利安德巴塞爾 (LYB) 2016 Q2 法說會逐字稿

Hello and welcome to the LyondellBasell teleconference. At the request of LyondellBasell this conference is being recorded for instant replay purposes.

(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, Tony. Thank you all and hello and welcome to LyondellBasell's second-quarter 2016 teleconference. I'm joined today by Bob Patel, our CEO, and Thomas Aebischer, our CFO, who is calling from our Rotterdam office. 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 presentation 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 website 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 August 29 by calling 866-453-2318 in the United States and 203-369-1226 outside the United States. The passcode for both numbers is 72916.

During today's call we will focus on second-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 inventor 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 volatility in prices of our raw material and finished goods inventories.

Second-quarter price recoveries for impacted products resulted in the reversal of the entire $68 million first-quarter LCM charge. Interim LCM charges are reversed in subsequent periods when information shows the LCM charge may not be sustained through year end. However, I'd also remind you that LCM charges that exist at year end cannot be reversed. Additionally, if are there future price declines within our inventory pools during the remainder of the year, this could lead to additional LCM charges. 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, I'll turn the call over to Bob.

Thanks, Doug. Good morning to all of you and thank you for joining our second-quarter earnings call. Let's begin with slide 4 and review the highlights from the second quarter. Our second-quarter diluted earnings per share declined relative to the first quarter to $2.45 per share with EBITDA of $1.7 billion. This excludes the $68 million lower of cost or market inventory gain. When the gain on sale of the Petroken Argentine business is also excluded from first-quarter results, underlying earnings per share in the second quarter increased by $0.15 per share.

Overall, second-quarter business trends were as we had expected. During the quarter our downstream integration in polyolefins and other olefin derivatives enabled us to capture strong chain margins. Positive seasonal oxyfuel margin trends benefited the intermediates and derivatives business. While our chemical and polymer operations generally ran well, there was scheduled maintenance and some unplanned downtime across Company.

Most significantly, the refinery operated at reduced rates throughout the quarter as repairs were required following a fire in our coker unit in April. The refinery returned to normal operation in mid-July. Based upon industry benchmark margins, the value of second quarter of loss production due to planned and unplanned outages across the Company is estimated to have been approximately $140 million. The ability to generate strong earnings during a period of heavy planned maintenance and a refinery upset is indicative our solid portfolio. We progressed our financial priorities during the quarter as well and Thomas will provide you with an update on those in a few moments.

Slide 5 reflects our continued outstanding safety performance. As I mentioned, during the first half of this year we performed an usually high amount maintenance. Periods like this often result in an increased number of injuries. However, our results remain steady. We strongly believe that an unrelenting focus on safety has resulted in the excellent performance we have seen over the past four years.

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

Thank you both and good morning. On slide 6 we outlined our quarterly and trailing twelve-month segment results. Combined olefins and polyolefins generated good results with $1.3 billion of EBITDA in the second quarter and $5.5 billion during the last 12 months. The intermediates and derivatives segment remained steady with second-quarter EBITDA of approximately $370 million and $1.5 billion over the last 12 months. Due to operating issues, the refinery recorded a loss.

Technology continued to perform well at an LTM pace of approximately $270 million. Overall, despite ongoing maintenance and global economic uncertainties, our profitability has remained strong with $7.5 billion of EBITDA over the past 12 months. The first half 2016 EBITDA represents an annual pace of nearly $7.2 billion.

Please turn to slide 7, which provides a picture of cash generation and use. During the second quarter we generated $1.3 billion of cash from operations and utilized $1.1 billion for dividends and share repurchases. Our maintenance and gross capital investments increased to approximately $560 million during the second quarter, with a significant portion of this investment focused on our Corpus Christi ethylene expansion and the turnaround at our Berre, France, facility. During the second quarter cash and liquid investments decreased by approximately $400 million to end with a balance of $2.5 billion.

Over the last 12 months cash from operations was $5.5 billion. A nearly equal amount was dedicated to dividends and share repurchases over the same period. After investments in our capital program, returns to our shareholders, borrowing and other activities, the cash and liquid investments balance declined by approximately $1.3 billion. However, at $2.5 billion, this remains well above our minimum requirements.

Slide 8 provides a longer perspective of cash flow as well as some current financial metrics. Our strong results and cash flow generation over multiple years positioned us to steadily raise our dividend and purchase shares. In May 2016, we increased our quarterly interim dividend by 9% to $0.85 per share. Additionally, our results have allowed us to access favorable credit markets while maintaining a strong balance sheet, BBB/Baa1 corporate credit rating and available liquidity of proximately $5 billion.

During the first six months of 2016 cash flow generation remained strong, although somewhat less than the pacing in 2014 and 2015. On an annualized basis using June 30 market capitalization, the cash flow yield is 9.4%. Our share repurchase program remained at an approximate 10% annual pace. During the quarter we purchased 8.8 million shares, representing 2% of our outstanding shares with approximately 4 million shares purchased during June. Notably, during May we received approval for our fourth share repurchase program for up to an additional 10% of outstanding shares over the next 18 months. Based on the June 30 share price, as the May quarterly dividend increased to $0.85 per share, the current dividend yield is approximately 4.6%.

Before I wrap up, I want to point out a few other items that might help your modeling. First, our effective tax rate for the quarter was 24%, several percentage points lower than our previously communicated estimate. The rate variance for the quarter compared to our forecasted annual rate was impacted primarily by discrete items, including the impact of a non-US tax law change as well as by our global earnings mix being balanced towards lower tax regions. We currently estimate our full-year tax rate at approximately 27% which is approximately one percentage point below our previous estimate. 2016 [tape] expending is on target to meet our forecast of $2.1 billion. Depreciation, amortization and interest expense are currently running at rates in line with our previous estimate.

With that, thank you very much for your attention and I will turn the call back to Bob.

Thank you, Thomas. Let's turn to slide 9 and review segment results. As mentioned previously, my discussion of business results will exclude the impact of the LCM inventory gain. In our olefins and polyolefins Americas segment, second-quarter EBITDA was $754 million. Results declined by $67 million, excluding the first-quarter gain of $57 million on the sale of the Petroken polypropylene business.

Relative to the previous quarter, olefin results were generally unchanged. Ethylene prices improved by approximately $0.04 per pound and our margins improved while customer internal derivative planned maintenance resulted in reduced ethylene volumes. Our operating rates during the quarter averaged approximately 80% due to the planned maintenance and expansion at our Corpus Christi facility. Excluding the Corpus Christi outage, quarterly rates were approximately 90%.

During the quarter we operated our metathesis unit, but the contribution was not material. 74% of our ethylene production was from ethane and approximately 90% came from NGLs. We initiated the Corpus Christi ethylene turnaround and expansion during mid-April, with completion planned for the end of third quarter. At industry benchmark margins, second-quarter loss production impact was estimated to be approximately $65 million. However, all but approximately $15 million was offset by purchases and inventory management during prior quarters.

In polyolefins, combined results declined by approximately $60 million. Results were driven by lower polyethylene and polypropylene volumes. Approximately half of the polyethylene volume decline was due to scheduled plant maintenance. Polypropylene volumes declined 5% primarily due to lower sales following the first-quarter sale of Petroken. Polyethylene price spreads were relatively unchanged while polypropylene spreads declined by approximately $0.02 per pound, several cents less than industry data would indicate.

Thus far during the third quarter, olefins and polyolefins Americas industry trends are relatively unchanged. Our heavy planned maintenance schedule continues into the quarter. The Corpus Christi plant is scheduled to remain down throughout the quarter. Two weeks ago we began a turnaround at our Morris, Illinois, facility. At current industry benchmarks, the net value of lost third-quarter production is estimated to be approximately $135 million.

Let's turn to slide 10 and review performance in the olefins and polyolefins Europe, Asia and international segment. During the second quarter, underlying EBITDA was $536 million. Exclusive of a $21 million first-quarter gain from the Argentine Petroken sale, [fisical] was relatively unchanged.

Olefins results declined by approximately $30 million as increased feed-stock costs outpaced olefin price increases. A turnaround at our Berre facility impacted olefin and polyolefin production during both the first and second quarters. At industry benchmark margins, the second-quarter value of lost production is estimated to be approximately $35 million, $20 million greater than the first-quarter impact. Advantage feed stock accounted for 52% of ethylene production, contributing approximately $25 million over (inaudible).

In polyolefins, results were relatively unchanged. Exclusive of the gain from Petroken sale, (technical difficulty) results improved by approximately $10 million. Joint venture equity income was very strong, increasing by $27 million, consistent with strong polyolefin margins. During the early weeks of the third quarter, underlying industry conditions have followed expectations and remain relatively unchanged. However, the third quarter is typically impacted by slower seasonal conditions. During the quarter there is no significant maintenance planned at our wholly owned facilities, but there will be some at our joint ventures.

Now please turn to slide 11 for a discussion of our intermediates and derivatives segment. Second-quarter EBITDA was $369 million, an improvement of $15 million versus the first quarter. Results for propylene oxide and derivatives declined by approximately $20 million, partially due to sales, product mix and derivative margins. This was offset by an improvement in the intermediate chemicals of approximately $10 million. Styrene margins with the leading factor with improvement of approximately $0.04 per pound versus the first quarter. Higher oxyfuels volumes and seasonal margining [futures] contributed approximately $30 million more than the first-quarter results.

Thus far in the third quarter, PO and derivatives and intermediate chemical industry conditions are relatively unchanged from the second quarter. However, weaker gasoline markets have negatively impacted oxyfuels. This is seen on the slide in the reduction of the July MTBE margins. Additionally, a turnaround at our Berre-Bayport EO/EG plant is estimated to impact third-quarter results by approximately $15 million.

Let's move to slide 12 for a discussion of the refining segment. Second-quarter EBITDA was a loss of $13 million, a decline of $27 million from the prior quarter. Crude throughput averaged 183,000 barrels per day as rates were impacted by the April 8 fire and other maintenance. During the second quarter the Maya 2-1-1 spread increased by $3.21 per barrel to average $21.07 for the quarter. However, due to our processing limitations we were not able to benefit from the increased spreads.

Based on the second-quarter industry benchmark spreads, the lost profit opportunity is estimated to be approximately $85 million. Repairs are now complete and the refinery returned to normal operation in mid-July. As you can see on the slide, during July industry spreads trended downward. Additionally, the cost of RINs increased following the issuance of new EPA guidelines. Compared to the second quarter, market RIN price July month-to-date has increased by approximately $0.17 per gallon. At full refinery rates, every $0.10 change in the RIN cost is estimated to impact quarterly costs by approximately $5 million. Our technology segment continued to perform well, with second-quarter EBITDA of $73 million.

I will conclude with slide 16. Second-quarter industry trends generally developed as we anticipated. We continued to see strong results in global olefins and polyolefins businesses. Our I&D segment benefited from the strength in the styrene markets and seasonal oxyfuel improvements, whereas the refining results were impacted by the refinery coker-unit fire. Our solid cash flow enabled us to increase our dividend and extend our share repurchase program.

In the near term, we believe that olefin and polyolefin markets will remain balanced, with periods of potential tightness. Our refinery has returned to normal operation. Due to recent gasoline market changes, our oxyfuels and refining businesses are experiencing some margin pressure. We continued to invest in our facilities with a third-quarter planned maintenance turnarounds at two olefin sites and our EO/EG facility at Bayport. At recent industry margins, we estimate the impact of the related production loss in the third quarter to be approximately $150 million. However, this maintenance is the foundation for continued reliability over the coming years.

Due to our unusually high planned maintenance schedule this year, the value of lost production through the first three quarters based upon industry benchmark [mile] margins is estimated to be approximately $300 million. In contrast, next year our schedule is quite light. Within chemicals there are no olefin plant turnarounds and only one PO plant turnaround. The refinery will also have a fluid-unit turnaround.

Finally I am pleased to announce that in a separate press release to be issued shortly, you will see that we have made the final investment decision for our new 1.1 billion pound-per-year polyethylene line. Startup is targeted to occur during 2019. This facility represents an 18% increase in our US polyethylene capacity. Additionally, it is the first of its kind process, combining attributes of both of our polyethylene and polypropylene technologies. As a result, the product capabilities will range from basic benchmark resins through to higher value-added grades.

We are now pleased to take your questions.

(Operator Instructions)

Steve Byrne, Bank of America.

It looks to us like polyethylene imports by China year to date are a little below year-ago levels. Just wondering if you think that's a reasonably good metric for demand in Asia. Anything that you are seeing that would suggest any softening in polyolefin demand in that region?

Good morning, Steve. I think the imports of polyethylene into Asia or into China are generally -- they do vary because of inventory changes and planned outages and so on. What we are seeing is still very solid growth in Asia year over year. I would not read too much into that just that import statistic.

Any root cause of that refinery fire that you found meaningful or lessons learned from that, that you'd care to share?

Well, we've collected what we found and we've checked out more than just the source of that fire. We think we've addressed the root causes and we understand those well. The refinery is back up and running at full rates.

Okay. Thank you.

John Roberts, UBS.

What's the startup date on the new polyethylene unit? Could you give us an update on the propylene oxide project as well?

Sure. The startup we are estimating to be mid-2019. That's progressing very well. The PO/TBA project, we are continuing with our front-end engineering and so that project is progressing very nicely. We expect to make a final investment decision in the first half of next year but it looks good so far.

Are you basically long that ethylene in the marketplace until that startup of the polyethylene unit?

We have been a merchant seller of ethylene and we've placed some of that Corpus Christi volume already. Over time, yes, that's our intention is through the addition of this derivative capacity we would move towards our long-term target of something around 15% of our ethylene as merchant sales.

Thank you.

Arun Viswanathan, RBC Capital Markets.

Just wanted to get your tenor on the markets right now. You discussed a balancing environment. How would you describe your customer inventory levels? How would you discuss kind of polyethylene pricing? We have seen some movement up in spot ethylene in the last couple of weeks and it looks like the polyethylene price declines that were expected in July have been pushed out to August. Maybe you could discuss what you're seeing on demand and your expectations for polyethylene pricing for the next maybe six, say six months.

We are seeing very balanced markets and demand is growing very solidly year over year. As in prior calls, we've talked about this that a lot of polyethylene and polypropylene demand is tied to everyday use sort of applications. That's evidenced in the growth rate despite some uncertainty in the macro economic environment. I think we're seeing that play through in terms of demand growth globally has been pretty solid year over year. Because of planned and unplanned outages in the industry, including our planned maintenance that we're doing at Corpus, markets seem to be balanced to tight.

Inventories, our sense is that inventories are about average or below average. My view is that in the next quarter or two, markets should be pretty well-balanced and anything unplanned would create tightness in markets. There's a reasonable planned maintenance schedule both in the US and Asia in Q3. That will keep things pretty well-balanced to tight for most of the remainder of the year.

Just as a follow-up on the cost side, ethane has also come off. Maybe you could give us your view on ethane and propane over the next couple of quarters as well. Thanks.

Sure. Ethane came off a little bit here because there were some unplanned cracker outages. There's some turnarounds going on, so I think demand has been off some. Propane looks to be pretty long. We think that propane will play an important role in setting the price of ethane not only in the near term but also longer term and so for now we see an abundance of ethane supply. As I've mentioned in prior calls, over the medium term, we expect for ethane to trade a little bit over its fuel value. Historically it's traded $0.05 to $0.10 over and that still affords the USA a reasonable feed stock advantage and in a tight market environment like we have today it provides for a good backdrop for solid earnings.

Thanks.

David Begleiter, Deutsche Bank.

Polypropylene margins have come off pretty hard since Q1. Can you discuss your expectations for the back half of the year in any potential for this to improve?

Good morning David. Polypropylene margins, last time we spoke there was a pretty wide gap between Asia and the US. We'd said that, that would come in some partly with Asian prices coming up, which they did, and US prices coming off a bit. I think we've reached that delta where we are likely we don't see a whole lot more.

If you step back and look at supply/demand and especially here in the US, there's not a lot of new supply coming and there is growth year over year. I expect the polypropylene market in the US to be relatively balanced to tight over the coming quarters. We don't really see meaningful new capacity in the US for a couple of years. There might be some de-bottlenecks but I think probably two or three years out before we see new grassroots capacity.

Bob, you'd highlighted again strength in styrene in the quarter. Could you discuss your outlook for styrene for the next 6 to 12 months here?

Styrene demand continues to grow. Again, no real new capacity in the near term. We are pretty constructive about styrene. We haven't had the opportunity to say that very often in the past few years. It seems that there is some resilience in the market and we'd expect that to continue.

Thank you very much.

Jim Sheehan, SunTrust Robinson Humphrey.

Could you discuss your priorities for cash allocation? You've got a lot of free cash flow and you went over some of the dividends and share buyback that you have done in the past. Are you considering M&A to be more of the mix going forward?

Let me start and then I'd ask Thomas to also to jump in. Our free cash flow so far, we have deployed it towards a very strong dividend and share buyback program and I would say over time as we ramp up on our growth projects, certainly we will use some of that cash flow to fund these growth projects.

In terms of M&A, there's not a lot of change from what we discussed in prior calls. We would have to see a clear path to value creation to consider M&A. It's certainly something that many companies think about, but for us we've got to make sure we know a clear path to value creation. Thomas, I didn't know if there's anything more you would like to add to that?

Thank you very much for the question. As you see and as I mentioned in my comments, we are in a fortunate situation with a strong balance sheet. Clearly we are committed as we have repeatedly said to a progressive dividend policy. We maintained the dividend. We were able to increase the dividend again to 9%, which we have mentioned. We just got another approval for another 10% share buyback over the next 18 months. We're in the fortunate situation to execute on our financial objectives.

Thank you. On the polyethylene unit, you're timing it for mid-2019. Looks like that the environment for delays is a hot topic. How have you evaluated the potential for delays in the industry and the resources that are needed in timing your own project?

I think generally, Jim, we are timing the construction of this project quite well because it will be post some of the large greenfield projects completing construction. I like our position there. In terms of delays, they're always difficult to forecast but if you look back at history and including some of our de-bottlenecks, these are very large, complicated clients. We have seen delays with not only some of our de-bottlenecks but also other projects and we expect some of that to occur which, frankly, has some implications on how operating rates turn out in 2018 and 2019. I like our position in terms of the construction cycle.

Thanks a lot.

PJ Juvekar, Citigroup.

Can you hear me? I'm sorry.

Yes we can hear you, PJ. Go ahead.

Sorry about that. There's a large price gap between Asian ethylene, which is $0.20 higher than the US ethylene. The situation could get potentially worse in 2017. How do you see this resolving? You are building a new polyethylene plant (inaudible) you are talking about ethylene exports. How and when do think the situation gets resolved? Thank you.

I think, PJ, we're going to have to look at ethylene prices more regionally rather than globally. It's more important, in my view, to look at polyethylene prices globally. To the extent that the Asian price is the price setter, then I think that's what we have to watch. Ethylene exports out of the US, I think they can only be good for the US ethylene market. It's kind of a relief valve, if you will, for the US ethylene business. If those are to be built, I would consider that to be a net positive for US ethylene producers.

I wanted to go back to your ethane comment on the medium term. There are some new crackers coming out. You have ethane exports going up. Balancing that, what is your outlook for supply, particularly in the Gulf Coast in Eagle Ford and Permian?

There's still a significant amount of rejection that's occurring even some still in the Eagle Ford and then places a little further away. PJ, I think what's important to say is how propane and butane prices develop because part of what will balance markets is feedstock flexibility. That something we are very focused on for the long run is to continue to find ways to increase feedstock flexibility. The cracker fleet in the US has a reasonable amount of feedstock flexibility which if ethane prices were to rise above let's say propane or butane economics then a lot of us could switch which would take some of that pressure off of ethane.

The other thing is in a low oil price environment, I would think that some of the ethane exports could be more variable. They could be shut off if ethane price were to rise. I think there's balancing factors in the market from a supply standpoint. With some premium over fuel value and with oil price moderately rising over time, I would think that, that will attract more supply. We think this will sort of balance out over time. Also the timing of startups of crackers will impact that too, right? If there delays then that pushes out that tightness of ethane and more time for more ethane protection to come to market.

Thank you for your detailed answer.

Don Carson, Susquehanna Financial.

Bob, you recently announced that you were going delay a planned expansion at Channelview in ethylene. Wondering if you could go over the rationale for that. Was that related to the fact that you just don't think the returns are there right now at current and perspective margins? Or is that more of a strategic issue that you just want to not expand your merchant ethylene position?

That project looks very good to us even in today's environment. We didn't delay it for economic reasons. It's really a matter of priority. First of all, we've got a lot of going in Channelview where that de-bottleneck was to be done. That's a large part of our PO/TBA project potentially as we go forward. We have a certain number of resources and we have got to deploy those in a way where we can focus and execute well. We want the team over there focusing on PO/TBA.

Also, if you look more broadly in the Company, near term our priority is more to build out our derivative portfolio and then in time we will come back and do that de-bottleneck. When we do our turnaround at our Channelview crackers in 2018 and 2019, we will likely be able to put in tie-ins such that we can implement that de-bottleneck any time and it may not have to be dependent on a turnaround. We're going to do that project at some point but I'd like for us to focus in the near term on the polyethylene plant and on PO/TBA and build out our derivatives and then we'll come back and take a look at that one.

Had a follow-up on polypropylene. You mentioned that your spreads were only down $0.02 in the quarter which certainly was a lot less than the overall decline we saw in North America. Was this something unique to Lyondell in terms of your sales mix or was this just the consultants getting the data wrong?

No, I think it is, it has to do with our sales mix and geographic mix.

Would that imply that there's more downside to come in Q3 and the second half in general that some of this industry reduction in spreads has been delayed at Lyondell?

Not necessarily. We don't really see that.

Okay. Thank you.

Vincent Andrews, Morgan Stanley.

Thanks and good morning. If I heard you correctly, you said you ran at an 80% rate in the US, 90% ex-Corpus Christi. I'm just wondering what types of rates we should be thinking about going forward. I can think back over the past two years or so and sometimes those rates were at or above 100%. What is the sort of rate we should be thinking about going forward?

Hi, Vincent, this is Doug. If you think going forward really the key thing is that we do have the 2 facilities in turn around. Otherwise, everything should be running full.

The two facilities are Corpus and Morris. Remember, Morris is an integrated ethylene-polyethylene site. When we're not making ethylene we don't run polyethylene up there either. Otherwise, our plan is to run full for the rest of the year.

Something around 100%, then?

Yes. That should be the base.

Great. Thanks very much.

Aleksey Yefremov, Nomura Securities.

Could you talk about your outlook for propylene? There is some new sea-borne exports of propylene out of the US and inventories appears to be low. On the other hand there's a new PDH unit in a startup mode. Any aspects for higher price for this [polymer]?

I think propylene prices depend a lot on where propane is and refinery rates and so one. Our sense is, is that with the new PDH units that are being built, propylene looks to be coming more into balance and could be long here in the US over the medium term. We're watching that but feedstocks do have a role to play in how much propylene is produced and when propane is favored, the crackers that have flexibility tend to produce a lot more propylene.

It sounds like you think that the export facility is not a big deal basically for the US market?

Well, for propylene there have been exports in the US for some time. I think it has a role, but I would summarize my comment by saying I think propylene is going to move towards a long position as some of this new PDH capacity comes on and if there are derivatives, if they're lagging than it becomes a bit long.

Thank you. Turning to MTBE, what is the supply/demand balance there, especially on the demand side? Outside of seasonality, is there any reason to be worried that octane value that MTBE was getting over the last year or so is diminishing?

No, I think this has been more about a gasoline phenomenon that you've seen this year in terms of spreads. Our view about MTBE longer term, we still think octane short. You think about new fuel regulations, they are requiring us to take sulfur out of the gasoline pool which reduces octane and also from a demand side, more and more higher compression engines require more octane. Our view is octane is tight to short and MTBE plays an important role in that.

Thank you.

Hassan Ahmed, Alembic Global.

Question around the I&D segment. As I was taking a look at your sales volumes, the acetyl volume sequentially saw a big jump up. We are talking, if I've run my numbers correctly, around 17%. I am just trying to figure out, you guys have reported a 17% rise in acetyl volumes Q1 to Q2 while one of your big competitors reported double-digit volume declines again for the same time period. I'm just trying to understand, clearly the market's a bit oversupplied. Is there an element of sort of gaining market share at the cost of pricing going on over there?

For us it was more about just running methanol at higher rates and also we had some planned maintenance earlier in the year on the [van] unit and now that's done. We ran at higher rates in Q2.

Fair enough. Okay. Now moving on, obviously a lot of questions on this call as well as some previous calls about ethane. Clearly, a lot of paranoia about ethane potentially jumping up significantly. Even partially is there a desire on your part maybe even for one facility or a few facilities to at least try to lock into longer-term contract in terms of ethane?

We have an ongoing contracting strategy around ethane. We're one of the bigger buyers of ethane from the Gulf coast. I think we're probably the largest right now. We have a very balanced strategy around buying ethane. I will come back to our my earlier comments which I think around ethane is we have to think about what are the balancing factors on ethane price? Again, I think propane and butane will play an important role. Also exports, some of those could be variable at very high ethane prices so I think the market will balance.

The other thing if ethane values persist at much higher than its fuel value that ought to attract more supply or incent more supply. Really, I think what we're all concerned about here, I suppose, is more about the volatility, not about some structural change in how ethane will be priced. I think as we saw earlier in this decade, when ethane price rose and margins on ethane over fuel value were $0.30 per gallon or $0.40 per gallon, that was met with a lot more supply. We think that as these crackers start up and so on, a combination of switching to other feedstocks, maybe less export and more supply, the market will find a new equilibrium and that will leave us in a position where the US still has the advantage vis-a-vis heavier crackers globally.

Thanks so much, Bob.

Nils Wallin, CLSA.

Good morning. Thanks for taking my question. With respect to Corpus, the delay, the turn around is extended. I'm curious, was this extension do to lower efficiency? Did you have some issues getting equipment? Are you just trying to help market find a little more balance into the back half of the year?

No, Nils, we would like to get this done as soon as possible. It's really about just the complexity and construction and the de-bottlenecks are very, very complex because are working in tight spaces and so on. Having said all that, we are a few weeks later than we had anticipated. We are expecting to be done by the end of September and commissioning.

The other thing is when we started the turn around and especially in June and early July we had some very, very unusual weather patterns, had a few days where we couldn't be in the field because of lightning and heavy rains. On the Texas Gulf Coast those things do have an impact at this time of year. But we're aiming to get that done by the end of Q3.

Understood. Just on polyethylene expansions this year. Obviously the Mexico plants have taken a while to get up. Some JVs in the Gulf Coast are apparently getting pushed out. Saudi Arabia had some issues as well and is not up. Are these delays going to -- will they be sufficient to allow demand to grow into the capacity growth or is there a risk that at some point all of this capacity comes on stream in the next 6 to 12 months and the market is surprised by a supply shock?

Again, you are highlighting that these projects are complex and they don't tend to start up as people plan and hope, including our de-bottleneck, as I just mentioned. I think with delays, as you say, demand will grow into the capacity and we see a pretty balanced market through the balance of this year and well into next year. We'll just have to see how the timing develops on the other big projects. But they are quite large and complex and it's just history indicates that there are a quarter or two delays are not unusual.

Understood. Thanks very much.

Frank Mitsch, Wells Fargo Securities.

Good morning, gentlemen. Good morning, Bob. I was wondering, obviously volumes were off in olefins, polyolefins in Americas due to the planned and unplanned outages, customer turnarounds, et cetera and you mentioned that your plan is to run flat out for the balance of the year ex the Corpus and Morris turnarounds. How should we think about sequentially Q3 versus Q2 volumes in O&P Americas given those factors? Would you expect it to be up, flat or down Q3 versus Q2?

Production will be lower, Frank, right, because of Morris being down and the timing of that turnaround, so that's one of the things you have to factor in. That's also going to put some pressure and impact polyethylene, as Bob said. I think you will see that. We had some maintenance and turnarounds planned work in the second quarter, so that you will probably see hold pretty even, I think, across the quarters. We will see ethylene production being down.

All right, terrific. Just to clarify, you are expecting a $10 million sequential headwind from planned /unplanned outages Q3 versus Q2, correct?

We said in our prepared comments that third-quarter production loss would result in about $150 million impact for the quarter.

All right, but sequentially you were off $140 million so it's just a modest if we're looking sequentially, correct?

Yes. Of course, with the $140 million you are considering the refinery in there.

Fair enough. Fair enough. Lastly you mentioned 1.1 billion pound ethylene plant scheduled to come online mid-2019. What are the capital costs associated with that facility?

We are in the low- to mid-$0.60 per-pound range per annual pound of capacity.

All right. Terrific. There's some other facilities that are bumping against the $1-per-pound range, so terrific. Thanks so much.

Duffy Fischer, Barclays.

Good morning, fellas. Question on Europe, which just seems to keep doing better and better. I am getting some pushback from folks that might it be too good to be true. Can you just walk through how much of the European improvement over the last several years you think is kind of structural and therefore sustainable and how much of that will be susceptible to the cycle over the next three or four years?

Yes, Duffy, if you think about the improvement, probably about half of it is structural based on feedstock improvements, fixed-cost improvements and so on. The rest is more market related.

Having said that, If you think about the European market there's really no new capacity coming. The euro is weaker than it was two, three years ago. We had $1.40 euro/dollar; today we're $1.10. My sense is that Europe will kind of be an insular market. I don't see a whole lot going out or coming in. With no new capacity being installed in olefins and polyolefins there, and demand growing modestly but growing some, we see a pretty balanced market. I think the operating rates ought to be reasonably high over there.

Okay. Thank you. Coming back to the US, we were long derivative capacity, short ethylene. That seems to have flipped. When you look out over the next three or four years with the capacity additions in the US, when do you think we get to the maximum point of being long ethylene, short derivative capacity?

I would suspect that'll be sometime back 2018 into 2019. Definitely not all of the derivative capacity has been announced yet, just like we are announcing today our polyethylene plant. I think that will balance out but on paper you would assume that it's something in the back half of 2018, 2019 range.

Terrific. Thanks, guys.

Jonas Oxgaard, Bernstein.

Question on the polypropylene in Europe. Normally polypropylene Europe ties to polyethylene but over the last six months we have seen the polypropylene 200 or so below polyethylene. Any comments on that and whether that will persist?

I think the European market just has a different underpinning given the feedstock and the olefin prices there. Our sense is that, that should continue for the first seeable future.

You don't think polypropylene will rise up to polyethylene anytime soon?

Propylene is a little bit -- (inaudible) been about flat or a little bit less than ethylene over there. I think you've got to step back and look at global pricing as well to be instructive on that.

Okay. On the US side, you talked a little bit about the propylene exports. Right now we're only exporting to Columbia. If we were to start cracking more propane and then some of these PDH plants actually come online, how much more propylene do you think Lat Am can actually absorb? At what point would we have to start exporting to Asia or Europe, which then are much lower net back?

I suspect that some of it would need to go to Europe which would be the next logical destination. Europe over time will probably need propylene, so I think Europe seems logical. Of course Asia has a large need and for them it's also make versus buy because in Asia you see a lot of new PDH capacity coming. Will have to watch that. The thing we have to see is how much propylene export capacity there really is in the US and whether somebody would build more or not. I don't have a fresh view on that.

Enterprise talked yesterday about how they can repurpose some of their propane to propylene.

Okay. I would think Europe would be more logical destination and then next to South America.

(Inaudible) South America is full, clearly, and I just don't know if they can absorb anything else. It makes perfect sense. Thanks, guys.

Bob Koort, Goldman Sachs.

We've have seen -- I guess there was some ebbs and flows. Sasol maybe pushed out their plant for a bit and now we've heard Total, Shell, [Sabic], Exxon, maybe all mobilizing to build capacity. Just curious, do you have any more appetite for a greenfield and is there any option to maybe do it in a joint venture arrangement with either a Middle East partner or maybe a North American partner?

What we see is that in a more moderate oil price environment over the medium or longer term and ethane trading somewhat above its fuel value. Construction cost being what they are in the Gulf coast, greenfield is challenging, we think, to earn reasonable returns and perhaps our return aspirations are a lot higher. I don't know. So far we'd like to see how the rest of the decade plays out before we take a really firm view on that.

In the meantime, we've still got some de-bottleneck capacity that we can do. As I mentioned, we have one more we can do at Channelview. We are focused on PO/TBA and polyethylene. We have pretty healthy slate of growth projects and capital projects ahead of us. I'd like to see us execute those really well before we think about new a greenfield plant.

Can I ask on the -- you are talking about these new investments, new capital, as you say it's PO and polyethylene. Is this, given that the margins have come in a little bit in the industry, does this decelerate your share repurchase activity? Can you give us a sense on what you think your buyback pace and balance sheet looks like over the next 24 months?

We have announced this next 10% buyback over 18 months. We are on pace to be able to fund that. Beyond that, we'll just have to see how markets develop and what -- our view is that we have sufficient cash flow to continue to supplement our share repurchase and so on and still engage in these growth projects. Thomas, I didn't know if you had anything else to add to that?

No. We have never really given perspectively information or estimates about share buybacks. As we have said, we have a new program approved for 10%. We have more than $5 billion of liquidity if you look at the committed credit facility as well. We are in a good situation to execute on the progressive dividend and on the share buyback program.

Very good. Thank you.

Jeff Zekauskas, JPMorgan.

Maybe if I could follow up on Bob's question, share repurchase for Lyondell right now is a good idea. Maybe you're at you're about one-times levered. CFO talked about your borrowing capacity. Would you be willing to move up to 1.5 times leverage or two times leverage? Maybe another way of asking it is under what circumstances would share repurchase not be a feasible option for you, exclusive of acquisition opportunities.

I'll start and then I will turn it over to Thomas. Generally speaking, our aim is to create value for shareholders. There's a range of options you've outlined, we evaluate those. At the end of the day, that's what we are focused on near term, midterm, long term. Thomas, I don't know if you want to add more to that?

No, we are evaluating the share repurchases obviously, without options. Answering your question about how far would we go with respect to leverage, what's very important to us is to maintain a healthy balance sheet. We are focused on the BBB-plus rating as mentioned in my initial outlines and that is clearly a very much a guiding benchmark to maintain that BBB rating through the cycle.

Thanks very much.

If there are no other questions then I will close with a few comments. First of all, in the near term we see markets being very strong. We see solid demand growth year over year. Planned maintenance and some unplanned outages in the industry and our planned maintenance have kept supply moderate, so we see pretty balanced markets. When we think about the cycle with some delays in new capacity, operating rates are not going to dip much below 90% on paper in the past. As we see some of these delays and even some of the CTO projects in Asia being canceled, there's a higher likelihood that 2018 effective operating rates may not dip below 90%.

Our view is that we are very constructive on markets near term, medium term. We are continuing to deliver strong earnings. Last 12 months had a pace of nearly $10 per share, excluding LCM. We have a strong dividend. We're engaged in our fourth 10% share buyback program. By virtue of those two things, we are returning significant cash back to our shareholders. Our focus remains very consistent, safe, reliable, cost efficient operations. We're going to finish the Corpus turnaround and de-bottleneck it by the end of Q3. We're going continue to execute on the other turnarounds that we have.

I think what all this planned maintenance activity sets us up for is a very strong 2017. We have very little turnaround activity in 2017. I think that positions us well for next year.

We're starting to build out our growth project portfolio, with our polyethylene project in 2019 and potentially the PO/TBA project in 2020. We are continuing to advance those growth projects as well. We look forward to updating all of you on those items at our next call. Thanks again for your interest in our Company.

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