Hello, and welcome to the LyondellBasell teleconference. At the request of LyondellBasell, this conference is being recorded for instant replay purposes. Following today's presentation, we will conduct a question and answer session. I'd now like to turn the conference over to Mr. David Kinney, Director of Investor Relations.
Sir, you may begin.
Thank you, operator. Hello, and welcome to LyondellBasell's third quarter 2020 teleconference. I'm joined today by Bob Patel, our Chief Executive Officer and Michael McMurray, our Chief Financial Officer. Before we begin the business discussions, I would like to point out that a slide presentation accompanies today's call and is available on our website at www.lyondelpcell.com. Today, we will be discussing our business results while making reference to some forward looking statements and non GAAP financial measures.
We believe the forward looking statements are based upon reasonable assumptions, and the alternative measures are useful to investors. Nonetheless, the forward looking statements are subject to significant risk and uncertainty. We encourage you to learn more about the factors that could lead our actual results to differ by reviewing the cautionary statements in the presentation slides and our regulatory filings, which are available at www.linedelpcel.com/investorrelations. Reconciliations of non GAAP financial measures to GAAP financial measures together with other disclosures, including the earnings release, are also currently available on our website. Finally, I would like to point out that a recording of this call will be available by telephone beginning at 1 PM Eastern Time today until November 30th by calling 888-566-0568 in the United States and 2033693064 outside the United States.
The passcode for both numbers is 6541. During today's call, we will focus on 3rd quarter results, the current environment, our near term outlook and provide an update on our growth initiatives. Before turning the
call over to Bob, I
would like to call your attention to the non cash lower of cost or market inventory adjustments or LCN that we have discussed on past calls. These adjustments are related to our use of last in first out or LIFO Accounting and the recent volatility in prices for our raw materials and finished goods inventories. During the third quarter, we recognized pre tax LCM benefits totaled $160,000,000 compared to LCN charges of $323,000,000 during the first half of twenty twenty. During the third quarter, we also recognized a noncash impairment of $582,000,000 that reflects our expectation for reduced profitability from our existing refinery. Comments made on this call will be in regard to our underlying business results, excluding the impacts of the refinery impairment and the LCM inventory adjustments.
With that being said, I would now like to turn
the call over to Bob. Thank you, Dave, and good day to all of you participating around the world. We hope that you, your colleagues and your families, are all staying healthy and safe during these challenging times. We appreciate you joining us today as we discuss our 3rd quarter results. Let's begin with Slide 3 and review the highlights.
In the third quarter, GlyondellBasell's businesses benefited from improving volumes during the initial months of a recovering global economy. After excluding the noncash impacts of LCM inventory benefits and an impairment of our refinery, 3rd quarter EBITDA was approximately $900,000,000, an improvement of more than $200,000,000 relative to the 2nd quarter. We continued to focus on cash generation and retention by efficiently converting more than 90% of our EBITDA into cash from operating activities and by carefully managing our working capital to end the quarter with approximately $5,000,000 $1,500,000,000 of cash. And available liquidity. Our strong balance sheet has served us well by allowing the company to capture opportunity during this downturn through the establishment and startup of a new integrated polyolefin joint venture in China, followed by the announcement in October of our intent to form another integrated polyethylene joint venture in Louisiana before the end of this year.
Both of these joint ventures offer unique opportunities LyondellBasell to grow 1 of the core areas of our business by investing in new, already operating high quality assets that have significant upside as market conditions continue to improve. These transactions are prime examples of our strategy to identify, develop and capture opportunities through business cycles. Let's turn to slide 4 and review our recent safety performance. Our employees and contractors maintain their focus on performing work safely to eliminate injuries prevent virus spread and minimize emissions from our assets. During September, we had 1 recordable injury across our global workforce of more than 19,000 employees.
Although our goal is always zero injuries, the September year to date recordable injury rate across both our employees and contractors is on track to improve upon the top decile industry performance we achieved in 2019. Our protocols for workplace sanitization, facial covering, social distancing, help screening and contact tracing have been successful in minimizing the spread of coronavirus across our global facilities. We had no evidence of work related COVID infections across our global workforce. Our major manufacturing locations continuously throughout pandemic as an essential industry. Our office workers have returned to work in Asia and we are gradually increasing our office populations across the rest of the world in accordance with local regulations and safety metrics driven by both employee and community infection rates.
We are using a safe and responsible approach to gradually increase the number of personnel at our Houston headquarters during the fourth quarter. In September, Our company released our annual sustainability report, the cover of which is shown on slide 5. We hope that you will all take some time to review the report. You will note that the cover image of our report does not depict images of solar arrays, windmills or pristine beach. Our products make modern life possible and often have a favorable environmental footprint relative to the alternatives We recognize that plastic waste represents a substantial challenge for society, and our goal is to play a central role in developing pragmatic solutions that balance the needs for environmental, economic, and social sustainability.
Our sustainability report describes the actions we will take as a company to help tackle 3 global challenges, eliminating plastic waste, addressing climate change and supporting and thriving society. Over the next decade, we will continue to develop successful waste management projects through the alliance to end plastic waste that will recover and reuse 1,000,000 of tons of plastic waste. By 2030, we aim to produce 2,000,000 tons of recycled and renewable polymers across our asset base. We are targeting a CO2 intensity there will be 15% lower by 2030 than it was in 2015. And the events of this year have led us to redouble our efforts to ensure a culture of inclusion across our diverse global workforce.
We hope you will find that this year's report not only tracks our progress on meaningful metrics for investors, but also describes the increasing scope of our hunting ambitions and strategies to support the transition to a low carbon circular economy and drive solutions for a more sustainable and driving society. Let's turn to Slide 6 and briefly review how we are advancing and our growth strategy with the Sasol joint venture that we announced on October 2nd. In summary, ByondellBasell has agreed to purchase of 50% interest in the newly built ethylene tracker, 2 polyethylene units, and the associated utilities and infrastructure located in Lake Charles, Louisiana for $2,000,000,000. Ryan Del Valle will operate the assets and market all of the polyethylene produced by this joint venture. As we discussed a few weeks ago, this transaction will enable both partner maximize the value of these world class assets while advancing our respective strategic objectives.
While no formal process is set out in the agreements, LyondellBasell will have the potential to acquire the JV assets in full at some point in the future. In addition to the Louisiana joint venture, we also established and started up a joint venture with Bora in China just a few weeks ago. We have been very clear that we have no intention of building a new integrated ethylene cracker on our own for the foreseeable future. But when these 2 JVs in China and Louisiana are taken together, we are essentially acquiring the full capacity and immediate financial benefits of a new and operational world scale integrated cracker complex with minimal exposure to the risks for project execution timing, uncertainty, and opportunity costs that are typically incurred during the multiyear construction of these types of facilities. Plus, we are acquiring this world scale integrated cracker at a very attractive valuation.
With respect to our joint venture with Sasol, both partners are working diligently and making good progress towards obtaining the required approvals that should allow us to close the transaction before the end of this calendar year. With that, I'll turn the call over to Michael, who will describe our financial results over the past quarter.
Has presented challenges for our business, we've also found great opportunities in the debt capital markets to reduce our interest costs, and extend maturities by refinancing some of our debt as we raise capital to support the formation of the Louisiana joint venture. Immediately after announcing our agreement with Sasol, we renegotiated covenants, extended our revolving credit facility by 1 year, and issued $3,900,000,000 in new bonds. These bonds were very well received by the market with an order book that was more than five times oversubscribed. We locked in favorable rates with a weighted average coupon of 2.72% across 6 tranches with maturities ranging from 3 to 40 years. The new bonds served to reduce the weighted average interest rate across our debt portfolio by 34 basis points.
After redemptions planned for the coming days, we will have both accessible near term maturities as well as staggered long term maturities without any large maturity towers. In the completion of the Sasol joint venture, we will prioritize deleveraging over share repurchases and work toward improving debt ratios to levels consistent with a stronger investment grade credit rating. We expect to continue to fund our dividend primarily from operating cash flows. One more modeling item. In the fourth quarter, we will have a charge of approximately $80,000,000 for loss on extinguishment of debt associated with our refinancing activities.
As Bob mentioned, our cash conversion remained strong in the 3rd quarter. On Slide 8, you can see that over the last 12 months, more than 100% of our EBITDA was converted into nearly $4,000,000,000 of cash from operating activities. Our business teams remain highly focused on aggressively managing inventories to these dynamic markets, while prioritizing cash generation and liquidity. Now please turn to Slide 9, where we'll provide further details on cash generation during the third quarter. We closed the 3rd quarter with cash and liquid investments of $2,800,000,000.
Capital expenditures of $425,000,000 declined more than 25% relative to the second quarter, largely due to the reduced pace of construction and our new POTBA facility in Houston. In March, we announced that we were reducing activity on the POTBA project to both prevent fiber spread at the construction site and conserve capital as we prepared for an uncertain economic environment from the pandemic. We have recently begun to reactivate the project and expect to return to a full pace over the coming weeks. We now expect the project to be completed in the fourth quarter of 2022. Approximately 1 year later than our original schedule.
The delayed timing of the startup should provide benefits on a more fully recovered global economy, as well as another year of global demand growth for the products. Higher costs arising from the delayed project execution more extensive civil construction and unexpected tariffs on materials are expected to add at least 30% to our original cost estimate of $2,400,000,000. We plan to provide a more definitive update on the estimated cost after activity is fully restored a $472,000,000 equity contribution for our joint venture with Bora in China and paid $352,000,000 in dividends to our shareholders. We ended the quarter with $51,500,000,000 of cash and available liquidity. The recognition of the impairment of our refinery during the third quarter has substantially changed the math for computing our 2020 forecasted tax rates.
We now believe that our effective tax rate will be due to the uncertainty regarding the impact of the Cares Act and the timing of certain discrete events, we will not be providing more specific guidance at this time. On the other hand, refinery impairment has resulted in our cash tax rate being higher than previously communicated. While it's difficult to forecast a specific percentage, We expect that our cash tax payments, net of refunds for 2020, will be approximately $200,000,000. With that, I'll turn the call over to Bob.
Thank you, Michael. Let's turn to Slide 10 and review our third quarter performance. As mentioned previously, my discussion of business results will be in regard to our underlying business results. Excluding the impacts of the non cash LCM inventory changes, and the impairment of the Houston refinery. Our global footprint and diverse business portfolio continued to provide resiliency in this challenging market environment.
EBITDA for the third quarter was nearly $900,000,000, more than $200,000,000 higher than the prior quarter. The upward trajectory supports our belief that pandemic driven reductions in demand for our products bottom during the second quarter. Our olefins and polyolefin segments continue to serve strong consumer demand for products used in packaging, and health care markets, while demand increased for intermediates and polymers used in durable goods applications. Volumes rebounded for compounded polymers from our Advanced Polymer Solutions segment as automotive Manufacturing reopened. Our refining segment and the LTPUs and related products business continue to be challenged by decreased mobility that has reduced demand for transportation fuels.
We expect that our diverse portfolio of businesses will see further improvement over the coming quarters as global economies continue on the path to recovery. Let's dig a little deeper on how the recovery is playing out in 2 significant markets for our company. Polyethylene and transportation fuels. Let's turn to Slide 11 and review the growth in polyethylene demand during the pandemic. In a typical year, global polyethylene growth rate is approximately 4%.
As you can see from the chart, In spite of the pandemic and recession, global polyethylene demand has still grown by 1% over the 1st 9 months of this year. As expected, Europe has seen a decline. The polyethylene demand in the U. S. And Canada and Northeast Asia regions has grown.
Despite capacity additions, China demand will continue to far exceed its domestic production and incentivize North American exports. Low industry operating rates during the second quarter, along with Hurricane Laura in August, and strong demand tightened supply on the U. S. Gulf Coast, which led to polyethylene contract price increases totaling $4.20 per ton over the months of June through September. The recovering demand for transportation fuels continues to be stubbornly slow.
On Slide 12, you can see that while U. S. Passenger and commercial vehicle travel has returned to within 10% of 2019 levels. US flights and associated jet fuel consumption is still down by 40%. In March April, refiners reduced operating rates in response to low demand and shifted distillate production from jet fuel to diesel.
While gasoline and jet fuel inventories are currently at manageable levels, the excess distillate capacity has driven dealer inventories to levels 30% above the same period last year. Industry consultants believe that up to 3,000,000 barrels of global refining capacity will need to be rationalized over the coming years to support more normalized margins since it is unlikely for airline travel to rebound to full utilization of the available refining capacity. As a result of an extended challenging outlook for refined product demand and margins, we recognized an impairment of the value of our refinery during the third quarter. Now let me summarize how these trends have come together for up me on Slide 13. In these initial months of economic recovery following the pandemic lockdowns, demand for our products has proven to be resilient.
As you can see in the comparison to the third quarter of last year in the top chart, our sales volumes are largely intact. Further progress is needed to drive margin recovery. Comparing our performance relative to the second quarter and the bottom chart, You see the stepwise improvement. Volumes are up and margins have improved in all of our businesses, except for those serving transportation fuels market. With continuing recovery in gasoline demand from passenger cars, we expect that our Oxyfuels business should recover more quickly than the broader repining market.
Let's review the 3rd quarter results for each of our segments. As mentioned, my discussion will describe our underlying business results, excluding the non cash impacts of LCM inventory changes and the impairment of the Houston refinery. I'll begin with our Olefins And Polyolefins Americas segment on Slide 14. 3rd quarter EBITDA was $404,000,000, $194,000,000 higher than the 2nd quarter. Improved demand for polyethylene and higher of $220,000,000 compared to the 2nd quarter.
Industry ethylene supply tightened, which led to price increase that improved olefins margins. Volume increased due to higher demand and the completion of planned maintenance at our channel view tracker in the second quarter polyolefin results increased by about $25,000,000 during the third quarter. Increased polyethylene demand drove higher margin and volume, partially offset by a decrease in polypropylene margin. We anticipate both volume and margin improvement for our O And P American segment during the fourth quarter. Recent polyolefin's price increases are expected to find support from industry supply constraints and robust demand.
And global economies continue to improve. This momentum could persist for the remainder of the year. Now please turn to Slide 15 to review the performance of our Olefins and Polyolefins, Europe, Asia and International segment. During the third quarter, EBITDA was $131,000,000, $88,000,000 lower than the 2nd quarter. Integrated profit margins were impacted by rising feedstock costs.
Olefins results decreased approximately $30,000,000 driven by a decrease in margin. Ethylene margin decreased as higher feedstock costs outpaced an increase in ethylene prices. Combined polyolefin's results decreased $20,000,000 compared to the prior quarter. Polyethylene volume decreased due to summer demand and polypropylene margin declined on lower spreads. Although equity income decreased by approximately $10,000,000 during the quarter, we were pleased to record a positive contribution for our Bora joint venture in September.
The very 1st month of its operations. In October, we've seen a slight decline in integrated polyethylene margin. Over the fourth quarter, We expect a typical seasonal decline in demand as we approach the year end holiday season. Please turn to Slide Steve, let's take a look at our Intermediates And Derivatives segment. 3rd quarter EBITDA was $245,000,000, $124,000,000 higher than the prior quarter.
Volumes rebounded with increased demand from durable goods markets, in our propylene oxide and derivatives business and the completion of planned maintenance in their intermediate chemicals business. 3rd quarter propylene oxide and derivatives results increased by approximately $45,000,000, driven by higher volumes from increased demand for polyurepanes and automotive, construction and furniture markets. Intermediate chemicals results increased about $40,000,000 mostly driven by higher volumes after the completion of our planned maintenance. Oxyfuels And Related Products results increased approximately $10,000,000 as a result of slightly higher margins due to higher product prices. In the coming quarter, stable demand for durable goods should continue to support profitability across most of the businesses in this segment.
In October, Hubsey Fuels prices and margins have come under additional pressure with lower seasonal driving demand. Now, let's move on and review the results of our Advanced Polymer Solutions segment on Slide 17. 3rd quarter EBITDA was $117,000,000, $94,000,000 higher than the 2nd quarter. Volumes rebounded significantly driven by higher demand for our products. 3rd quarter integration costs were $7,000,000, Compounding and solutions results increased approximately $90,000,000 due to higher volumes, driven by increased demand for our polypropylene compounds utilized in automotive end markets.
Advanced Polymers results were relatively unchanged. Although the demand for our products is improving, we expect typical seasonality to affect 4th quarter profitability for the Advanced Polymer Solutions segment. As activities in the automotive and construction market slowdown at the end of each calendar year. At our Investor Day last September, We updated our targets for synergies from the A. Schulman acquisition to $200,000,000.
I'm happy to say that we have successfully implemented our synergy plan and we believe that the annual run rate of more than $200,000,000 will become increasingly visible with volume recovery in this segment. Now let's turn to Slide 18 and discuss the results for our Refining segment. 3rd quarter EBITDA was negative $121,000,000, a $107,000,000 decrease versus the second quarter of 2020. As I discussed earlier, This excludes the impact of both LCM and the one time impairment of the Houston refineries. Results for the quarter were pressured by excess industry capacity and reduced demand for transportation fuels.
In the third quarter, lower demand for gasoline and jet fuel negatively impacted both margins and volumes. Margins declined in the 3rd quarter due to the absence of a hedging gain recorded in the 2nd quarter. Unfavorable byproduct spreads and a decrease in the Maya 211 benchmark crack spread. During the quarter, the Maya 211 crack spread decreased to as low as $7.75 per barrel, and ended at a historically low quarterly average of $9.89 per barrel. In response to sluggish demand, We reduced the utilization rate at the refinery to 81% with an average crude throughput of 216,000 barrels per day.
Refining margins are expected to remain compressed until demand for gasoline and jet fuel returns closer to pre COVID levels. We plan to operate the refinery at about 80% of nameplate crude capacity during the fourth quarter. Let me be clear that we are leaving no stone unturned in our efforts to reduce expenses and minimize losses at the refinery. Where deferring non safety related discretionary activities and reducing the salaried workforce by approximately 10% at our refinery through early retirements and potential worker redeployments to our other facilities in the Houston area. We are evaluating every possible option with regard to procuring crude oil and optimizing production from this asset.
Please turn to Slide 19 as we review the results of our Technology segment. 3rd quarter Technology segment EBITDA was comparable to the prior quarter at $111,000,000. Licensing revenues increased while catalyst margin and volume decreased. Based on the anticipated timing of upcoming licensing milestones and catalyst demand, We expect that the fourth quarter technology business profitability will be similar to the first quarter of this year. Please turn to Slide 20 and allow me to review the progress of our value driven growth investments.
Our company is executing on a very clear and simple strategy to increase free cash flow by harvesting new sources of EBITDA generation while moderating our capital expenditures. Earlier this year, we accelerated our plans to reduce capital expenditures to $2,000,000,000 or less. We intend to maintain our capital budget at these levels for the next 3 years. In the second quarter, we started a 500,000 ton per year polyethylene plant in Houston, utilizing our next generation hyperzone HDPD technology. At full nameplate capacity and average margins from 2017 to 2019, We estimate this asset is capable of generating $170,000,000 of annual EBITDA.
On September 1st, we established a new joint venture in Northeastern China with Borrow. This investment has already contributed earnings in September and recent margins indicate the joint venture is capable of generating $150,000,000 of annual EBITDA for our company. In 2018, we expanded our compounding business by acquiring a Schulman and reform the Advanced Polymer Solutions segment. With integration completed, we are on track to capture $200,000,000 in estimated synergies that should become increasingly visible as volumes recover in the market served by this segment. We expect to close the transaction for the Louisiana joint venture with Sasol before the end of this year.
At full capacity and historical margins, This investment is capable of contributing $330,000,000 in EBITDA to our company. In our Intermediates And Derivatives segment, the combination of 2 new propylene oxide investments in China and Houston starting in 20222023 put together at almost $500,000,000 of annual estimated EBITDA. The formula is very simple. Maureen EBITDA and moderating capital expenditures should result in higher free cash flow at any point in the business cycles. Let me summarize this quarter's highlights and outlook with Slide 21.
During the third quarter, LyondellBasell's leading and Advantage Global positions enabled us to capture value and deliver resilient results. We demonstrated commercial agility by matching production continued demand from packaging and healthcare markets and increasing volumes from automotive and other durable bids markets. We're seeing higher demand for our products from the covering global economies. Our North America polyethylene exports are increasing to support growing demand in Asia. As global mobility increases, the demand and margins for transportation fuels will eventually show improvement.
Our financial strategy continues to support our commitment to an investment grade rating. With sound cash generation and disciplined capital deployment decisions, We are focused on maintaining the continuity of our dividend and prioritizing deleveraging upon completion of the Sasol transaction. Our goal of mine's alpha is to capture opportunities throughout all points of business cycles. Over the past several years, we have carefully planted the seeds for profit generating growth by building, acquiring, and partnering on assets that expand our reach with new capabilities to sustainably harvest profitability from advantaged feedstocks, expanded product ranges, and an increased footprint in the world's fastest growing markets. We look forward to discussing our progress on maximizing cash flow from these investments over the coming quarter.
Are now pleased to take your questions.
Star 1 and record your name. First question in the queue is from John McNulty with BMO Capital Markets. Your line is now open.
Yes, thanks for taking my question. So, it looks like there's normally you have a seasonal dip as you go from kind of 3Q levels to 4Q for a whole host of reasons, but it seems like Given this year is a little bit of, an atypical year we'll call it, where you've got, you know, polyethylene price surging throughout the third quarter and into 4th. And you've got maybe not quite as big of a delta around transportation fuels and and that type of thing. I guess, how should we be thinking about your ability to maybe buck the trend of the normal seasonal dip going into 4Q? Is that something that's possible as the economies are recovering, or is that maybe too much of a stretch?
Yeah. Good morning, John. Indeed, especially in polyethylene, as you noted, this year and and polypropylene to an extent, this year was because of the hurricanes And prior to that, the inventory reduction that we undertook as a company and and generally as an industry, likely if there's some slowdown in demand, we certainly, we as a company will take the opportunity to rebuild some inventory for very, very low levels today, and really kind of hand them out on many products. And I suspect that, that'll get us through the seasonally soft period and, and, get into year. So I suspect that'll be the case in Polyolefins, for the most part.
Next question is from Steve Byrne, Bank of America. Your line is now open.
Oh, I'm just curious about this more JV it's a 150,000,000 EBITDA projection. Is that effectively a net income number? How how would you how would you compare that to you know, your other assets in terms of of the margin. And and the reason I ask is not to NAFSA pricing has been pretty volatile over there, and I don't know whether that's fair to be looking at for that joint venture. Is it more likely that you're really getting the naphtha, you know, linked to oil prices from your refinery JV partner.
Yeah. So, Steve, the 150,000,000 will be at the EBITDA level. So it's like equity earnings. Think of it that way. We do not expect dividends from Bora for a couple of years because the priority will be to delever.
You'll recall that the financing was roughly 1 third equity, 2 third debt for Bora. So, you know, the way we've outlined the joint venture and and how, the bank covenants work we need to prioritize, delevering first. We'll get some incremental, commission income from sales of Polyolefins, a likely dividend income will come in year 3, 4 and onwards.
Next question is from Jeff Zekauskas with JP Morgan. Your line is now open.
Thanks very much. Brent prices have moved down from about, I don't know, $44 a barrel to 37 over the past month. Do do
you think that will make
a difference to, global petrochemical prices?
Yes. Good morning, Jeff. So it may, but I think right now what's driving global petrochemical prices and especially polyolefin prices, it's more about, the heightened level of demand that we've seen very low levels of inventory. I think that's really what's going to drive near term pricing and provide support potentially for the final increase, that's been announced here in the US. The the other thing to note about a falling oil price is that, in it should benefit our European business because typically when oil price declines, we see margins open up in Europe We saw the opposite of that in Q3 because oil prices actually increased, and we saw a bit of margin squeeze whereas we couldn't pass all of that through.
To the end users. So so I think net, probably benefit for Europe and near term supply demand likely drives pricing more so than Brent price.
Next question is from Alexei Yefremov from KeyBanc. Your line is now open.
Yes. Good morning, everyone. Your point p, your, feedback has been sort of all over the place over the last four quarters. It was creating a lot of movement around just like you just said, Bob, What's a good normalized number for from the current environment for this segment? Is this, you know, closer to 130,000,000 dollars, $140,000,000 that you just printed in the third quarter or maybe around $220,000,000 EBITDA that you had in the first half of this year?
Yeah. Alexis, right now, because there's so many moving parts that I hesitate to give you a normalized number. So I think you put your finger on a few of the drivers, which is the direction of oil price Also, you know, Europe has has been one of the softer regions in the world. We've seen improvement in Europe from Q2 to Q3, but it has it has not been to the degree that we've seen in China and the US. So, I would say more of a mixed market in Europe, and more clear strength in the U.
S. And in China. Well, let let's wait until next quarter, and we'll we'll try to help you with that, normalized number. But today, I hesitate just given all the moving parts.
Next question is from Duffy Fischer with Barclays. Your line is open.
Yes, good morning. Question about 2 of your assets. So first one is just the refinery. With the write down, what is the current book value of that asset And are we in the ZIP code where we're actually thinking about maybe shutting the asset? And then the second one is just POTBA, the the increase in costs there and the delay, what's that going to do to the return on that project?
Yep. Hey. Good morning, Chelsea. On the refinery, book value will be a little over 500,000,000 and and we'll post that in our queue, later today or or Monday. So that's that's after the write down.
On the POTBA project, certainly, you know, returns will be lower. We think probably in the 10% range, on returns for POTBA I think in the end, we're gonna net out kind of the delay of the project in in this way. I think first of all, it it gave us some cushion on cash flow this year that Given the uncertainty at the time we made the decision back in q 2, I still continue to believe it was the right thing to do. Secondly, When we do start up, it'll be time better when markets are recovering or fully recovered, hopefully, by then. And and we'll be bringing new capacity online at a time where where it's more likely to be needed.
So in the end, you know, I think balancing near term needs with with long term, market demand. I think this was the right call to make, and we continue to believe it was the right call.
Next question is from P. J. Juvekar with Citigroup. Your line is now open.
Polyethylene goes in disposables, like plastic bags and packaging. So the European P demand down 3% versus North America 4%. It was quite a stark, difference between the 2. And I thought European stuck at home would be doing the similar things like ordering from home and packaging demand goes up with that. What's what's is there something underlying in Europe that's going on besides just the weak economy?
So, you know, from our perspective, we really saw the industrial part of the demand be very weak. And and, you'll recall that the automotive sector was essentially shut down for example, we we produce polyethylene that goes into, fuel tanks. And and so that's continue to be weak. The automotive sector has not come back in Europe as strongly as it has in the US. Industrial bulk containers and things like that.
So the industrial part of demand was softer, in Europe. I think on the packaging side, saw similar strength in what we've seen in the US. So, it's more about the level of activity. It didn't resume to the to the rate that we we had expected. And lastly, in Q3, we still saw some seasonal slowdown from a typical European holiday season, you know, you know, the the European kind of vacation season where some of the factories shut down, there was still some of that, and and enough that it cost some seasonality in Q3.
Next question is from Bob Court with Goldman Sachs. Your line is now open.
Thank you. Bob, I was wondering if you could comment a little bit on ethane. I was looking at the nat gas markets are up 80% or 90% from summer and the ethane markets look like they're only up about $0.10. The strip on ethane looks fairly subdued, but I guess if the oil markets are terrible, maybe there's less drilling and there's some more, the downtime curtailments start to to take, do you see a potential run on ethane in the first quarter? And is there something you guys can do proactively to insulate yourself if that were to happen?
Yes, good morning, Bob. So first of all, we estimate ethane rejection rates are still pretty high, probably north of 500,000 barrels per day. I've heard numbers much higher almost double that, but likely the rejection is probably happening in regions that are further away from the Gulf Coast. So There's probably some in the Permian, but probably more as you get out towards the Rockies and certainly in the Marcellus. So, today, you you see ethane in the low twenties.
I wouldn't be surprised to see ethane move to the mid twenties. You know, especially here in the winter as new natural gas prices rise a little bit more. I don't think we'll get to see a spike. Only because higher prices will likely incent more supply to come online. And and maybe you know, as you say, but with more crackers starting up, we may, on the margin need more supply from further away agents, And if that were to happen, then, you know, maybe ethane does move to the mid twenties.
But I still think there's so much rejection out there that, a little bit of price for and send more supply.
Next question is from David Begleiter with Deutsche Bank. Your line is now open.
Thank you. Good morning. Bob, just on polyethylene for the October increase, one of the leading consultancies as the club had increased not successful. Do you agree with that assessment? Well, so David, first of all, you know, there are kind of timing effects on when these price increases get implemented and it's phased over about 2 month period depending on contracts and size of buyer and that sort of thing.
But if you kind of step back and look at, the market environment today, as I mentioned earlier, inventory is still really low. And, in fact, this morning, I was just looking at ACC data and, days on hand, is like 10% lower than where it was last year, but that's stated on hand. So including a lower sales rate, the absolute inventory levels are incredibly low today. So I think that points to a tighter market Secondly, we don't see demand really letting up yet. Our our order books are are filling up quickly, for November.
And, and as I said earlier, likely if there's some softness, you know, our, certainly, our approach is gonna be, we're gonna have to build back a bit of inventory because of the impacts of weather and, and also just, you know, stronger demand. So, let's see how it plays out, but it seems to me that, you know, from our perspective, the the increase is still on the table.
Next question is from Vincent Andrews with Morgan Stanley. Your line is open.
Thanks, and and good morning, everyone. Just, you
know, getting back to the polyethylene demand dynamics,
if this year, let's just say it finishes the year +1 percent, it's supposed to grow 4, how do you think about next year? Do we have, above 4% year next year? Because some of
the rebound may be in
the auto industrial part as you suggested, or, do we just have had this air pocket this year and we don't make any of it up?
Yeah. So good morning, Vincent. So USPE demand so far year to date has grown about 1.7% And if you look at Q3, the year over year is like 2 a half percent. So you can really see the the higher level of demand growth post the low Q2. So I I I think, you know, Q2 is kind of a lost quarter.
Just to kinda round out the regional look, in Europe, demand is up 2 a half percent year to date. And in China, it's up almost 5% year to date. And China imports are up about 5% year to date as well. So really good growth rates globally in polyethylene And to your point about is there some catch up growth next year, I do think in the industrial and auto areas, now auto impacts polypropylene more than it does polyethylene. But, I I I think when the recovery recovery really takes hold, which should be above trend line growth for a year to 18 months, and I still expect that to be the case.
We'll probably be seeing that more dramatic in polypropylene just given that there's more durable good end use in polypropylene.
Next question is from Hassan Ahmed with Alembic Global. Your line is now open.
Bob, I wanted to sort of continue with some of your thoughts around polyethylene. Was taking a quick look at Chinese Polyethylene import data that just came out for September. You know, imports were up 36% year on year. Months on months, they were up 17%. And obviously, that's for the backdrop of, you know, continued sort of supply additions out there.
So, you know, as you look at the net, you know, call it 2021 and things start sort of normalizing, but obviously more capacity keeps coming online. How should we be thinking about the pace of Chinese polyethylene imports?
Yeah. So if you look over the next 2 to 3 years, it seems that, if if you use, historical demand growth, that the new capacity likely won't be enough to meet demand growth. And so they're gonna need to incrementally import more polyethylene. We don't think imports have leveled out yet in China, and we think that'll be the case. I don't know about next year.
Because of timing of projects, whether they're delayed or not. But if I look over the next 2, 3 year horizon, likely their import needs grow. Another thing to think about Hassane is that if you look at q2toq3, as US demand came back in polyethylene, exports actually declined significantly from q2toq3 out of the US. And if you look at US year, there's very little new capacity in Polyethylene coming online. So, you know, speaking to the prior question about will we see higher demand growth in the US if there's catch up demand?
I think if that's the case, there'll be less being exported out of the US and likely, that'll create a tighter global market. And and lastly, if you look out further on polyethylene supply demand, you're already seeing many projects that are being canceled or delayed. So it seems to me that we're seeing kind of a classic setup of of a cycle here as we said in the trough, starting to see delays, starting to see cancellations, and let's assume China rings on, you know, all of the capacity that's announced. They still need to import more.
Next question is from Arun Viswanathan. Your line is from RBC Capital Markets. Your line is open.
Good morning. Yes, I just wanted
to go back to polypropylene.
Could you just remind us how much of your portfolios levered there, across, O And P Americas, Europe, and and APS? And, what is your outlook there? I guess, you know, you mentioned a lot of durables exposure. Obviously, you know, could remain quite press, especially if we go into another round of lockdowns. But maybe you can just offer your thoughts on the polypropylene market and, the impact on lined up as well.
Thanks.
Certainly. So so at a high high level, polyethylene certainly is a bigger driver than polypropylene. If I look if I look globally, in the US, polyethylene is a bigger business for us than polypropylene in Europe. Polypropylene is a bit bigger than polyethylene not by a lot. And in APS post the acquisition of A.
Schulman, you know, we're much more diversified prior to the acquisition of A. Schulman, like, you know, 100% of our compounding was essentially, probably propylene and about 90% was automotive. So, and you'll recall back when we announced that transaction, that was part of the rationale was to to have more diversity and and participation in end use segments in packaging and medical and and have more polyethylene content. So I'd say, you know, on on APS, we'll probably still 60% Polypropylene 40% other just as kind of a rough, breakdown. On the polypropylene outlook, certainly, you know, polypropylene has struggled this year, especially in Q2, because of the higher durable good and auto content.
Polypropylene demand is down year to date, by 1 to 2% in Europe and US. Up significantly though in China. So, you know, China polypropylene demand is up some 15%. It's a very, very large increase. So, you know, our view is that, polypropylene will be very constructive.
We don't see kind of a wall of supply. And, actually, I think that, as the economies recover around the world, durable goods will likely grow faster, into a growing economy and a recovering economy which probably favors polypropylene even more than polyethylene.
Next question is from Kevin McCarthy with Vertical Research Partners. Your line is open.
Yes. Good morning. Financial question for you. It looks like your net debt balance increased about $425,000,000 on a sequential basis. I heard you call out the payment Sephora So if
I adjust for that, that that
would have trended flat to down, let's say. My question is, you know, there are other, issues, working capital, timing issues, other other one time, events that, that that would have prevented you from deleveraging more in the third quarter?
Yeah. It's Michael. Yeah. Really, Bora is the big one to call out. Really nothing else, I mean, any significance to to call out.
Hey. Hey, Kevin. If you look at this year, our operating cash flow will more than cover dividend and all the ongoing expenses. So we should have a surplus pre the, borrow equity infusion. Yes.
Next question is from Frank Mitsch with Fermium Research. Your line is now open.
Good morning, gentlemen. If I
could just follow-up on that, Bobby, you'd you'd mentioned, when you were talking about the Sasol JV that perhaps in future, you might acquire, all of those assets. And obviously, you, you know, you also discussed that priority right now is to de lever. How should we think about the potential timing of doing something with Sasol in the future? And then I guess, kind of an overarching thing. You know, should we think that Lyondell might do some more M and A in terms of making acquisitions in 'twenty one or really will the delevering, you know, the front and center?
Yes, Frank, good morning. So first of all, I just wanna be real clear on our capital allocation priorities. Maximize cash flow continuity of the dividend solid investment grade rating through the cycle. We're committed, whatever we decide to do, we're committed to the dividend and the investment grade rating Having said all that, timing of a step 2, probably 3 to 5 years out. So I think we have a window to deliver before that decision is upon us.
Now, of course, you know, a lot of that depends on the pace of the recovery, how much, excess free cash flow we generate in 20212023. But remember that that's all the the first half of the JV will be contributing excess cash flow beyond the additional interest expense that we'll take on. So we think that'll be accretive or additive to cash flow for next year. Based on our current outlook, we think next year, we can cover the dividend from operating cash flow. So, so I I think, you know, our priorities are gonna be to to de lever, 1st and foremost, And I think there's enough time before step 2 will be upon us.
We'll be able to deliver meaningfully.
Next question is from Mike Sasson from Wells Fargo. Your line is open.
Hey, guys. I apologize if I misheard this, but I I thought you mentioned that OP Americas would improve in the 4th quarter versus the 3rd quarter. Hopefully, the browns continue that route as well. But when you think about that margin grade in Slide 14, Was the bulk of that achieved in September and and is is that sort of the run rate as we head into the 4th quarter?
Yeah, Mike. Good morning. So the, that indeed the, you know, the timing of price increases, except for that last five, Most of those implemented kind of later in the quarter is the way it all lays out. So, I think that's probably a reasonable way to look at it is the September would be the run rate going into q 4. I think the thing we'll have to watch for is the seasonality, as I mentioned earlier, in response to some of the other questions, my sense is that the market is so tight and the inventories are so low that, I don't think we'll see the degree of seasonal softness that we've seen in in past years, this year.
But let's see. And to your comment about the browns, let's hope they continue to strengthen as we go into Q4.
Next question is from Jonas Oxgaard with Bernstein. Your line is now open.
Thank you. I'm looking at the, compounding business. So it sounds like your synergies or cap shirt and automotive is coming back. Polymer prices are from that that we're normalizing. So Can you give us a sense for how how do you think about sustained or sustainable earnings in that business?
And how are you thinking about a strategic outlook for it? Is this something you're looking at adding to?
Uh-huh. Good morning, Jonas. So, first of all, on APS, I think you're really in Q3 starting to see what a fully synergized APS represents and and the earnings power, as volume grows, more of those dollars will flow straight to the bottom line, in in in a much more efficient platform post our synergies. If you if you go back to pre COVID and around the time of the acquisition, we can we the LyondellBasell business that was in ATS, that is in ATS today, was earning at that time about $375,000,000 of EBITDA. We acquired $200,000,000 from a Schulman and we achieved $200,000,000 of synergies.
So nearly $800,000,000 of EBITDA, that was kind of the run rate back in 'eighteen. So the question now is, what's the trajectory to get back to that earnings rate and, I think as you mentioned earlier, a lot of that will be tied to the recovery in automotive. Looks very good in US and in China. Europe needs to improve meaningfully for us to firmly be on the path to get to those kind of numbers that we had back in 'eighteen, But again, I think as volume increases, we should see a large part of that revenue fall to the bottom line, you know, on on on the margin. Because the fixed costs are now all covered and we have a synergized platform.
So so normalized earnings, if you go back to 18 conditions, should be closer to 800.
Next question is from John Roberts with UBS. Your line is now open.
Thank you. Do you need
to write down the TBA TBA assets as well like you wrote down the refinery or because it's integrated into the PO operations, the value doesn't need an impairment?
Yes, so, exactly as you said. First of all, it's a co product in our in our I and D business. But but more importantly, John, the market characteristics for for TBA are a bit different than than what we see for our refinery, because the, the margin in TBA is based on upgrading butane to MTBE. So, you know, whereas in the refinery, part of our margin is the light heavy differential, And there, we think there's there's a longer road to recovery to get more sour crude back on the market. I would characterize the TBA downturn as cyclical and perhaps, part of the refining downturn as being a little bit more, lasting because of this lack of supply of sour crude.
So we will not be writing down our our POTBA or our TBA assets. Think of that as being more cyclical.
The last question in the queues from Matthew Blair with Tudor, Pickering, Holt. Your line is now open.
Hey, good morning, Bob.
Hey, Matt.
Are you still planning a refinery turnaround in 2021 and if so, can you share any details on the cost and the scope?
Yeah. So, Matthew, you've got us in the middle of thinking through that. So I'll be able to give you a definitive answer, at the next earnings call. We're thinking through, you know, our cash needs for the company, how the markets will develop. We ought to make a really thoughtful decision because, you know, we still think that our refinery is an asset that, that makes it through this downturn.
So, you know, probably what I'm trying to balance here is near term versus long term, and and how do we position the refinery best for when markets do return? So, we're going through all that math now and, And, certainly, we're gonna do whatever we need to do to to manage the the the the regulatory requirements and all of the safety related projects that we need to do. Those are our primary focus for us. And beyond that, you know, the turnaround timing is part of a broader set of decisions that we're trying to make next year for the refinery. So stay tuned.
I'm showing no further questions at this time.
Alright. Well, thank you. Well, let me offer a few closing remarks. Our team at LyondellBasell, we're continuing to focus on near term near term maximizing free cash flow, continuity of the dividend, and maintaining a solid investment grade rating through the cycle. As I've consistently mentioned over the past few calls.
At the same time, I think we're really well positioned to emerge stronger from the pandemic because we'll have a lot more assets, a synergized APS platform will have lower CapEx as we come out of the pandemic as well, And I think all that sets us up to really accelerate on free cash flow generation with with our initial focus being on de levering but I think our company is really setting up for coming out of this downturn, in a very good way much stronger than when we enter. So thank you for your interest in our company, and we'll look forward to updating you at the end of January. Have a great weekend, and be safe.
This concludes today's call. Thank you for your participation. You may disconnect at this time.