利安德巴塞爾 (LYB) 2015 Q4 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. (Operator instructions.) I'd now like to turn the conference over to Mr. Doug Pike, Vice President, Investor Relations. Sir, you may now begin.

Thanks, [Tori]. Well, welcome to LyondellBasell's Fourth Quarter 2015 teleconference, and I'm joined today by Bob Patel, our CEO, Thomas Aebischer, our CFO, and Sergey Vasnetsov, our Senior Vice President of Strategic Planning and Transactions.

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.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 Management which are believed to be reasonable at the time made, and are subject to significant risks and uncertainties, and actually results could differ materially from those forward-looking statements. For more detailed information about the factors that could cause our actual results to differ materially, please refer to the cautionary statements in the presentations slides and our financial reports, which are available at www.lyb.com/investorrelations.

And reconciliation to 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.lyb.com.

And finally, I'd like to point out that a recording of this call will be available by telephone beginning at 2 p.m. Eastern Time today until 11 p.m. Eastern Time on March 2 by calling 866-465-1311 in the United States and 203-369-1427 outside the United States. And the passcode for both numbers is 22160.

Now, during today's call, we'll focus on fourth quarter and full year 2015 performance, the current environment, and near-term outlook. Before turning the call over to Bob, I'd like to call your attention to the non-cash lower cost for market inventory adjustments, or LCM, that we've discussed on past calls. As previously explained, these adjustments are related to our use of LIFO accounting and the recent decline in prices of our raw material and finished goods inventories. Now, during the fourth quarter, we recognized LCM charges totaling $284 million, and comments made on this call will be in regard to our underlying business results excluding the impacts of these LCM inventory charges.

With that being said, now like to turn the call over to Bob.

Thanks, Doug. Good morning to all of you, and thank you for joining our fourth quarter earnings call. For those of you that follow LyondellBasell, you might recall that, one year ago in my first earnings call as the CEO of LyondellBasell, I described how we built a

company capable of delivering differential results for our shareholders in a variety of business climates. I'm pleased to report that we successfully navigated the volatility of 2015 to deliver another record year for you, our shareholders.

Before we get into the numbers, I would like to introduce a new member of our team, Executive Vice President and Chief Financial Officer, Thomas Aebischer. Thomas comes to LyondellBasell with a long history of global accomplishments in the arenas of finance, information technology, accounting, tax, and procurement. I'm confident that Thomas will provide our finance and IT organizations with the experience and leadership to drive our continued success. Thomas, welcome to LyondellBasell.

Thank you very much, both for your kind words, and good morning to all of you. Although I have only been with LyondellBasell for a few weeks, I'm very impressed with the relentless commitment and focus for superior results that I have already seen in the Company. I look forward to meeting all of you, our stakeholders and investment community, and describing how we will continue to build value with disciplined and consistent financial management.

Thanks, Thomas. Let's take a look at slide four and reflect on a few of the more notable financial accomplishments for 2015. Although we operate in a very capital-intensive industry, LyondellBasell's record earnings in 2015 generated robust cash flow and a 34% return on our invested capital. $1.4 billion of this cash was used to fund our capital program, while over $6 billion was committed to dividends and share buybacks. Our dividend yield placed us in the top quintile of the S&P 500 index, and the purchase of our outstanding shares relative to our average enterprise value placed us in the top 3% of the S&P500. The strength of our earnings and our disciplined use of cash helped us to again outperform the S&P 500 on a total shareholder return basis.

Before we dive deeper into the financials, I would like to call your attention to slide number five. LyondellBasell's culture places a strong emphasis on continuously improving our health, safety, and environmental performance. I'm proud to report that our team again achieved record safety performance in 2015. This is top decile performance for our industry. We believe that outstanding safety performance is an essential foundation for reliable operations that deliver differential financial performance. While I'm pleased to see the improvement for the past year, we'll continue to be relentless in our drive for safety perfection.

Our annual results, summarized on slide number six, exceeded the previous records established during 2014, with $8.1 billion of EBITDA and $10.35 of earnings per share during 2015. As seen in the quarterly results on the bottom of this slide, LyondellBasell's strong operating performance during the second and third quarters enabled us to capture the benefits of tight markets due to industry outages. Relatively lower margins resulting from more balanced markets, seasonal trends, and lower crude prices, coupled with several planned and unplanned outages at our plants, reduced the Company's fourth quarter profitability.

Slide seven summarizes some 2015 accomplishments and segment results. Three of the five segments, olefins and polyolefins, Europe, Asia, and international, intermediates and derivatives, and technology achieved record results. Over $5.8 billion of cash flow from operations enabled us to buy back 52 million shares, or 11% of the shares outstanding at the beginning of 2015. Additionally, we increased our interim dividend by 11% to $0.78 per share, bringing our total dividend for 2015 to $3.04 per share. I won't mention each of the operating accomplishments shown here, but I think these items exemplify our continued operating strength and advancing growth programs. Strong operations, advantage feeds, and incremental volumes reflected common and consistent theme of how the entire team at LyondellBasell continually finds ways to realize more productivity from our existing assets.

Let's turn to slide eight and look at some of the metrics that drove 2015 performance. I'll highlight a few. Across the top of the page we've plotted our key volumes. On the left you can see the additional volume from our La Porte ethylene expansion and the steady increase in polyethylene and polypropylene volumes, largely from existing assets.

In the charts along the bottom of the page, you see a summary of product margins and spreads. The indexed ethylene and polyolefins charts represent our internal data, while the other two represent industry benchmarks. Following US ethylene margins were partially offset by rising polyethylene and polypropylene margins, helping to maintain strong chain profitability. In Europe, both olefins and polyolefins margins increased. MTBE and refining industry spreads remained relatively constant with prior years.

Please turn to slide nine, which plots fourth quarter and full year segment results. As I already mentioned, this has been a record-setting year for both EBITDA and operating income. I'll review these in detail during the segment discussions.

Please turn to slide 10, which provides a picture of our cash generation and use. During 2015, we generated $5.8 billion of cash from operations. We also took advantage of favorable interest rates and borrowed $1 billion at a coupon rate of 4-5/8%. The cash and short-term security balance ended the year at $2.4 billion.

Turning to slide 11, you can see the $5.8 billion in cash from operations. This cash generation has allowed us great flexibility. Over the past four years, we have funded $5.6 billion of capital investment and $18.7 billion towards dividends and share repurchases. Since the inception of our share repurchase program, we have repurchased approximately 142 million shares, or about 25% of the total shares outstanding. At the end of 2015, we had approximately 15 million shares remaining under the existing share repurchase authorization.

Since this is the beginning of a new year, I want to address some of your 2016 modeling questions. Regarding capital, we are currently planning to spend approximately $1.9 billion during 2016. This spending level progresses both our base maintenance and growth programs. Approximately 40% is targeted toward our growth program.

Base maintenance spending increases this year due to a heavy turnaround schedule, and increased health, safety, and environmental spending. The majority of the growth spending will be dedicated to the Corpus Christi ethylene expansion that should begin production during the third quarter.

Although not all plans are finalized, we expect capital spending to remain around $2 billion annually through 2020. The largest individual growth project is our PO-TBA plant, which is currently estimated to cost approximately $2.1 billion. While we have not yet finalized plans and timing for all of our polyethylene growth projects, we are currently performing design engineering for a one billion pound expansion that could be complete during the 2018 to 2019 timeframe.

Our net cash interest expense for 2016 is expected to be approximately $320 million. This includes interest on $7.7 billion of outstanding bonds at an average coupon rate of approximately 5.2% and $12 million of interest on short-term facilities. At current conditions, we estimate that these expenses will be offset by approximately $100 million in benefits from interest rate and currency swaps and interest on our cash balance.

2016 annual book depreciation and amortization should be approximately $1.1 billion. We plan to make regular pension contributions that total approximately $110 million, and we estimate a pension expense of approximately $65 million. We currently expect a 2016 effective tax rate of approximately 28%. The cash tax rate is expected to be somewhat lower.

Now, let's turn to slide 12 and review segment results. As mentioned previously, my discussion of business results will be in regard to our underlying business results excluding the impacts of the LCM inventory charges. In our olefins and polyolefins Americas segment, fourth quarter EBITDA was $834 million, $86 million less than the third quarter. For the full year, segment EBITDA was $3.8 billion.

Relative to the third quarter, ethylene margins decreased by $0.06 per pound. This decline was driven by prices that were lower by $0.04 per pound and higher costs due to lower [co]-product prices. Our operating rates remained strong during the quarter, averaging 95%. 72% of our ethylene production was from ethane, and approximately 90% came from NGLs.

In polyolefins, our polyethylene spread was relatively unchanged, while the polypropylene spread was up approximately $0.04 per pound. Polyethylene volumes were relatively unchanged. Polypropylene experienced sales volume decline of approximately 8% due to operating issues at our Bayport plant.

For the full year, results decreased by $369 million, with higher polyolefins results offsetting more than half of the decline in olefins. Polyolefins results provided approximately $570 million of improvement over the prior year due to margin improvement and increased polyethylene volumes from our 2014 Matagorda de-bottleneck.

Overall, 2015 was a year of transition, with lower crude prices moving margin from olefins into polyolefins. Industry operating rates for olefins improved, and our crackers operated reliably. We completed our channel [view] expansion during the third quarter and captured the additional capacity from our 2014 La Porte olefins expansion and Matagorda polyethylene de-bottleneck. Our growth program for ethylene and polyethylene continues to add value.

In January, spot ethylene prices have continued to decline as the market follows lower oil prices. We continue to see margins holding for polyethylene, and additional upside for polypropylene margins in a very tight North American market.

A heavy turnaround season is planned for US crackers in 2016, with the schedule particularly heavy during the second quarter where IHS estimates that 10% of North American capacity will be offline. Our Corpus Christi ethylene turnaround and expansion will begin during the second quarter, with completion planned during the third quarter.

Let's turn to slide 13 and review performance in the olefins and polyolefins Europe, Asia, and international segment. During the fourth quarter, underlying EBITDA was $451 million, or $104 million lower than the third quarter. For the full year, underlying EBITDA was a record of nearly $1.9 billion, a $445 million increase versus 2014.

Olefins results decreased versus the third quarter by approximately $130 million due to lower margins. Polyolefins results improved as sales volumes increased by 6% and 5% for polyethylene and polypropylene respectively.

Polyethylene margins remained strong, but were relatively unchanged, while polypropylene margins had a modest improvement. Our polypropylene compounding business improved modestly on higher sales volumes. Equity income decreased by $11 million due to reduced margins at our Saudi Arabian joint ventures.

Olefin results for the full year increased by approximately $25 million over 2014. This increase is largely the result of a lower cost of naphtha that outpaced the declines in ethylene pricing. Excluding the impact of our Munchsmunster cracker turnaround, we operated our crackers in Europe at 95%. Our polyolefin results increased approximately $420 million year-on-year, reflecting improved spreads and higher volumes for both polyethylene and polypropylene. Polypropylene compounding and polybutene-1 results were relatively unchanged versus 2014.

Equity income from our joint ventures increased by $54 million due to strong margins at our joint ventures in Poland and South Korea. During January, industry conditions were generally consistent with the fourth quarter. During March, we will start a turnaround on our Berre, France olefins cracker that is expected to impact first quarter results by approximately $20 million. Joint venture equity earnings are anticipated to decline modestly in part due to lower polyolefin prices and the Saudi feedstock price increases that took effect in late December.

Now, please turn to slide 14 for a discussion of our intermediates and derivative segment. Fourth quarter EBITDA was $286 million, a decline of $220 million from the third quarter. For the full year, the segment generated record EBITDA of nearly $1.7 billion, $104 million more than 2014. The fourth quarter decline was attributable to typical seasonal demand declines combined with planned outages and uncharacteristically high unplanned outages in our plants.

The segment's fourth quarter results were impacted by planned maintenance totaling approximately $20 million, and unplanned down times impacted results by approximately $50 million. Propylene oxide and derivatives results decreased by approximately $10 million, with slightly lower margins due to sales mix.

In our intermediate chemicals business, EBITDA declined by approximately $160 million as styrene margins declined by $0.07 per pound. Included in the intermediate chemicals results, acetyls results declined by approximately $30 million due to lower volumes from an extended turnaround and a $0.17 per gallon decrease in methanol pricing.

Oxyfuels results were lower by approximately $60 million, in line with typical seasonal trends. During most of 2015, LyondellBasell's propylene oxide and derivatives and styrene businesses captured opportunities, while the industry experienced operating problems that tightened the markets for those products.

Intermediate chemicals results improved by approximately $120 million due to improved styrene margins that were partially offset by lower methanol and vinyl acetate margins. Oxyfuels results decreased by approximately $60 million versus 2014, which benefited from unseasonably strong fourth quarter margins one year ago.

A new year has started with stable demand in the propylene oxide market. Oxyfuel margins remained near typical winter levels. Methanol prices have come under pressure with additional capacity entering the market and lower crude oil prices. In contrast to the fourth quarter, we do not have any significant planned maintenance scheduled during the first quarter.

Let's move to slide 15 for a discussion of the refining segment. Fourth quarter EBITDA was $68 million, a decline of $75 million from the prior quarter. For the full year, the segment generated $519 million of EBITDA, an increase of $110 million versus 2014.

During the fourth quarter, the Maya 2-1-1 spread averaged $18.55 per barrel, and crude throughput averaged 206,000 barrels per day. Rates were impacted by planned and unplanned maintenance. The total impact is estimated to be approximately $50 million. The lower Maya spread was primarily driven by seasonally weaker gasoline crack spreads. The cost of [RINS] increased by approximately $10 million related to the EPA ethanol requirements.

2015 full year refining results improved over 2014 despite challenges from a labor strike in the first quarter and fourth quarter operating issues. Crude throughput averaged 238,000 barrels per day, down 21,000 barrels per day from 2014. The Maya 2-1-1 benchmark decreased by approximately $2 per barrel to average $22 per barrel for the year.

The refinery's capture rate of this margin improved during 2015 with improved secondary product margins and higher utilization rates -- a higher utilization of discounted Canadian crude oil volumes. The cost of RINS were relatively unchanged. We're currently performing planned maintenance on a crude unit coker that is expected to impact first quarter results by approximately $40 million. First quarter crude oil throughput is expected to be similar to the fourth quarter of 2015.

Turning to slide 16, let's step back and consider the changes that are occurring in our core olefins and polyolefins markets. As crude prices have fallen over the past 15 months, there has been some compression in North American monomer margins, but they remain quite good. This is illustrated by the gray bars in the charts on the top left.

The chart in the upper right demonstrate that polyethylene and polypropylene demand growth improved in 2015 relative to the prior four years to approach the long-term growth averages we have seen over the past 25 years. This strong growth supports the balanced to tight market conditions that are likely to persist into 2016. These healthy markets have resulted in strong polyolefin margins in both Europe and the US, as you can see from the blue bars on the left.

Finally, the table on the lower right highlights LyondellBasell's leverage to these strong integrated chain margins. Global supply and demand balances, regional feedstock advantages, and industry operating rates continue to support our positive outlook for our industry and our business.

Let me conclude with slide 17. The fourth quarter was a period where the ethylene industry returned to a balanced market as industry operating problems subsided. Polyolefin margin expansions offset much of the decline in monomer margins.

At LyondellBasell, planned maintenance activities across our assets negatively impacted our results by approximately $55 million, while unplanned events increased the negative impact by $105 million. The fourth quarter was also impacted by seasonal factors, primarily in our fuel-related products, which negatively impacted the quarter by approximately $100 million. This is generally comparable to the seasonal impact over the last few years.

During 2016, oil price volatility and concerns about the global economy will undoubtedly foster uncertainty in financial markets. Despite such uncertainty, we believe that we continue to benefit from abundant supplies of low price feedstocks and from solid underlying demand for our products. Additionally, we anticipate that the heavy industry outage schedule for the first half of 2016 will continue to be constructive for the markets we serve.

Before we open the line for your questions, I want to make you aware of our upcoming investor reception to be held here in Houston in conjunction with the IHSS World Petrochemical Conference. As in the past, we will be hosting a reception with members of our executive leadership team at the end of the first day of the conference near the venue. Please watch your e-mail for invitations, or contact Doug for further details.

We're now pleased to take your questions.

(Operator instructions.) Steven Byrne, Bank of America Merrill Lynch.

Yes, thank you. You mentioned your ethylene operating rates at 95%. What would you estimate global cracker operating rates to be, and where do you think they could be over the next couple of quarters in light of the pickup in turnarounds that you mentioned?

Yes, good morning, Steven. Global operating rates, our sense is that they've been averaging in the high 80s to about 90%, excluding some of the unplanned outages. So, last year in the second quarter, they probably drifted a little lower. I think in 2016, markets are going to be relatively balanced. In 2015, demand growth for ethylene nearly matched supply growth for ethylene, so market conditions look very similar. I think the thing we're going to have to watch is the level of unplanned outages that created the tight markets in second quarter.

And what feedback are you getting from your customers with respect to their inventory levels as oil fell during the fourth quarter?

Well, if you think about it, throughout last year, as oil price declined and there was uncertainty about global economic growth, we saw our customers depleting inventory, especially downstream of our polyolefins business. By the end of the year, our sense was they were buying only what they needed, and they were buying kind of one week at a time. So, anecdotally, I would say that inventories are very low, and we see, even in the last week of January when we saw oil price move up a little bit, we had a sudden rush in terms of demand, both in Asia and in Europe. So, my sense is inventories are very low.

Thank you.

Arun Viswanathan, RBC Capital Markets.

Thank you. Good morning. Just wanted to get, I guess, some thoughts on this demand situation. It looks like demand is flowing through slightly better on polyolefins. Would you attribute any of that to inventory building ahead of this large turnaround schedule that's coming in North America? And then, secondly, do you think that there's any kind of flow-through from lower energy prices on demand?

Yes, good morning, Arun. First of all, in terms of inventory build in polyolefins, we haven't really seen that. And typically, with turnarounds, my sense is that the industry doesn't tend to build polyolefin inventory, especially here in the US where we're able to supplement ethylene production through purchases and so on. So, I think inventories are probably at average levels in our industry, and I would say downstream they're on the low side.

In terms of demand benefiting from lower energy, difficult to say. I think the more important theme is that, in 2015, you saw very good strong growth in polyethylene and polypropylene globally, including in Europe where we saw demand growth. And I think this is a testament to the fact that both of those product areas, and about two-thirds of our total output from the Company, goes into non-durable applications, which tend to grow generally irrespective of economic conditions.

And so, again, I see next year, or 2016 being very similar, that demand growth and supply growth will likely match, and we'll have pretty balanced markets. And again, [their] inventory replenishment downstream, and that should add to demand in 2016.

Great. And just as a follow-up, just want to get your thoughts on capacity growth in general. There's obviously a lot of crackers set to come online in 2017 through 2019. Do you see all of that coming through, and how does that affect your own decisions to expand polyethylene capacity?

Well, I think there are something like eight crackers that are planned here in the US between 2017 and 2020. As evidenced by prior startups, not all of those will start up on time. Our sense is most of those will go. Timing could vary based on what's been announced.

Our approach has been in the past, and will continue to be in the future, that we want to be largely integrated in the ethylene and derivative chain. But, we do have a merchant position. I expect us to have one in the future. And as I mentioned during my prepared remarks, so far we're advancing a one billion pound expansion, and we have a few others that we're working. So, those others, it'll be more a matter of timing and phasing.

Thank you.

Bob Koort, Goldman Sachs.

Hey, good morning, it's Brian Maguire on for Bob.

Hey, Brian.

Was hoping you could share your thoughts on any potential impact for the lifting of the crude export ban in the US, I guess particularly on your refining operations. Any expected impact from that?

No, Brian, I don't see much impact in terms of crude supply. We've been diversifying our crude supply over the past three or four years, and we have a good mix of Canadian, Mexican, and other sources. So, I don't expect much of an impact.

Okay, and one follow-up. I know you mentioned a couple times how strong polypropylene margins have been recently. Yes, I guess just kind of what are you seeing in January, and how do you expect that to play out through the rest of 2016? Is it a case kind of like with polyethylene, where the polymer margin is tight enough that you can sustainably hold onto that, or do you expect to have to pass some of the lower monomer through as 2016 goes on?

Well, in the case of polypropylene, we see a very, very tight market. There's really not any new supply coming here in the US. So, I would expect that to continue. We've had years of fairly modest margins. And as you know, our company has significant leverage to polypropylene. We're the largest polypropylene producer in the world, and so we're very constructive about polypropylene.

Polyethylene I think is very balanced. We get these inventory cycles that come through, but again, as I mentioned in the prior question, small increases in crude price have caused spurts of buying, which tells me that there's not a lot of inventory downstream. And I think, as we go into the seasonally strong period in March, April, May, we should see markets be very firm.

Great. Thanks very much.

Thank you.

David Begleiter, Deutsche Bank.

Thank you. Good morning.

Good morning.

Bob, on styrene, you've been positive, constructive for the last number of quarters. What's your view now on styrene heading into 2016 post- the little bit of weakness we saw in Q4?

Well, David, I'm still constructive. I mean, I think if you step back and look at new supply, there isn't much that's coming. There is anticipated restart, or are already restarted the PLSM unit in Europe that was down, some others that are down in Asia right now.

But again, styrene is a lot like polypropylene has gone through, even more so I would say. Styrene has gone through years of under-investment, and demand has finally caught up. And we see styrene market being much more balanced over the coming years. And we think now that the shift in polystyrene demand has happened, demand should grow reasonably well year-over-year.

Very good. And last, Bob, there's been some M&A activity pickup this week. What's your view on M&A for Lyondell maybe over the next two, three, four years? How will that play into your growth plans?

I think as I've mentioned, David, in prior calls, our priority thus far has been on share repurchase when we think about deploying our free cash flow. But, as all good companies do, we study various different ideas, and we know the lanes we want to play in. We know our strengths. And so, we continue to monitor the market, and we're always weighing share buyback versus other options.

Thank you very much.

Don Carson, Susquehanna.

Yes, thank you. Bob, just I thought you might outline in more detail some of your derivative expansion plans in this call. Just wondered when can we expect more of an outline. And is it primarily polypropylene that you're main interested in? Do you have the capacity to increase your polypropylene plants?

Yes. So, so far I've defined for you the one billion pound expansion that we're thinking we'd bring online in 2018 and 2019. We'll develop further plans as the year progresses, but you can imagine I don't want to get out in front of my Board in terms of the kind of growth plans that we envision. But, if you just step back and think about our strategy and our approach, we aim to be largely integrated in ethylene and derivatives, and I think that'll stay true as time goes on.

In terms of polypropylene, we're actively studying de-bottleneck ideas, and we'll consider a Greenfield, as well. It's still early. We've seen this improvement in polypropylene very quickly in 2015, so we'll be very thoughtful and methodical as we've been in the past. But, to the extent possible, de-bottlenecks have served us well in the past, and that's an area we'll explore in the future first.

And just on the polypropylene outlook, as you showed in slide 16, polyethylene demands recovered to its long-term trend. Polypropylene hasn't. Do you think that as polypropylene has come down to a more normal ratio relative to ethylene, that you could still see further demand expansion in polypropylene?

Absolutely. I think polypropylene demand will likely accelerate more, as propylene is much more competitive especially here in the US.

Okay, thank you.

Thank you.

John Roberts, UBS.

Thank you. I'm surprised you thought that customers' inventories of polyethylene are low going into all this outage activity that we're going to have in North America. Why do you think they're not preparing for that?

Well, I think their sense is that the product is available. That's usually been the trend. The only time, John, that I've seen customers build inventory is when we had a couple of bad hurricanes come through Houston. I think that spooked people. And so, prior to hurricane season, they built for a year or two. But generally, they don't do that. We haven't seen that.

Okay. And then, I'd imagine by now you've repositioned your ethylene that gets displaced by the new oxy cracker. Could you just confirm that?

Yes. We've been actively contracting ethylene, as you know, with our Corpus Christi startup in the third quarter. We're well ahead of our planning on all of that. And we have a fairly mature merchant portfolio in terms of customers for ethylene, and so we're planning for that very well.

Okay, thank you.

Hassan Ahmed, Alembic Global Advisors.

Morning, Bob.

Good morning, Hassan.

You touched in your prepared remarks, you touched on a bit of a hit to your Saudi joint ventures. Now, we all know obviously that the Saudis escalated cost towards the end of the year in terms of natural gas costs, [near-term] costs, and the like. So, if we were to sort of freeze product pricing at current levels, and oil prices and the like, what sort of year-on-year hit should we expect from that feedstock cost escalation in Saudi?

Yes, Hassan. For us it's very modest. As you know, our joint venture equity ownership is about 25% in the biggest ethane cracker investment over there for us. So, I would estimate that to be in the $10 million to $15 million range annually, so it's not significant, frankly.

Super. And as a follow-up, on the asset use side of things, a bit of an interesting year last year where you had a series of industry outages in 2015, then you had initially higher methanol prices, then a precipitous decline in methanol prices. So, how should we be thinking about the asset [deals] business on a year-over-year basis, particularly in light of some of this capacity coming back online and continued downward pressure on methanol prices?

Well, I think in terms of methanol, Hassan, certainly more capacity has come online, and you can see the impact of that. I think there's going to be a more competitive market in 2016. In terms of further downstream into asset deals, we're going to have to watch how Asia demand develops and how well global capacity runs. But, likely a little bit more competitive market in 2016 than there was in 2015.

Super. Thanks so much, Bob.

Thank you.

Vincent Andrews, Morgan Stanley.

Thanks very much, and good morning, everyone. Can we talk a bit about feedstocks, in particular ethane and propane? I'm just looking at natural gas is at $1.99, and propane's become the preferred crack again. So, I guess two questions within this. One is how low do you think ethane's actually going to be able to go with the natural gas price? And are we past the point where propane can't drag it lower, either? And then I have a follow-up.

Sure. Well, first of all, we talked about this last time, that as ethane price moves up and down, it doesn't track exactly with its cost [floor] day-to-day. But over time, our sense is that ethane is still very well supplied, and it should sell closer to its cost floor. The fact that propane is more in favor today in terms of economics, I think that'll ebb and flow. As we crack more propane, then ethane could come back in. And the key for us at the Company is to focus on flexibility. And so, I think we have a very flexible cracker fleet that can crack all the way up to naphtha still, and then that's what we're aiming to do, Vincent, is to make sure that we retain that flexibility and incrementally build on that.

Yes, I guess that gets into my follow-up question, which is that the new oil price stack and futures curve, are you changing any -- your thoughts on flexibility and what you want to be more flexible for? Is that shifting away from ethane at all as we move into the latter half of the decade where there's going to be a lot more ethane demand, and maybe not as much production?

Again, I think flexibility's going to be the key. And so, we are investing incrementally to increase our flexibility to crack more propane, a few other feedstocks. And so, that's what we want to retain longer-term, because it's difficult to call two, three years from now whether it'll be ethane or propane. We want to make sure that we can crack meaningful amounts of the big feedstocks.

Thank you.

Duffy Fischer, Barclays.

Yes, good morning, fellows.

Good morning, Duffy.

A question just on the split between ethylene and ethylene derivatives. When we get through with the de-bottlenecks that are going on this spring for you and for others, it looks like ethylene capacity is going to increase. Until you bring on your potential polyethylene, should it be fair to think about things sliding for the ethylene side and moving more towards the derivatives over the back half of 2016 and 2017?

Well, Duffy, this is Doug. We've long had a very solid merchant position with the key supplier base there. And obviously as we increase the ethylene, when we bring up the capacity at Corpus Christi -- and we'll add that probably in the third quarter -- you'll see that come into the market. That's contracted, but you'll see that as merchant sales. Remember, it's merchant sales is where it's going to, so it's contracted merchant.

Then, as we move down the road, what we'll do is we'll bring the polyethylene capacity up, and that'll sort of rebalance across that. And as Bob said, he's looking at other polyethylene options and other derivative options [for it] within the Company. So, yes, you will see our merchant position for a while step up in a contracted manner.

Okay. And then, just the lower oil price environment, how does that affect the economics of the PO-TBA plant you guys are contemplating in Texas?

Yes. I think, Duffy, on that one, the key is, first of all, having a view on octane, and we think octane is going to be very, very tight because a lot of the new engines are high compression engines that require high octane.

The other thing that's important to remember about PO-TBA is that the TBA benefits from butane selling below oil price. So, we see butane discounts relative to oil sustaining at the kind of levels that they've been, 50%, 60%. If you think about the gas barrel or associated gas that gets developed, wet gas will be preferred because it has co-products that have good economics. So, we think that still looks solid. And remember, the startup on that is mid-2020 or early 2020. So, likely by then, I would think oil prices are higher than where we are today.

Terrific. Thank you, guys.

Thank you.

Aleksey Yefremov, Nomura Securities.

Good morning. Thank you. If I remember correctly, you were initially thinking about a billion to two billion pounds expansion for your polyethylene plans, and it seems like you have decided on the low end of this range. Could you just give us some thoughts on why did you come down at a billion versus two?

Yes. I think, Aleksey, this is really more about phasing. So, we're advancing the first project in a more focused way, and then as the year progresses, we'll be in a position to talk a little bit more about the phasing of the next project. So, it's not an absolute, this one is the only one we'll do. We have several ideas. I just want to make sure that we do them at a [minimum pace] in a phased manner.

Great, thank you. And as a follow-up, in the medium-term, it appears that your cash flow does not support both dividend and in the share buybacks at the current pace. You would need to keep borrowing incrementally to sustain this pace of buybacks. Is your medium-term plan to keep doing that to increase the leverage, or perhaps the level of buybacks could be impacted?

Well, if you think about our cadence, what we've done up to this point is we've been on this pace of 10% share buyback. I think you should expect that we're going to be relatively consistent with that. We'll be issuing our proxy in early March, and so you can read the details there.

But, given where share price is today, given where what our earnings outlook is, I think we should be able to support a reasonable share buyback program. We've shown in the past that we've been willing to take on incrementally a bit more debt to support the share buyback program. I think we're prepared to do that. If you look at our leverage, we're quite low. So, we'll continue to evaluate that as the year goes, but I would expect that our pace in the past is what should occur in the future.

Thank you.

Frank Mitsch, Wells Fargo.

Hey, good morning, gentlemen. Hey, Bob, coming back on polyethylene, you outlined a case that you're not really seeing margin compression here in January relative to Q4, and your expectation is you're going to see demand improve seasonally, and there's a lot of industry turnaround. So, I'm guessing you're thinking things are going to stay relatively stable through the middle of the year.

And then, when things start to pick back up, operations start to pick back up, what do you say to investors that might be expecting to see some more margin compression in the back half of this year?

Yes, good morning, Frank. Absolutely. In the first half of the year, we think that markets are going to be fairly tight. In the back half of the year, we're going to have to see how demand develops in China, here in the US, and there's certainly new capacity coming online. So, I think it'll probably be more of a balanced market in the second half as opposed to the first half that has the potential to be a very tight market.

And staying with that demand theme globally, obviously we'll see how China develops. How are you thinking about that region right now? And for that matter, how are you thinking about European demand, as well? Obviously the stock market is telling us one thing. What are you seeing on the ground?

In terms of polyethylene demand?

Sure, yes.

Yes. Well, I think demand is developing quite nicely. Again, as mentioned earlier in one of the questions, we're seeing buying activity pick up as we move towards the second half of January. And I would expect that this year we ought to see similar growth to last year. And frankly, if I'm right about lower inventories downstream, the higher -- as oil price incrementally stabilizes or moves up, we should see inventory replenishment downstream, which will add to demand growth year-over-year. So, frankly, I'm pretty constructive about polyethylene growth here going into 2016. Downstream, our customers don't have a whole lot of inventory globally.

That's very helpful. Thank you.

Thank you.

Jeff Zekauskas, JPMorgan.

Hi, thanks very much. There's been an enormous curtailment of oil drilling in the United States, and presumably that curtailment will continue. Do you think that that will affect ethane supply over the next couple of years?

Well, Jeff, so far we don't see an impact. It's certainly something we watch, and we look at what industry consultants have been talking about. And our own intel, our sense is that ethane should be very well supplied. There's enough ethane to supply the expansions that are upcoming. Our sense also is that, you think about gas drilling, likely the wet barrels could develop first because ethane and propane and butane incrementally provide value to the economics of gas. So, we're pretty constructive.

And again, for us, we continue to focus on our ability to also crack more propane and butane and so on. And I think the industry will swing from ethane to propane if propane becomes more favored, and that'll naturally balance the three NGLs, I think. So, more and more, we need to consider the NGL pool as a total rather than the individuals, I think.

Yes. And then, for my follow-up, you talked about stability in polyethylene margins. And I mean, no one exactly knows where polyethylene prices are going to go, but isn't that sort of the general drift of things, that maybe in the next couple of months they'll come off, I don't know, $0.05 a pound, something like that? So, do you have a different view, or do you think that your margin compression in polyethylene will come in the second quarter?

I think you said it well, Jeff. It's difficult to predict the price where it's going to go. But, the one thing that I think about is the balance between supply and demand, whether it's regionally or globally. And my sense is that we still have fairly balanced markets. We're coming into a March, April, May timeframe that will bring a seasonal uptick in demand, likely inventory restocking. I would imagine at some point oil price will reach some kind of a bottom, and then, if that happens, it'll bring buyers back.

If you think about 2015, we had a year where not only there was a lack of confidence on oil price, but also there were questions about economic growth in the US and in China, and we had destocking despite that. Polyethylene demand grew more than 4%. So, that's what makes me constructive. In the near-term, I don't know where polyethylene price (inaudible) go, but I think markets are pretty balanced.

Okay, great. Thank you so much.

P.J. Juvekar, Citi.

Yes, hi, good morning.

Good morning, P.J.

Bob, if the first wave of crackers start up in the US, at least four or five crackers, and if we need to get (inaudible) and down to -- of course to feed those crackers, do you see [a put] pressure on ethane if it has to be brought in from Marcelles?

Yes. I think if it has to be, then certainly there's a tariff that they have to pay to get the ethane down. But, I would say that as the first wave of crackers come online, there are closer supplies of ethane that will come to market. If ethane price were to rise enough where propane and butane become much more economic, I think you will see those who can shift to those other feedstocks will do it.

So, that'll all bring things in balance. I mean, our sense is that the industry is still rejecting somewhere 400,000 to 500,000 barrels of day of ethane, and albeit some of that is up further away, but there's certainly enough nearby that I don't see ethane price rising dramatically above its fuel value. But, it's something we'll continue to monitor, of course.

Thank you. And you have a great balance sheet today. And given that if we do get into a cyclical downturn, how do you think your capital allocation strategy could change, and how can LyondellBasell take advantage of that situation? Thank you.

Well, in past investor meetings that we've had, and when we did Investor Day last year, we showed you our cash deployment hierarchy. And I would say we're still very consistent with what we've shown you. Our first and highest priority is to maintain our assets very well.

So, we're going to spend money on maintenance capital and health, safety, and environmental capital. We'll pay our dividend. We'll service our debt. And when you think about our dividend, it's about 30% of our EPS. So, there are a lot of capacity.

So, [I mean], our balance sheet, as you rightfully mentioned, is very flexible. So, I think we want to maintain this kind of strength and flexibility as we work through the back part of this decade, and I think we'll find opportunities based on these strengths.

Thank you.

Thank you.

Nils Wallin, CLSA.

Yes, good morning, and thanks for taking my questions. What is your view on the ethylene price in the US relative to the rest of the world? It seems significantly lower than Asia, certainly, and Europe. Is it going to sustain itself at this discount, or do you think that there's any sort of arbitrage opportunity?

Good morning, Nils. Well, first of all, when you think about the ethylene price, let's go back to Q4 and think about what developed during Q4. Production of ethylene in the US was at a record level in Q4, so we had the highest production at a time when we also had a largely merchant supplier of ethylene had logistics issues where they had to move ethylene out of a [cavern] because they were going to do some maintenance on it.

Also, we had a very weak PVC market. So, I think all those things led to a decline in ethylene price in Q4, and that's kind of where we are today. As we work through Q1 and Q2, and we've talked about some of these large unplanned -- sorry, planned outages that are in Q2, that'll likely tighten market.

I would expect PVC to improve, this specific logistics issue I described, and I think that'll run its course by the end of Q1. So, we'll have to see, but it seems to me that ethylene price ought to drift somewhat higher, and the forward curve indicates that for ethylene.

The other thing that's important here in the US is to also look at polyethylene price and look at polyethylene price in the US relative to the rest of the world. And I think that starts to make a lot more sense. So, our ethylene is priced more locally, and polyethylene is priced globally. And it's important to remember that distinction as we move through the year.

Got it, understood. Now, certainly polypropylene has seen a significant jump in its margin through 2015. It seems like 2016, even in January, there's some margin expansion there, too. Is there -- it's kind of a two-part question -- at what point will this encourage additional investment in the US you think to build more capacity? And then, is there a chance that polypropylene is getting too expensive relative to, say, high density polyethylene and it might encourage some inter-polymer substitution?

Well, I think in terms of expansions, first of all, you have to remember that, from the time somebody decides they're going to expand, it takes two to three years to add polypropylene capacity. So, I think meaningful expansions as we sit here today, likely not until back half of 2018, maybe 2019, or something like that, if someone were to decide today.

In the near-term, polypropylene expansions have to come in concert with some thought about the source of propylene. And as we have more flexible crackers and propylene output varies, those who are going to expand have to take a view on where propylene prices are going and where the supply is going to come from.

So, my sense is that in this year people will probably take a look at that and see where we go. But, in the near-term, I don't think higher polypropylene prices will impact demand or substitution from polyethylene. We've seen these periods in the past. I think polypropylene is very competitively priced.

Got it. Thanks very much.

All right. Thanks, Nils.

Okay, I think we're about out of time, so I think we'll have one more question, please. I apologize to anyone that we haven't been able to take their questions.

Alexander Laurence, Jeffries.

Good morning. Just a quick one. As you look at the cadence of investment over the next four or five years, to what extent is that being regulated by engineering bandwidth? And is there a need to sort of improve the bandwidth or increase engineering capabilities into the next cycle? So, can you just give us a little bit of longer-term context on that?

Yes. I think certainly that has been the most challenging part of this construction cycle, is the front-end engineering. And so, the industry or the EPC companies have added some of that capability. And if you think about our projects, like the PO-TBA project and our polyethylene project, those are kind of on the back end of construction of the big crackers, and so on.

So, I think those projects will benefit from some slackening in demand for not only engineering capability, but also for construction and commissioning and so on. So, I think we're well placed. And if you think about future cycles, the industry has certainly added capacity to be able to execute projects.

Thank you.

All right. Well, thank you for all of your thoughtful questions, as always. Let me close with a few comments. First of all, 2015 was a very challenging year, with significant oil price decline, feedstock price volatility, and uncertain outlook for global economic growth. Despite all these headwinds, our portfolio continued to prove its resiliency when we delivered record results.

I think our focus on safety, operational reliability, and cost efficiency continue to serve us very well and position us to outperform in a variety of market conditions. And this focus has enabled robust free cash flow generation, which has been deployed in a very shareholder-friendly way through low cost, high value growth projects, strong regular dividend, and large stock buybacks. Going forward, our focus and priorities remain very consistent. Thanks for your continued interest in our Company.

Thank you, speakers. And that concludes today's conference. Thank you all for joining. You may now disconnect.