利安德巴塞爾 (LYB) 2016 Q1 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 would now like to turn the conference over to Mr. Doug Pike, Vice President, Investor Relations. Sir, you may begin.

Thank you. Hello and welcome to LyondellBasell's first-quarter 2016 teleconference. 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. Actual 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.

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 web site at www.lyb.com. 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 1 AM Eastern time on May 23 by calling 866-513-4385 in the United States and 203-369-1984 outside the United States. The passcode for both numbers is 42216.

During today's call, we will focus on first-quarter results, the current environment, and the near-term outlook.

Before turning the call over to Bob, I'd like to call your attention to the non-cash lower of cost or market inventory adjustments, or LCM, that we have 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. During the first quarter, we recognized LCM charges totaling $68 million. Comments made on this call will be in regard to our underlying business results excluding the impacts of these LCM inventory charges.

Now with that being said, I'd turn the call over to Bob.

Thanks, Doug. Good morning to all of you and thank you for joining our first-quarter earnings call. Let's begin with slide 4 and review the highlights from the first quarter.

Our first-quarter diluted earnings per share improved relative to the fourth quarter to $2.48 per share with EBITDA of $1.9 billion. This excludes a $68 million lower of cost or market inventory adjustment. The sale of our Argentine subsidiary, Petroken, resulted in a gain of $78 million, which impacted earnings by $0.18 per share.

We continued to deliver, with three of our five operating segments improving in profitability relative to the fourth quarter. During the quarter, our downstream integration in polyolefins and other derivatives enabled us to capture a profitability as margin move from [martimer] into polymers and other downstream products. Our chemical and polymer operations generally ran well across most sites and we completed a planned maintenance turnaround in our refinery.

After the close of the quarter, we completed our second Indian polypropylene compounding acquisition. We continue to executed on our financial priorities during the first quarter and Thomas will provide you with an update on this progress in a few moments.

Slide 5 reflects the outstanding safety performance that our employees and contractors achieved during the first quarter of this year by reducing injuries to almost half of the already low rates of the past several years. We strongly believe that an unrelenting focus on safety provides benefits to our operations and ultimately profitability. Good operating reliability across our chemical facilities supports this belief.

Now Thomas will discuss our financial highlights for the first quarter.

Thank you both and good morning. On slide 6 we outlined our quarterly and trailing twelve-month segment results. As Bob mentioned, three of our five business segments improved relative to their fourth-quarter 2015 performance. In olefins and polyolefins Americas, results were similar to the fourth quarter.

Olefins and polyolefins EAI benefited from falling naphtha prices and continued strength in polymers. Intermediate and derivatives benefited from a strong global styrene market and improved production following fourth-quarter maintenance work. The refinery saw long seasonal margins and reduced volumes largely due to a planned turnaround. Overall, despite the substantial fall in the price of crude oil and global economic uncertainties, our profitability has remained strong with $7.9 billion in EBITDA over the past 12 months.

Please turn to slide 7, which provides a picture of cash generation and use. During the first quarter we generated $1.3 billion of cash from operations and utilized a similar amount in dividends and share repurchases. We also took advantage of favorable interest rates to borrow EUR750 million at a coupon rate of 1.875%.

Our maintenance and growth capital investments increased to $527 million during the first quarter, with the majority of this investment focused on our Corpus Christi ethylene expansion and turnarounds at the refinery and our Berre, France, facility. During the first quarter we increased our cash and liquid investments by $577 million to end with a balance of nearly $3 billion.

Over the past 12 months we generated $5.7 billion of cash from operations and again used a nearly equal amount for dividends and share repurchases. After investments in our capital program, our borrowing and other activities, the cash and liquids investment balance declined by approximately $600 million.

Slide 8 provides a longer perspective, as well as some current financial metrics. Our strong results and cash flow generation over multiple years positioned us to steadily raise our dividends and purchase shares. Additionally, it has allowed us to access favorable credit markets while maintaining a strong balance sheet and BBB-plus EAA1 credit rating. We finished the quarter with approximately $5 billion of liquidity and a total debt-to-EBITDA ratio of 1.2.

Our share repurchase program continued during the quarter, with another 12.3 million shares purchased. Since the inception of the program, we have repurchased approximately 155 million shares, or approximately 27% of the initial shares outstanding. At the end of the quarter we had approximately 3 million shares remaining on the existing authorization. In our proxy statement filed with the SEC in early March we proposed that our shareholders vote to authorize an additional repurchase program of up to 10% of our outstanding shares.

During February we received gross proceeds of $184 million from the sale of Petroken, our wholly-owned subsidiary in Argentina. The Petroken polypropylene sale provided an after-tax gain of $78 million. $57 million is booked into the O&P Americas segment, while $21 million is related to the PP compound business and booked to O&P EAI. The gain represents an $0.18 per-share impact on our first-quarter earnings.

Before I wrap up, I want to point out a few other items that might help your modeling of our Company. First, our effective tax rate for the quarter was 29.5%, slightly higher than our annual estimate.

The first quarter was impacted by these pretax events and our estimate for the full year remains unchanged at 28%. Depreciation, amortization and interest expenses are currently running at rates in line with our previous annual estimate.

With that, I will turn the call back to Bob.

Thanks, Thomas. Let's turn to slide 9 and review segment results. As mentioned previously, my discussion of business results will be in regard to our underlying business results excluding the impact of the LCM inventory charges. In our olefins and polyolefins Americas segment, first-quarter EBITDA was $878 million, a $44 million improvement over the fourth quarter. This includes a $57 million gain from the sale of Petroken.

Relative to the previous quarter, olefin results were relatively unchanged. Ethylene prices declined by approximately $0.05 per pound and our margins slightly declined as we incurred an estimated $20 million negative impact related to ethylene purchases in preparation for our Corpus Christi plant turnaround.

Our operating rates remained strong during the quarter, averaging 94% with similar high rates seen across the North American industry. 69% of our ethylene production was from ethane and approximately 88% came from NGLs.

In polyolefins, combined results declined by approximately $20 million. Results were driven by lower polyethylene spreads of approximately $0.04 per pound, with price declines partially offset the lower ethylene costs.

Declines in polyethylene were partially offset by improved polypropylene results, with spreads expanded by approximately $0.06 per pound over the fourth quarter. Polypropylene volumes were relatively unchanged, with improved US volumes offset the absence of Petroken volumes for most of the first quarter.

During April, spot ethylene prices have improved over first-quarter averages as supply has tightened during a heavy industry turnaround season. The quarter is benefiting from a $0.05 per pound March polyethylene price increase. Polypropylene prices may decline by a few cents during the quarter, but demand and margins remain strong.

Our Corpus Christi ethylene turnaround and expansion began last week with completion planned during the third quarter. We currently estimate this to impact second-quarter results by approximately $10 million and third-quarter by approximately $40 million.

Let's turn to slide 10 and a review performance in the olefins and polyolefins Europe, Asia, and international segment. During the first quarter, underlying EBITDA was $549 million, or $98 million higher than the fourth quarter. These results include a $21 million gain from the Petroken sale.

Olefins results improved by approximately $65 million, with reduced cost for naphtha and other fees outpacing a decline in ethylene prices. Our ethylene production volume was relatively unchanged as both periods included the impact of a plant turnaround. Utilization of advantaged feed stocks increased by 7% of ethylene production to provide a $15 million advantage over naphtha during the quarter.

Operating rates for the ethylene industry during the first quarter have been reported at 91%, a level that has not been seen in Europe is the first quarter of 2008. In polyolefins, improved results were driven by higher margins. European polyethylene spreads increased by approximately $0.01 per pound, while polypropylene spreads improved by approximately $0.02 per pound.

Our polypropylene compounding and equity income was relatively unchanged. During April, global markets continued to tighten on strong demand with occasional reports of olefin and polyolefin shortages across various geographies and end uses. Next week we anticipate completion of our Berre turn around.

Now please turn to slide 11 for a discussion of our intermediates and derivatives segment. First-quarter EBITDA was $354 million, an improvement of $68 million from the fourth quarter. Results for propylene oxide and derivatives and oxyfuels were relatively unchanged.

The improvement in I&D was largely driven by higher volumes and margins in the intermediate chemicals business. Styrene margins improved by approximately $0.02 per pound versus the fourth quarter. Our asset deals, C4 chemicals and the ethylene oxide and derivatives businesses all benefited from volume improvements relative to the fourth quarter when we perform maintenance.

Oxyfuels were relatively unchanged as low seasonal margins were offset by volume improvements. April has exhibited continued tightness for styrene that has supported strong pricing. Oxyfuel margins have started to rebound from winter levels and methanol prices continue to be pressured by additional capacity entering the market with some offset from higher crude oil prices.

Let's move to slide 12 for a discussion of the refining segment. First-quarter EBITDA was $14 million, a decline of $54 million from the prior quarter. During the first quarter, the Maya 2-1-1 spread declined by $0.69 per barrel to average $17.86 for the quarter and crude throughput averaged 186,000 barrels per day.

Rates were impacted by our planned turnaround and a some unplanned maintenance. The cost of RINs was relatively unchanged from the fourth quarter.

As you may be aware, a fire occurred in one of our two coker processing units at the refinery on April 8. While we have not yet completed the investigation to determine the cause and full impact of the incident, we have continued to operate the refinery during the two weeks following the fire and we expect to operate at approximately 75% of the full throughput during the second quarter. At the current time, we expect that repairs to return the refinery to full processing capability can be completed before the end of the second quarter.

At current market conditions and repair expectations, we estimate a $40 million to $70 million second-quarter impact. Our technology segment continued to perform well, with an $18 million improvement to $73 million of EBITDA during the first quarter.

Turning back to the O&P segments, slide 13 describes how our integrated positions in the ethylene chain help provide consistent profitability. The left chart illustrates the balance of ethylene production and consumption among products in the US and relative to our wholly-owned and joint venture share globally. In the US, typically less than 20% of our sales are into the merchant market.

In addition to our polyethylene integration, approximately one-quarter of our US ethylene production is consumed internally in products and processors including ethylene oxide, styrene, vinyl acetate, and metathesis. On a global basis, our ethylene position is relatively balanced. The right chart illustrates how a polyethylene is partially offsetting moderation of regional ethylene margins and improving our capture of the full chain margin established by global price of polymers.

Turning to slide 14, this slide provides a similar view of the propylene chain. In the US, our propylene oxide business consumes approximately one-third of our propylene production. Although we are short of propylene both in the US and globally, we are comfortable with our strong long-term supply arrangements in all regions.

With the addition of new on-purpose propylene production from PDH and MTO technology around the world, we believe that the world will be well supplied for the foreseeable future. The expansion of polypropylene margins illustrated by the prices and spreads on the right chart has leveraged our leading global position in the polypropylene market, and with lower propylene pricing, the lower absolute price of polypropylene has driven strong demand growth globally.

Slide 15 illustrates the impact of new capacity and new technologies from a global ethylene market. As we have discussed before, we believe that global demand growth in ethylene chain will continue to support effective operating rates between 90% and 93%. This is the zone that we have operated in since late 2014 and where the market will typically behave in a balanced to tight manner, depending on maintenance schedules and operational reliability.

While the upcoming capacity additions may create periods of disruption in local markets, the global markets should be able to absorb these additions reasonably quickly. In the first quarter of 2016, the industry appeared to shift from a balanced market toward the high end of this transition zone. We estimate that first-quarter industry effective operating rates were 95% in the US, 91% in Europe, and about 90% in Asia. Today, global conditions are quite tight.

The chart on the right describes why we believe that new and rapid additions of methanol to olefins-based ethylene capacity in China is beginning to play a role in establishing a high-cost floor for global ethylene chain pricing. While naphtha and LPG economics drive the majority of global ethylene supply, the last increment of global supply is increasingly filled by production from new China MTO plants. Early in the first quarter, ethylene price was supported this high-cost floor and as we entered the spring demand and turnaround season, global supply demand tightened and March prices reflect the transition from a balanced to tight global market that is approximately $0.15 per pound above this high-cost floor. With approximately $0.25 per pound lower cost than MTO, US ethane-based production should continue to benefit from strong operating rates.

Let me conclude with slide 16. The first quarter developed as we anticipated. We continued to see strong and growing demand for our polyolefin products in all regions. This supported full chain margins for our O&P businesses.

Our I&D segment benefited from higher volumes after completion of fourth-quarter maintenance and strengthening styrene margins. Refining results were impacted by the turnaround and a seasonally lower industry spreads. We are actively managing our portfolio with a successful European bond placement, the completion of our Argentine divestiture, our second polypropylene compounding acquisition in India, and continuation of the share repurchase program.

Looking forward, we see olefin and polyolefin markets remaining tight during the near term as there are heavy turnaround schedules in both the US and Asia. The recent rise in crude oil prices provides tail winds for both pricing and demand as customers no longer feel incentives to delay purchases in hopes of future declines in product prices. In fueled markets, we are realizing typical seasonal spread improvements that support both our oxyfuels and refining businesses.

Planned maintenance at our facilities is expected to impact second-quarter results by approximately $20 million to $30 million and the refinery repair will impact results by an additional $40 million to $70 million. The supply in inventories of natural gas and NGL feed stocks remain strong and we expect pricing to remain favorable for the foreseeable future.

We're now pleased to take your questions.

Thank you.

(Operator instructions)

Steve Byrne, Bank of America.

Thank you. Curious to your view on whether you think the European polyethylene price premium over the US is sustainable longer term? And the opposite on polypropylene pricing with the premium in the US, is that sustainable longer term? Secondly, as the US polyethylene industry shifts to a more export-oriented market down the road here in the next few years, where do you anticipate your incremental exports are going to go? Can you move them into Europe?

Good morning, Steve. First of all, on of the European markets, and even your question about US, I think you got to step back and look at operating rates globally. I think were in a regime where operating rates are balanced in that balanced zone to tight zone. In Europe, PE prices have held up well. We think operating rates are relatively high. We're moving into a seasonally strong period so I suspect that generally, polyolefin prices will be pretty resilient in Europe for the foreseeable future going into Q3.

In the case of the US PP prices, a very large gap had developed between Asia and the US and we had anticipated that some of that gap would need to be narrowed. Now, part of that has happened with Asian polypropylene prices moving up in Q1 and part of that has been with PP price declining some in the US, I think those things are coming back into balance but if you step back, we will likely land in a zone where margins are very good from a historical perspective. And I suspect that given where operating rates are, we should be able to sustain that for some period of time here.

In terms of your last question about exports, our marginal export from the US should go to Asia. That's really the destination. To the extent that we produce products in the US that we could supplement our production in Europe, we might consider doing that. But we have a big base in Europe already, so we're really well positioned, I think, to optimize globally. We have a great marketing position in Asia. We have a big presence in Europe and so our shift is really moving more to global optimization in polyolefins as this new capacity comes on. I think we're well positioned to capture value in that regard.

Thank you.

Thank you. Jeff Zekauskas, JPMorgan Chase.

Thanks very much. In your refinery operation, in the quarter you just reported, did maintenance activity lower EBITDA by $40 million or was it a different number?

Good morning, Jeff. Well, we didn't really quote a number around the maintenance. I will look to Doug any minute, but as it -- our refining segment results reflected a few things. We came into the year as an industry here in the US with pretty high inventories of gasoline. [Vegal] demand has been struggling. We saw margins come in. I mentioned the crack spread had declined some. Blend premiums had come in as well. And then in addition to that, we had our crude unit and coker turnaround, which took some capacity out during that period. It was a combination of both.

Yes, Jeff, I think you're in the right guide -- ballpark in guidance that we gave before and you see it in the volumes being down. That's were you'll see that predominantly. But also what you found in the first quarter versus fourth quarter was there was a Maya 2-1-1 declined a little bit, so you saw some impact from that and naturally when you're in a turnaround period, your mix and yields tend to be affected. There some impact of that in that quarter. It's the combination of those things.

Sure. For my follow-up, what's your tentative date for when you'll be fully up and running after your 800 million pound expansion?

We are expecting the latter half of Q3.

The latter half of Q3. Okay. Good. Thank you so much.

Thank you. John Roberts, UBS.

Morning. I think you originally expected $162 million in proceeds from the Argentine sale. Did it come in at that level?

Yes. Generally we came in at the level we had expected.

Okay.

Proceeds were $180 million of cash for the proceeds.

Great. Thank you. And then, is polyethylene from recycled material globally larger or smaller than MTO? Where does it sit on the cost curve? Because I'm thinking that's also been one of the swing factors out there recently in balancing polyethylene markets.

It has some but we think that as we move into the next couple of years, MTO will really be the bigger future, because if you look at Asian capacity expansions on ethylene, I think about half of them are MTO, CTO type of capacity. More and more I think that last increment will become more of the price setter as we go forward.

So you don't think recycled has been a major factor in helping to tightened the markets here because it would be high cost as oil came down?

Yes. I think it has been a factor. I think it's been a factor but it's a combination of that and the need for MTO for new virgin polyethylene, if you will, that's created demand for the virgin polyethylene.

Okay. Thank you.

Thank you. David Begleiter, Deutsche Bank.

Bob, just on polypropylene, it should also be a good Q2, but what's your expectation for polypropylene margins in the back half of the year versus maybe the first half of the year?

I think were still going to see a pretty balanced to tight market for some time. There's not really a lot of investment in the queue. Albeit polymer plants don't take as long as crackers do to build, it still takes some time to do engineering and get permits and so on. So our expectation is that the polypropylene market globally should do reasonably well and certainly in the US. Operating rates will be fairly high through this year and into next year.

Very good. Lastly on styrene, Bob, do expect these strong conditions to continue through the remainder of 2016?

Yes, I think so. I think styrene has been very resilient. Demand is growing. Much like polypropylene, it's been under invested for so many years and we're seeing demand growth in the case of styrene in the last couple of years at reasonable levels. So we think we're, again, in that operating rate zone where any outages would cause margins to stay relatively strong.

Thank you very much.

Thank you. Vincent Andrews, Morgan Stanley.

Thanks. Good afternoon, everyone. Obviously we all know there's a big turnaround season underway but one of the things that's changed over the past month or so is that the length of the season appears to have extended as a couple of cracker turnarounds have been pushed out later into the year. I'm just wondering, what impact do you think that will have in terms of how the market -- how and when the market will reset itself post the turnaround season in terms of it seems like there will be some pretty good pricing into the season and there's a lot of concern about what happens to prices thereafter. Any thoughts on that would be helpful.

If you look at April/May timeframe, between planned -- our outages are around the 10% range. I think the shift of that one cracker turnaround into the fall creates a tighter environment in the fall as well now. Our view is that with these planned outages being at a higher level now in the fall as well, we see a pretty tight market through Q3 and so far we see pretty good demand growth, not only in the US but globally. We expect pretty good market conditions in Q3, certainly.

Okay. Just as a follow up, Sasol recently announced delay in the startup of their Gulf Coast cracker and it appears some of the subtext from that was that the low oil price environment, there's some of funding issues. As you look around the world to some of the other plant capacity over the coming years, do think it's plausible that we'll see delays for funding reasons as well?

The delays could come from not only funding but general project delays from execution as well. I think, Vincent, this so-called second wave of crackers certainly many to be evaluated and to what degree globally in the MTO capacity will come on. We have in our materials the operating rate for ethylene. You see based on the current planned production increases in 2018, there's a slight dip in operating rates and certainly if some of the delays occur we could see a much flatter operating rate curve in that balance zone.

I think there's a possibility of that. That's an outcome of this lower oil price environment. We've talked about this in other venues and other IR sort of meetings that in an lower oil price environment, greenfield cracker investment look to be high-single-digit returns so I think it's feasible that some of this could get pushed out.

Thanks very much.

Thank you.

Thank you. Arun Viswanathan, RBC Capital Markets.

Good morning, thank you.

Good morning.

I had a question, maybe can you describe the inventory environment out there? Do you think your customers have built inventory in Q4 and Q1 as well ahead of the turnaround season?

I think inventories are at normal levels. I don't think they're overly excessive downstream because while there was a turnaround season anticipated, oil prices were also dropping so that caused people not to build too much, but maybe there was some expectation of prices coming down. Polyethylene prices did decline earlier in the first-quarter and then they moved up recently. I don't see inventories being a big theme here. The bigger theme is improving seasonal demand, which we typically see in this April/May time frame, not only the US but globally, and a fairly heavy turnaround season here in the US and in Asia.

Okay. Thank you. Maybe you can describe your views on the refining segments. Would you still characterize that as core and something you'd invest in or is it harvest mode and what your plans are there? Thanks.

If a refinery. It's a very complex, large-scale refinery. It's here in Houston in very prime real estate. We like it. We like the asset and it generates good cash flow that we can deploy elsewhere. I don't think it's a segment where we would aim to grow, but certainly we view it as an important part of the cash generation capability of our Company and deploying that cash elsewhere in other segments that we see as being more strategic, perhaps.

Thanks.

Thank you. Aleksey Yefremov, Nomura Securities.

Good morning. Thank you. Back to MTO question, what percent of global demand do you think is supplied by non-integrated MTO, so merchant methanol buyers? Also, what are the operating rates for those MTO units currently?

The amount is maybe in the 2% to 3% range. It's not a lot but it's enough and it's needed today to meet that last increment of demand. As I mentioned earlier, if you look forward and you look at the amount of expansions that are planned in Asia, quite a bit of a new capacity is going to based on MTO and CTO, so I think it's important to think about that becoming a more meaningful slice of demand that will be a price setter. In terms of operating rates, that's more a difficult question to really assess because it's need-based, right? We do know that today MTO is needed and that's really to the extent that I can answer that question.

Thank you. As a follow up, turning to acetyls and BEM specifically, two of your competitors announced plans, or at least consideration for a BEM expansion in North America, have you looked into this and have you made a conclusion of whether this is of interest to you or not?

Well, where basic in methanol. BEM we see as other ethylene derivative just kind of at a high level we would evaluate BEM like we would any other ethylene derivative. That's how we think about it. It's on of our ethylene derivatives.

So no current plans for evaluation --

No. Nothing that we've announced. No.

Okay. Thank you.

Thank you. Don Carson, Susquehanna Financial.

Thank you. Bob, I want to go to slide 15. You outline in your views of global ethylene supply and demand. Can you talk a bit about your outlook for feed stocks in the US, specifically ethylene availability? Do you see propane perhaps capping how high ethane can get on the basis of increased demand from these new crackers?

Yes. I think certainly that interplay between ethane, propane and butane is important. As we come into the summer months, propane and butane tend to price lower and are more abundant here in the US. Let me talk a little bit about ethane. I know this is topic that's on a lot of people's minds. If you think about different time horizons, think about the very near term, we still think there's a significant amount of rejection that's occurring in the US, and some of that nearby the Gulf Coast in some of the shale plays like the Eagle Ford and the Permian and so on. So we think in the near term there's plenty of ethane available and certainly during this turnaround season there's a little bit less ethane demand. As we go into the second half of the year, in Q3, this still quite a few turnarounds so I think between that and propane and butane becoming more competitive in the cracker feed slate in the summer months, ethane should do quite well.

Longer term, I can't help but think but with all of the reduction in E&P CapEx, that eventually this should be a supply price response in oil. We've seen a bit of that already with a fairly big move in oil price recently. As the oil price moves higher, presumably, that makes propane and butane more valuable and likely, I think, wet gas more desirable to develop. And so we think that the crude-to-gas ratio should be favorable. We think that wet gas ought to be more desirable to produce and that in the end, that ethane demand increase over time will be met with more supply.

We've seen that in the past where the midstream space is able to respond pretty quickly. The infrastructure to the west is still fairly scalable. New fractionation capacity can be added very quickly. The capital cycle is far, far less than that for crackers so in the end, I think if I step back, I think about there's plenty of hydrocarbons here and ethane available. Really it's a matter of the degree of the damage. I do think that greenfield investment will need to be undertaken more carefully in a $60, $65 oil environment compare the $100-plus oil environment. That's how I see ethane, short, medium and longer term.

Thank you.

Thank you. PJ Juvekar, Citi.

Thank you. Good morning, Bob. I just wanted to ask you another question on this ethane, propane. As you see these new crackers start up and also you have these ethane exports, and at what point in time or at what price do you think these ethane exports becomes unviable? How do you see exports playing a role in ethane pricing?

I think some of the ethane exports are needed for just feed stocks. I think they're going to be independent of price and some are more sensitive to price. The thing you have to look to is propane-based ethylene economics in Europe compared to landed ethane from the US and what economics that would infer about ethylene in Europe. Some of that could change but again, more importantly, I think, PJ, there will be a reasonable supply response if ethane prices were to rise and I think fundamentally there's plenty of ethane available and the ability for ethane supply to turn on is a relatively shorter time period than that for ethylene.

Thank you. For a follow up, I think, Bob, you mentioned that roughly 20% of your ethylene is margined ethylene and you announced a potentially new polyethylene plant. Would that basically close your margin position when the plant comes online?

No. It wouldn't. It wouldn't close a completely and frankly, PJ, we'd like to have some merchant position. For us, that's another optimization knob that we have in our ethylene and derivative value chain. As many of you know, we also can convert ethylene to propylene through our metathesis process. When we think about merchant, we can balance through producing propylene but our aim, longer term, is to have that merchant position somewhere in the 15%, 10% to 15% range over time. If you think about back in 2013 and 2014, that merchant position really served us well as spot ethylene prices expanded and so we'll have those kinds of periods and we think that having some merchant position provides the opportunity to optimize the value chain even more.

Thank you.

Thank you. Hassan Ahmed, Alembic Global.

Morning, Bob. Bob, just wanted to revisit the whole MTO side of things. It seems to me that last couple of quarters as ethylene prices continue to come down, it seemed that there were a few new MTO facilities in China which were mechanically complete but were still waiting for some sort of stability or positive inflection in ethylene pricing to start up. Now, what's your view? Are those facilities beginning to come online? The reason I ask that is because obviously that could a meaningful impact on methanol demand and pricing.

Certainly. It's difficult to assess unit by unit but again, if you step back and you look at demand growth, it seems to me that more of the demand growth in Asia will be met with MTO-based polyethylene production. Today we're kind of in this period of trying to assess how many units are running or not and so on. I think as we move through this year and go into next year, MTO will be an important part of satisfying that last incremental demand and will be a more consistent price setter.

Fair enough. Moving on to the I&D segment, the production volume numbers that you guys provide on a segment-by-segment level basis, within that, if I take a look at the acetyl silo, it seems there were big jumps up in a year-over-year as well as a quarter-over-quarter basis. If I have these numbers right, as acetyls was up production volume wise 28% year over year and 13% quarter on quarter. Now I know there was some turnaround activities in Q4. I'm just going to get a sense of the sustainability of these big volume moves.

Yes, I think it is turnarounds but that turnaround was a big turnaround in Q4 and it went a little longer than we had expected. I would say Q4 volume was lower, even more so than we had expected because of the turnaround and the volumes are sustainable. Our contract portfolio is set up such that Q1 volumes are kind of what you ought to expect.

What sort of underlying, call it, within acetyls and BEM, what sort of underlying demand growth are you seeing globally?

We're seeing reasonably good demand growth. I don't think it's anything unusually above trend line, but it's fairly steady from our perspective.

I think the larger changes that you're seeing or really related to the two methanol plants and their output and turnaround and maintenance activity with them. As you look back, recall in 2014 the Channelview plant did not run at full capacity. Adjustments were made in 2015. We were able to bring that to full capacity late in 2015. You had the La Porte turnarounds. I think what you're seeing is basically methanol volumes and maintenance and turnaround schedules.

Very good. Thank you, guys.

Thank you.

Thank you. Bob Koort, Goldman Sachs.

Thank you. Good morning.

The morning, Bob.

Bob, I was looking at your supply/demand curve. It looks like maybe there's a little iteration for some slower demand there so the operating rate comes down a little bit more than maybe we had seen in the past going into 2018. I guess relative to the interesting chart you have on the right side of slide 15, I'm wondering how should we think about the margin path as we go to those operating rates that looked similar maybe to 2012 or 2013 period. I recall back then the naphtha guys in Asia didn't make any money so should we assume pricing would go on top of that MTO, North Asia MTO, price or is there some reason to think they could retain some margin in that global operating rate environment?

I think it, again, it depends on how that balance develops. If you step back, the way I think about this cycle, whatever turns out to be, it looks to be fairly shallow. I think there's a few characteristics about what lies ahead that's different than what we've had in the past, in the past decade or past cycles. This time, first of all, I don't see -- we don't see operating rates dropping into the low 80%s like we've seen in the past. This is around 90%, plus or minus, depending on timing of capacity expansions, how demand develops, as you say.

The other thing that I think is very different about this cycle is the US is positioned in the top quartile of the cost curve, so we're going to run our assets hard. If you think about the fourth quartile, MTO does become more meaningful as time goes on. To your point, that ought to be more and more of the price setter and as oil price rises going into -- presumably rises going into 2017 and 2018, we ought to see the slope of this cost curve maybe inch up some. You've got to look at margins, I think, in that context and also the operating rates, they're going to be on either side of balance. They're not dropping as low as 80% as they have in the past.

Got it. That's helpful. Thank you, Bob.

Okay. Thank you.

Thank you. Jim Sheehan, SunTrust.

Good morning. Could talk a little bit about free cash flow in the quarter? It dipped a little bit. What is your outlook for free cash flow for the rest of the year? Do you think that working capital changes influenced what happened in the first quarter?

Well, I'll start with that and then Thomas will supplement, certainly. I think, first of all, working capital changes, we don't think they're going to be significant. They're not going to be really material to our cash flow development. If you look back at the last 12 months, our free cash yield has been about 10%, 11%, in that range. It's been double digits for quite some time. I think our cash flow generation's into to be pretty strong. Thomas, I don't know if you wanted to add more.

No. I don't think I can add more here. The cash flow generation for 2016 is going to be strong, as we have seen in the past. We have -- as we have talked at our year-end call, the CapEx expenditures are going to be higher in 2016 versus 2015, so that obviously will, when you look at a free cash flow perspective, will impact it but we are expecting strong cash flow generation, net working capital, no significant changes expected there today.

Very good. Also, could you talk about how you're thinking about M&A these days? Is there any view to diversifying the Company further? How would you look at -- you've got a very strong balance sheet here. Where does M&A fall in your uses of cash priorities?

There's really no change in our position regarding M&A. I think I've talked about this in prior calls. We like -- first of all, from a portfolio standpoint, we think that the O&P and I&D value chains provide a very wide playing field and I think both play to our strengths of running large-scale operations safely, reliably. We know how to manage costs well. We understand cycles and we know how to do well in all parts of cycles. As we think about cash flow deployment and we think about the various options, and certainly we study all kinds of alternatives, so I don't think our position has changed on M&A.

Thank you.

Thank you. Frank Mitsch, Wells Fargo.

Good morning, gentlemen, and to quickly follow up on that. That obviously begs the question, you're on a share buyback, you're going to your shareholders to get more approval. This is 2.8% per quarter rate, is that the baseline thinking right now?

In May, Frank, we will get approval, hopefully get approval for this next 10% and we will commence that program. Our approach has been that we would do these 10% programs up to 18 months kind of timeframe. We will evaluate that. You've seen us increase the pace in Q4 when we thought there was even better value in our shares and so I think we'll continue to evaluate that.

Thank you. Following up on I&D, the PO and derivatives business saw material volume growth sequentially and then you also pointed out how the PG margins were essentially flat Q1 versus Q4, but you said that your margins were down due to sales mix. Can you elaborate on what's going on in that business and what we should be expecting in Q2 and beyond?

In I&D, in terms of Q1 it was on really on oxyfuels. We had a couple of things going on there. Seasonally, Q1 is usually weak in terms of margins and in addition to that, as I mentioned during the refinery -- refining discussion, blend premiums came in, gasoline inventories were high. It was kind of an unusual period where in addition to the seasonal impacts, we had some downdraft in margins and we see -- already we see oxyfuel margins coming back. That was an important feature, but Frank, part of that was offset by pretty good styrene margins and we think those should continue.

Frank, within the volumes, as you look at the volumes, if you'll recall fourth quarter we had maintenance turnaround at our French PO plant, so that affects both the propylene oxide and the oxyfuels businesses. And then we also had the maintenance going on across ethylene glycol and the acetyls. So fourth-quarter volumes were pretty heavily affected by maintenance. First quarter really reflects all assets up and running.

This a little bit of a mix effect across PO. You got to think of it as a global business and as different events occur in the industry, often with other players, of which parts of the globe you're going to be supplying. In general I think if you went back over our past five years, what you'd see is the typical comment about propylene oxide and derivatives as a very stable quarter-to-quarter profitability.

In terms of the mix effect, that's a really a Q1 sort of an issue and not something that we should count on for Q2 and beyond?

Just oxyfuels seasonality. I think that's -- when you boil it kind of net-net, that's what it is.

Thank you so much.

Thank you. Nils Wallin, CLSA.

Great. Good morning and thanks for taking my question. I was wondering if you'd update us on your thoughts on the PO/TBA plant, when you would expect to make a final decision and if you do go ahead with it, how that might affect your ability or your interest in doing buybacks while it is being built?

We are progressing the project. We're doing detailed engineering as we speak and we would expect some time in the first half of next year to make final investment decision with a projected startup date of about mid-2020. That's currently where we are on that project, Nils. We evaluate a lot of different scenarios in terms of our cash flow deployment and so on. I would say more broadly I see us being able to support and continue to invest in that project through whatever is ahead of us in the next three, four years.

In terms of share buybacks, we're always evaluating that as one of our options in deploying cash flow. When you look further out, I think we are going to continued develop a variety of options. Remember, our aim is to meaningfully create shareholder value and continue to generate this strong cash flow that we've been known to generate.

Of course. That's helpful. Thanks. Another question back on ethane, I think that their understanding is that there's plenty of ethane out there in terms of potential capacity, supply, and rejection but I'm curious. As the new plants, new ethylene plants come on stream, do we have to get the sources of ethane from further-out locations like the Marcellus or the Bakken? How might those delivery costs to supply the incremental demand affect the ethane price?

I think there could be periods where Marcellus ethane is needed, but if you think about the amount of new consumptive capacity that's coming, it's something in that 400,000 barrels per day range by mid- to late-2018. But the price of ethane I think also needs to be considered in the context of propane price and in context of butane price. Also, if Marcellus ethane is needed, then my view is that Eagle Ford ethane and Permian and Haynesville is even more profitable because it's much closer to the Gulf Coast. I would imagine that there would be some supply response from more closer-in production of ethane and the markets ought to balance.

Got it. That's very helpful. Thanks again.

Thank you. Laurence Alexander, Jefferies.

Good morning. Just two quick ones. What's your thinking now about the incentive to shush naphtha capacity given the MTO dynamic that you outlined? Secondly, as you think about the European prospects in the medium term, to the extent that ethane exports can effectively provide an alternate for the price mechanism and possibly provide a bit of support for naphtha margins in Europe?

I think first of all, in terms of naphtha crackers, we're not expecting rationalization, either in Europe or in Asia for naphtha crackers. Most of what was going to get done got done earlier in the decade. As far as ethane setting the ethylene price in Asia -- sorry, in Europe, I don't think that's going to be the case because I think the mainstream market still settles on naphtha and supply/demand. I expect that to be until but I suspect that those who have the ability to crack something other than imported ethane, then they will run those economics and they'll import more or less depending on whether ethane-based ethylene makes sense in Europe or not. I don't think that will become a price setter in Europe.

Thank you.

Thank you. Jonas Oxgaard, Bernstein.

It's a question on ethylene, North America. You're adding another couple of hundred thousand tons. Other people are adding left and right and no derivatives. How much more ethylene do think North America can absorb before going to cash costs? When would that happen, do you think?

I think it's just a timing of derivatives and ethylene expansions and when you look at turnarounds and so on, these increments are not that big to change the underlying ethylene supply demand dynamic. Our sense is that there is still more derivative capacity in the aggregate and that we ourselves already have a view on where were going to place our ethylene. Longer term, I think will see more derivatives come on as some of these crackers start up. We don't see it quite that dramatic, frankly.

Okay. How long would it actually take for you to get your derivatives online once you finally announce it?

Well, our polyethylene expansion that we're advancing, we are aiming for some time in 2019 to have production.

Okay. Thank you.

Thank you. At this point we have no further questions in the queue. Speakers, you may proceed.

Okay. Thank you. Let me just close with a few comments before everyone disconnects. I want to just summarize by telling you a little bit about what I think our priorities are for Q2. To me, they're pretty clear. I think we've got to get the refinery expeditiously and safely returned to normal operation. We have our large turnaround at Corpus Christi and the expansion that will follow, where as I mentioned, we're aiming to start that up in late Q3.

Ultimately, at a more higher level, our aim is to really maximize cash flow during this very balanced and tight market environment, not only in the US but globally. From a financial perspective, assuming that we receive shareholder approval, we'll start our fourth 10% share repurchase program in May. We look forward to updating you on progress in all of these items and others in July. Thanks for your continued interest in our Company.

Thank you. That concludes today's conference. Thank you all for participating. You may now disconnect.