter results.

Fuel product yields declined versus the second quarter, due to the schedule hydrodesulfurization catalyst change that I mentioned during our last earnings call. RIN costs were relatively unchanged versus the second quarter.

Canadian and light crudes represented approximately 25% of our third quarter throughput. Exports accounted for less than 5% of finished product fuel sales. October benchmark spreads have averaged approximately $21 per barrel. Thus far, RIN costs for the quarter are relatively unchanged.

We anticipate receiving our first shipments of Canadian crude via the recently completed Flanagan South Pipeline during the fourth quarter. There is no significant refinery maintenance planned during the fourth quarter.

Our Technology segment EBITDA totaled $41 million, or $30 million lower than the second quarter. This decrease in EBITDA is a result of lower licensing revenue during the quarter. This decrease represents a typical fluctuation in the business, and is not indicative of a change in underlying performance.

Now please turn to slide number 13. During the third quarter we delivered record EBITDA and earnings for the second consecutive quarter, making this our best quarter ever. We also added 800 million pounds of annual ethylene capacity at our La Porte site.

Additionally, we continued to purchase shares under our repurchase program, purchasing approximately 12 million shares during the quarter. We finished the quarter with 504 million shares outstanding, for a reduction of 73 million shares, or approximately 13% since the program began.

In the early weeks of the fourth quarter, we have seen a significant decline in crude oil price. Declining crude oil prices typically impact global chemical prices and margins over time. Of course, declining crude oil also lowers some of our costs, so the net impact is difficult to estimate. Many markets seem tight at present, so that should mitigate some of the impact.

During the fourth quarter, we typically experience seasonal declines in oxyfuels and polyolefin results. However, neither was significantly impacted during the first weeks of October. Counterbalancing these headwinds, we should benefit from the recent ethylene capacity expansion at La Porte. We also expect to benefit from Canadian crude deliveries through the Flanagan South Pipeline.

I'd like to spend a few minutes now discussing the new growth projects that we were developing and announced during the quarter. The first is a new greenfield PO TBA facility to be located along the US Gulf Coast. We plan to deliver this plant by 2019. This world-scale facility will benefit from our proprietary PO TBA technology, and low-cost natural gas-based feedstocks. The project will increase our own PO capacity by approximately 35%.

We also announced that we're evaluating a further expansion of our Channelview ethylene facility. This project potentially adds another 550 million pounds per year of ethylene capacity in 2017. Based on 2013 industry benchmark margins, when completed this project could add annual EBITDA in the range of $200 million. Engineering work is already underway.

In total our US ethylene expansion projects will add approximately 2.5 billion pounds to our annual capacity. This is equivalent to a new olefin plant. Most of this additional capacity will be available a full two years ahead of our competitors' new greenfield plants, and at a fraction of the cost. These advantages are significant.

It must be remembered that even at recent oil and gas prices, US-based ethane production continues to enjoy an advantage of approximately $0.30 per pound over naphtha-based production, according to IHS benchmarks. Time will tell if oil prices stay at this depressed level, but the fundamentals of LyondellBasell's story remain intact, and our growth projects are already coming on line.

I would also to spend a minute discussing the news of my announced retirement. On the first day that I arrived at the Company, I said that I did not join the team to simply help exit Chapter 11. Instead, I joined to help create the world's greatest petrochemical company. I truly believed this was an achievable goal with the right strategy, and a commitment to excellence.

We have been relentless in pursuing our back-to-basics strategy, and we are realizing our goals. As you know, our first priority was to achieve leading environmental health and safety performance, and plant reliability. While we can always do better, we are now setting the benchmarks.

We also worked to achieve financial strength. Today, the Company's balance sheet is very strong. The Company is fiscally fit. Controlling costs is part of our culture. We pride ourselves on flat to falling costs every year.

As for growth, we've talked a lot about being the early bird. We have proven the value of identifying and capturing market opportunities quickly. Our US ethylene expansion program is a great example of this. We are coming online sooner, and at lower cost than our competition. We have robust expansion plans driven by our advantaged positions.

We have been taking steps over the last few years to prepare for my eventual retirement. Through the formation of the management board, five executives now help me in running the Company's day-to-day operations. They review the same proposals, and we strategize and make decisions together. We have an excellent team at all levels in the organization.

The team has achieved the goals I set when I arrived at the Company. By my scorecard, we may well be the best petrochemical company in the world. After five and half years of nonstop work, it's time for me to retire.

Our supervisory Board of Directors has established a committee to choose my successor. I'll continue to serve as CEO and Chairman of the management board, to ensure an orderly transition, pending the selection of my replacement. I'm confident that there will be seamless transition.

Allow me to conclude my prepared remarks by saying that our team is busy. We're on top of all the details. We recognize that while our past results may have been impressive, our future results are what really matters. We're committed to returning value to you, our shareholders. LyondellBasell has a very bright future.

We're now please to take questions, Jessica.

Arun Viswanathan, RBC Capital Markets

Hey guys, thanks for taking my question. Sorry about that. I guess maybe you can just help us understand some of the comments in the press release, a little bit more detail and how you look at it given past history. So crude has come down. You acknowledge that. What do you expect over the next three to six months or a year or so, as far as ethylene margins? Is there a relationship that's really closely tied together? Or is it looser? And then do you expect any kind of demand response in any of your products?

Okay. Let me take those kind of in order, Arun. First, oil prices did fall precipitously. Having said that, that happened quickly. Oil prices sometimes bounce right back. So it's a bit difficult to tell at this point where oil prices will stabilize. They were much higher during much of the year. So we'll see what happens on that front.

There is over time a relationship between the price of say, WTI, and the price of our products in that there will be some clearing prices in Asia, and to a certain extent in Europe. A general rule of thumb is $10 a barrel WTI may compute over time to about $0.05 a pound on naphtha-based ethylene.

Having said that, you also have to factor in supply-demand ratios. At this point in time, supply is extremely tight in the United States. We've had, as you saw from our extremely good O&P Americas results, very, very strong ethylene pricing and margins.

The spot prices for ethylene were over $0.70 a pound at certain points in time. And we sold 15% of our capacity into that market. A number of our competitors are still down, and the market is still extremely tight. So under those conditions, prices don't fall very quickly.

Polyethylene seems to be quite tight right now. Whenever ethylene is not available like that, orders don't get filled by some of our competitors. We've seen very strong demand. Order books are full. So supply-demand in the Americas seems pretty tight.

In Europe, that same tightness seems to be there. We haven't seen cancellations of orders on the falling of crude prices, like sometimes happens. It seems to be pretty solid. I think because inventory levels have been very, very short in the converter. So with that kind of a dynamic, the market seems to be reasonably tight still.

In Asia, prices have come down a bit, but definitely not in line with falling naphtha prices at this point. Over time, we'll see what happens in supply-demand. As I mentioned, so far so good.

Okay. And then so I guess just on that point then, do you expect operating rates globally to be impacted in the sense that could there be any kind of demand response from a lower oil flowing through to increased polyethylene demand globally over time?

Well, demand rates could come down. But usually that's seen in Asia. As you know, we don't have any capacity there. In Europe, we ran at 95% olefins capacity the last two quarters in a row, well above the industry operating rates that have been kind of in the mid-80s. And in the United States, we've all been running flat out. And we expect that to stop, because we've got a feedstock advantage. So in terms of us as a Company, we're running hard and you've seen that reflected in our numbers.

No. I'm sorry. I was just asking if you think that lower oil could actually ultimately result in increased demand for your products.

That's difficult to say. There's always that theory that that could increase demand a bit, but-- in a sense that there's more money in the consumer's pocket. But again, for our Company, we don't expect that to have much impact, because we're running our assets hard already in Europe and the United States. We don't need that to continue--

Or at least globally, in Europe or in Asia?

Yes. Well, we don't export much out of Europe. And in the United States our exports have been mostly South America and Mexico, about 15%. So we're basically domestic in the sense of Europe production and the US production. So we don't need Asia to recover that much to do well.

Okay. Thanks. I'll turn it over.

Bob Koort, Goldman Sachs

Hi, Jim. Congratulations on a terrific run. Good luck in your retirement.

Thank you.

I was curious what you thought about supply chain across your product lines. And I guess maybe you can help me gauge the concern that while underlying demand is still probably reasonable good out there with the price drop in oil, there might be a lot of procurement managers out there licking their chops at getting some future discounts. And so, do you think we could get a big head fake in the fourth quarter where destocking amplifies concerns about economic vitality? Or do you think most of the customer inventory levels are pretty lean, and so there's limited ability to do that?

Bob, I think the customer inventories are pretty lean. Usually, we'd see that pattern by now in the month. And I've been watching the order books very closely. I would have expected that in Europe first. And we just haven't been seeing it.

In the United States, because of the number of outages of ethylene, polyethylene has been particularly short. And I didn't expect it here. And of course, we didn't see it. But so far we haven't been seeing much of that. And the volumes that we sell into Asia through the Middle East and all have been moving pretty nicely.

So I just think that supply chain is tight at this point. And of course the US economy is doing well, and that should be a plus of sorts.

Great. Thank you.

David Begleiter, Deutsche Bank

Thank you. Good morning. Jim, any concern as oil moves lower, it will impact drilling activity in the US, which will impact ethane and propane supply down the road?

Well, there's always some chance of that. I've spent a lot of my career in the oil business. But you have to recognize that a lot of these rigs have already been booked for multiple months, and sometimes years. I expect they will continue to drill.

If you look at the rig counts and all, they've been kind of steady as she goes. There's always a little curtailment as people run out of their capital budgets at the end of the year. But then they're starting to spend again hard at the beginning of the year.

Gas prices aren't that different than where they've been. Oil prices are down some, but I think most of that drilling continues and still looks okay, as far as we can see. And of course a bigger question is do people think this is a short-term thing, or a longer-term thing.

Final point I want to make is that as far as ethane goes, we're very, very long. You've seen propane prices come down, and there's still 30% ethane rejection going on. So we're not too worried about that.

And Jim, just on the refinery- how should we think about the impact of Flanagan South and the Canadian crude on your refinery margins?

Yes. Well, Canadian crudes typically sell for significant discount, even after transportation. Sometimes that could be $7 to $10 a barrel, depending upon where that's at. Ultimately, we would expect to move that volume of Canadian crudes up to 30-35%. We'll just have to see how quickly we can ramp it up. But it should be a nice plus for us.

Thank you very much.

Some of that crude is trading for what--$65 a barrel in Hardisty, to give you example of where it is today.

Very good. Thanks a lot.

Jeff Zekauskas, JPMC

Thanks very much. I guess my first question is for Karyn. Interest costs came down from $89 million to $79 million sequentially. And the tax rate was relatively low at around 25.5%. How did you do that? And are the interest-- the lower interest payments sustainable?

So on the interest expense, yes, a couple of things there. One is increased interest income associated with our marketable securities. You saw that earlier in the year as we've gone a little bit beyond the three-month investment cycle to increase our returns associated with our cash sitting on our balance sheet. So that was about $3 million of that. Another close to $4 million relates to our swaps that we entered into during the period.

So essentially, the fixed or floating interest rates essentially allows us to convert fixed rate debt into floating debt, so we can capitalize on the current low interest-rate environment. So that overall impact from that is about $4 million.

And then from a tax perspective, really it was a mix of our earnings. So those associated with non-US earnings, in terms of the mix that we had, coupled with that was an increase in the tax benefits associated with some of our own internal financing and structuring, and then of course some impacts associated with FX. So our tax rate for the full-year 2014 is expected to be approximately 27%. And so that's the decline in the third quarter, we'll look at that. So fourth quarter, you can anticipate that moving up to around 28%.

Okay. And then for my follow-up, I was wondering, Jim, if you thought that there was a difference in OPEC's strategy in this oil price decrease, in that we haven't really seen announced cuts in production. And I was wondering if you thought that-- or I was wondering if you thought there was a difference in the strategy, and what might be the motivation behind the difference in the strategy, if there was one.

Well, I'm not sure I have any unique insights on that. But it had been reported previously that Saudi Arabia would likely cut production in the event of price falls. Then there was press to the opposite effect. And then more recently, I heard a little bit of news about maybe some production cuts. So I'm a little uncertain exactly where they're going to go.

One thing to remember is that the dollar has been increasing in strength. And you have to look at the relative buying power that they get from say $80 crude versus $100 crude, in the past, when the dollar was weaker. So there's some that-- and the price. Otherwise, we'll just have to see what happens over time.

I think sometimes it's more important to watch what happens than what's said.

Thank you very much.

Kevin McCarthy, Bank of America

Yes. Good morning. Jim, you recently announced another expansion at Channelview, the 550 million pounds for 2017. I was wondering if you could comment on how you think the returns for that expansion will compare to your earlier expansion at Channelview in 2015, or perhaps the La Porte expansion that you just completed. And what are the key assumptions as it relates to energy and costs that you're baking into those out-year expansion projects?

Yes, Kevin, I think that you'll see that that project also has extremely strong returns. I saw another competitor quote a number for an expansion just in the last week or so. And the number surprised me at how high it was. We're doing some retraining, some pretty simple work on the back end of the Channelview asset, things that we had done at La Porte and proved the concept. So fairly inexpensive debottleneck.

Obviously the work that we've done at La Porte and the earlier node on Channelview was furnace expansions, where we actually have additional furnaces too, at each location. So this is different. This is kind of a debottleneck of the back end, and some pretty simple pounds at a very nice robust cost.

Now we have to wait for a turnaround. The engineering is in progress. That's why the 2017 date. We already had these ideas in the past, but it needs a turnaround to make it cost effective, or optimally effective.

Having said all of that, I sure likes bringing on that 800 million pounds when spot price is above $0.70, like we just did. So it was great timing, and we were able to move that product into the market at some beautiful margins. And spot price is still high.

As a second question Jim, what is your outlook for propylene and derivatives like polypropylene, let's say over the next 6 to 12 months? It seems like there's a lot of volatility there both on propane feedstock and then the monomer and the polymer. I'm just curious as to what is driving that in your view, and how sustainable it is.

Yes. Polypropylene margins are kind of up and down. The volumes have improved from time to time. We moved out of our flux unit, our metathesis unit, into spot sales for a while, because it made so much sense at the high prices. And then now we're back in the [double-dimer] mode, and making propylene, because of the propylene price. So we're very flexible on that kind of thing, and move in response to markets.

We used to have a tagline of being the world's largest polypropylene producer. But you can see that that isn't what moves our earnings one way or the other. We have a lot volume, but that's not what moves things.

I would like to comment on propane a bit. It's in the crack again. The prices have come down. It's a positive story, but I've said in the past, and I'll continue to say that propane will, over time, continue to modulate around the cost of crude. And while it's advantaged right now, and it doesn't pay to export as much of it at this moment in time, there's plenty of export capacity now, and some of that increasing. So propane isn't the big story, I think. I think it's still cheap ethane with propane from time to time contributing.

And we did say that propane is in our crack in the last two quarters in Europe, because it does get exported there, and does help us on a relative basis, compared to naphtha.

Okay. Thank you very much.

Laurence Alexander, Jefferies

Good morning. Quick question on the use of condensates and alternate feedstocks in Europe. You had a pretty good track record the last couple of quarters. How much further can you push that, or is this sort now sort of the run rate in terms of the amount that you can shift over the mix?

Well, Laurence we're doing a few things, some minor capital projects in Europe to bump that up a little bit more. It's more favorable in the summer months than it is in the winter months. If propane is really cheap right now, some of that can extend in. And if some condensate exports happen, that's a plus for us. So right now, it's been 55% or so, which is pretty significant. I think it's a nice plus. And the biggest story there though is differential operating rates. We're short monomer in our system. And so we're running extremely hard, 95% of nameplate. And that puts money in the bank.

And then is there-- as part of the dislocation happening with the arrival of the condensates, is it possible to secure longer-term discounts or should these be viewed as sort of fleeting? And if spot conditions change, your margins will move with that?

Yes, I think in the United States, at this point in time, there isn't a need to try to do that. In Europe, so far we have not done long-term contracts. We've got certain deals sometimes with foreign producers, because they recognize that it could get a little bit competitive. They'd like to secure market outlets. And so we've been able to negotiate some deals there for Europe. But longer term, we're kind of moving with the market more than not.

Thank you.

PJ Juvekar, Citi

Yes, hi. Thank you, Jim. On the Gulf Coast, there is a lot of new ethylene capacity announced, but not enough polyethylene capacity. So do you expect ethylene to go long, and then eventually maybe profits shift to polyethylene?

PJ, I don't really think that's going to happen. We look at our balances all the time. We're long ethylene. We're obviously adding some additional polyethylene capacity. We expanded Matagorda. We've got the new announced billion-pound plant. We look at who's trying to buy from us.

Some of those people who are out there announcing new plants, are really trying to negotiate different supply contracts. So not all of that's going to come on. We're watching the balances. We're trying to make sure that we're in the right spot on all of that. But I think we're well-positioned. I don't think all of that is going to move to polyethylene. It historically hasn't done that.

I've been in the business a lot of years. I know I'm retiring now, but I don't expect that to change dramatically.

Okay. Thank you. And one of the reasons you didn't build a new cracker was that labor was tight on the Gulf Coast. Now that you've announced a new PO plant, which would presumably use the same labor force. So why a PO plant? And then can you tell us how much it's going to cost you? Thank you.

Yes. I'm not going to give an estimate right now, because we haven't finalized those numbers. We have some preliminary numbers, but I'm not ready to release those. Your point is valid that that labor market is still going to be tight. But as you've probably seen, PO is extremely tight. And while this PO TBA plant won't have the margins of our really early ethylene expansions, the margins look very nice.

The other thing to remember is that it's a PO TBA plant. And while PO is going to be short, we think, and obviously very short right now because of the supply outages by competitors. The TBA molecule, going into oxyfuels, we think is going to be extremely important. That value of octane becomes more and more important. And the margins have been good. We have customers who are demanding that extra product, and so we feel pretty good about it.

I'll also point out that a lot of that olefins construction, 2017-2018, we're going to be in that partway in this plant, but we're a bit on the back end of that with the 2019. So we'll try to modularize and do a few other things, too, to keep the cost down. But yes, we're building it in the time when labor costs are going to be a little bit higher.

Thank you.

Nils Wallin, CLSA

Good morning. And thanks for taking my question. The first is, in this lower oil environment, assuming that oil kind of stays where it is; does that change the relative value you see in repurchasing shares over the next few years?

Nils, first, I'm not going to assume it stays that low. We'll see what happens on that. It's a fairly short-lived phenomena so far, and we'll see how that develops over time. But we still have a significant ethane advantage in the United States. Obviously our shares came down fairly dramatically with the reduction in oil price. So I think it's an even better buying opportunity, personally. We like our share repurchase program, and we think we have a bright future, so I see us continuing on that.

Understood, thanks. And then just with respect to the La Porte plant coming on stream, and then the normal sort of seasonal weakness one would see in the fourth quarter, how would those two play out? Is the La Porte capacity enough to offset it, or just offset it 50%? Is there a way to quantify what you see, the impact of the plant in the fourth quarter?

Well, we expect to be able to sell every pound of ethylene that we can make. We've been able to demonstrate that's the case over the last couple of years. And polyethylene seasonally comes down in the United States. But we've also been able to sell all those pounds. So sometimes it impacts margin. So far, as of today, the market is extremely tight in the United States. So we'll see what happens later on, if any of the oil price starts to show up in our margins. But so far so good.

Thanks very much.

Frank Mitsch, Wells Fargo Securities

Yes, good morning and congratulations on yet another record. And it sounds as if the first three weeks here in October we're still operating at record margin levels for the business. Jim, and following up on your point, does oil stay down here, another industry leader recently opined that he sees it getting back to $100 within the year. And if that in fact is the case, do we get back to margins kind of where we are right now? Can you offer what your thoughts are on this period of margin profitability? Is it anomalous? Or is it something that could be sustained back when we get oil back to triple digits?

Yes. First Frank, I won't be so bold as to predict oil prices. I wasn't very good when I was an E&P guy, and I probably haven't gotten any better as a chemical guy. But when you look at the track record, oil has been more above $100 than under, in recent times. So we'll see where that goes.

In terms of where the margins are, in the third quarter we had exceptionally tight supply-demand issues. There were a couple of competitors that had unplanned outages that were significant. That continues into the fourth quarter.

In addition, there's been some turnaround activity. There's a lot of capacity down right now. And so those of us who can run, have great spot prices. We'll be getting into contract discussions, contract price discussions here shortly. But again, supply-demand is very, very tight. It's set up for good margins, and contract has been still considerably under spot. It's good supply dynamics coming into the fourth quarter in the United States.

So your first part of the comment about how we're doing so far in the quarter, it's at that kind of record level, so far so good.

All right. Terrific, and that 15% of sales of ethylene on the spot market seemed rather high to me. You mentioned before you flexed the metathesis unit. And then I guess La Porte starting up that maybe you didn't have those pounds contracted. Can you put that 15% into perspective for us? Where are you typically on that, and in future times where margins are this good, can you get back to that? Or do you believe that you're going to have your volumes already contracted for?

Well, we don't have all of our volumes contracted for. We've got the ability to flex with that metathesis unit. And so we spun that thing around really quickly into the spot market, because there were some people desperate for pounds, and we're happy to sell them those pounds. So 15% was pretty bold. We didn't get that extra 800 million pounds until the end of the quarter. And so it didn't have that much impact on the quarter itself. That's kind of a fourth-quarter item.

All right. Thank you.

John McNulty, Credit Suisse

Yes. Good morning. Thanks for taking my question. So with regard to some of the coal-to-olefins facilities that are still planned in Asia at this point, can you comment as to your thoughts on if oil prices do stay at these levels, how much jeopardy are those projects potentially in? And does it really change how we should be thinking about the ability for some of that capacity to come into the markets?

Well, that's very, very high capital cost production. And then once it's on, it does have some feedstock advantage, in theory. With lower oil prices, you have to double think about whether that makes sense or not. And of course, always remember that there's a lot of capacity going in in the United States. It's still very, very significantly advantaged that's going to compete on the coast. Some of that stuff is more inland.

So we'll see how that all develops. But it should give people a bit of pause in China in developing those projects at that kind of a capital cost. And I would say even on the export of ethane, if you've got to go build ships and do all of that, and you start looking at that dynamic, it's better to have assets like we do that are cheap capital that are coming on now, that almost guarantee that brilliant return.

I think that strategy is working well for us.

Great, thanks. And then maybe one follow-up. It does seem like the US projects would still, pretty much all of them would still have huge economics, even with oil where it is. But do you see any chance that because of the drop in oil that maybe the rush to get all of these projects up, which is causing some of the inflation that you were talking about earlier in the call, maybe that rush subsides a little bit, maybe drawing out the cycle a little bit longer, and also maybe putting a little bit of relief into the labor and engineering markets. How should we think about that?

Well, the projects are already started. They'll still be trying to get those projects done as quickly as possible. And I don't think it's more the oil price. Because again, folks who do these kind of multi-billion-dollar projects aren't looking at a three-week or even a three-month type oil price. They're more interested in what they view the longer term to be.

So they're going to continue to progress those projects as quickly as they can. But having said that, costs are definitely higher. And productivity is definitely lower. So we'll just see how quickly they get them on stream. We're feeling very good about having La Porte running now, and the couple of furnaces at Channelview are coming along very, very nicely with the first part of the year startup. And Corpus is moving along nicely.

So being early is a good thing. I think the projects, as I've said before that others have announced, may be a bit later than people expect, and definitely more expensive than they originally forecast.

Great. Thanks very much for the thoughts.

Vincent Andrews, Morgan Stanley

Thanks very much. Thanks for taking my question. Jim, could you talk about where you see global operating rates for ethylene today, and then when you normalize for all the outages coming back, where do you think they'll be in 2015 and 2016?

Well, today I think depends on the geography. In the United States, if you can run, you're running. But people haven't been running very well. I've seen some industry numbers that have an 8 in front of it, instead of a 9. And that just shows you how much capacity has been down. We've been running our system, obviously La Porte at 106%, the rest of the system at 96%. We're running hard.

In the United States that should continue well into the future. I don't expect that to change with the advantage we have. In Europe, I think people in the mid-80s is about right, some maybe say in the low. In Europe, at this moment in time, depending upon which region you're in, monomer is a bit short here and there because of some plant outages and some turnarounds. So it's reasonably tight right now compared to where it's been. We've been in the high-90s in Europe, because we're monomer short.

Asia, 80% kind of level, maybe a little higher than that. So we'll just see. Next year, we'll see how the economy goes, and that could push it up some. I've seen some people forecasting getting in the 90% range. We'll just see.

So your view is not that we're going to wind up in the 90% plus range over the next couple of years, or you're taking a wait-and-see approach? Which is it?

I always-- it depends on the economy. If the economies start to come back, you'll see that number soon. And if it doesn't it's a couple of years away probably.

And maybe last question on this and then I'll pass it along. What is the right GDP multiplier to use for ethylene going forward?

The right multiplier?

Yes.

Let me ask you who's running? If-- the big issue is still how many plants are down that aren't expected to be down in the United States as to how strong that margin really is. We've seen spectacular margins lately. And does it continue at that? Probably not. But having said that, does it continue to be strong? You bet. I'm not going to put a single number out there and say that's about what it's going to be. But we still say it's very, very strong. And I think you should assume that we'll have that same correlation, the global GDP on rates that we've seen in the past.

Okay. Thanks very much and congratulations again on your retirement.

Thank you.

John Roberts, UBS

Can you hear me now, Jim?

Yes.

And congratulations on your retirement as well. Jim, in Europe, IHS Chemical recently has talked about raw materials being in free fall. Do you think in November you'll pick up some margin in Europe because of the rapid drop in raw material cost? And then in December, if volume is slow, will you run full out, even if there's an inventory pull-down? Do you have enough cost advantage do you think in Europe to keep your crackers running full out no matter what?

Well, whenever naphtha prices and other feedstocks fall, we typically see some margin expansions, because of way price is settled at the beginning of the month. I think recently there's been some indications that maybe there could be a bit of margin expansion because of tightness in certain of the hubs. We don't get to crack as much, or we typically don't crack as much of the favored feedstocks in the winter months as we do in the summer. So we'll see how that goes.

We're watching the polymer volumes. But as I said, so far those are holding up. And as of this moment in time, we're running our crackers hard still. There's some seasonality toward the end of the year and the holidays. That's very, very typical in Europe. I would be surprised if that didn't happen again. But so far everything is shaping up okay.

Okay. Thank you.

I'm afraid we're just about out of time. So I think we'll just take one more call. I apologize to those that we couldn't take today.

Hassan Ahmed, Alembic Global

Good morning, Jim. In the quarter there were a couple of unplanned outages, particularly within the I&D side of things [in] your facility. And you also talked about the methanol facility as well. Could you just give us a sense of the EBITDA impact of that?

Yes, Hassan. PO had a good quarter, volume was strong and pricing solid, because of a competitor outage. That's going to continue for a while. People expect that to be well into next year, if not the whole of next year. And so that bodes well for the PO business.

Frankly, we didn't run up to our standard in some of the other assets. We restarted the methanol plant, and I mentioned that we ran at about 75% operates. This is a company who likes to set benchmarks in most of our assets. And so far that asset has not delivered. We've got a turnaround planned for early next year to fix some of that. We've had an [SCR] issue kind of about every quarter, we have to take a little bit of downtime. We're working on a permanent fix on that. And then we had some furnace issues on the methanol unit.

So we hope to line ourselves out on that one. The EO unit had an issue, too. We had some unexpected downtime. That unit has been extremely reliable up to this point in time, but we had an exchanger leak. We did some pretty clever things to get it back online. It's running now, so that's corrected itself for now.

But that downtime, in addition to the styrene price fall, is why we missed. So styrene still is a bit tough, but there's some styrene capacity also down in Europe, which should [negate]. We'll see what happens on benzene. Olefin prices have run up, good thing for us generally, but it hurt our styrene margin.

So I'd expect-- frankly, in my view, I&D had a miss because we didn't run very well. And that's not who we are.

Fair enough. Fair enough. And you recently spoke at an event where I guess you were asked about your views pertaining to an MLP. And I think there was some confusion with some people thinking that you sounded more positive, some people sort of thinking to the contrary. So could you just tell us where you are in terms of MLP-related thought process?

Yes. We're still studying it. I wouldn't say I'm more positive, less positive on it at all. I think obviously the transaction that's been in the market has performed well. We're a different company, a different tax position, different size; a variety of things that influence that. But we're watching, studying some more, and obviously we can't file anything today. But we've had Sergey and his team busy at work making sure we understand all the implications of a potential deal. And we'll go from there.

Super. Thanks so much, Jim.

Okay. Well let me make a few closing comments then. We just finished another great quarter, our best ever. And while we know we have oil price volatility, we know what to do about that. For instance, in the United States when we had the blowout on spot prices, we stepped quickly into that market, shut down our flex unit and put a lot of cash in the bank.

We historically have operated our assets very close to nameplate, sometimes, you'll recall that we ran our crackers over 100% for a whole annual period about a year ago. We know how to control our costs. It's absolutely part of who we are as a company.

We talk about flat to falling costs every year. We've been early in delivering our growth projects. If we're late, it's by weeks. It's not by months. It's not by years. And we're bringing those projects in at a point in time that's wonderful in terms of margins.

We've got a great balance sheet. We've been buying back our shares. We think there's another buying opportunity today with the prices that are down. And so we feel extremely good about our future.

I have announced my retirement, and I'd like to thank all of you for the support that you've given me through the years. I commented that I came to help create the best petrochemical company in the world. We're getting there, a bit more work to do, but we're getting there. Thank you.

That does conclude today's conference. Thank you for participating. You may disconnect at this time.