Hello, and welcome to the LyondellBasell Teleconference. At the request of LyondellBasell, this conference is being recorded for instant replay purposes. I'd now like to turn the conference over to Mr. David Kinney, Director of Investor Relations. Sir, you may begin.
Thank you, Amanda. Hello, and welcome to the LyondellBasell teleconference. I am joined today by Bob Patel, our CEO and Michael McMurray, our CFO. During this call, we will review this morning's announcement of LyondellBasell's Louisiana integrated polyethylene joint venture with Sasol. Following the review, we will open the line for your questions.
Before we begin the business discussion, I would like to point out that a slide presentation accompanies today's call and is available on our website at www.lyondellbasell.com. Today, we will be discussing our business while making reference some forward looking statements. We believe the forward looking statements are based upon reasonable assumptions. Nonetheless, the forward looking statements are subject to significant risks and uncertainty. We encourage you to learn more about the factors that can lead our actual results to differ by reviewing the cautionary statements in the presentation slides and our regulatory filings, which are available at www.lyondellbasell.com/investorrelations.
Finally, I would like to point
by calling 800,333,304,67 in the United States and 203,369,3627 outside the United States. Passcode for Wealth Numbers is 3652. With that being said, I would now like to turn the call over to Bob.
Thanks, Dave. Good morning and thank you for taking the time to join us on such short notice. We hope that you, your colleagues and your families are all staying healthy during these challenging times. This morning, we announced the completion of definitive agreements to form a new joint venture with Sasol. This transaction builds upon the measured strategic approach we have been taking to position our company for the future.
This deal offers a unique opportunity to grow one of the core areas of our business by investing in new already operating high quality assets that have tremendous upside as market conditions continue to improve. We recognize that this announcement might come as a surprise after we continue to pursue our highly disciplined financial strategy focused on maximizing liquidity during the first 6 months of the pandemic. But we believe that this joint venture uniquely fulfills all of the highly selective criteria we outlined for identifying and capturing value minded inorganic growth during industry cycles. We believe this acquisition will place LyondellBasell in a stronger position as the economy recovers and our industry returns to normalized volumes and earnings. Please turn to Slide 3 of the presentation we posted to our website this morning and allow me to describe this value in more detail.
LyondellBasell will purchase a 50% interest in the newly built ethylene cracker, 2 polyethylene units and associated utilities and infrastructure located in Lake Charles, Louisiana for $2,000,000,000. LyondellBasell will operate the assets on behalf of both partners for the joint venture. This joint venture enables both partners to maximize the value of We expect to obtain we expect to be able to obtain customary approvals and close the transaction before the end of this calendar year. While the agreements do not set out a formal process, LandellBasell has the potential to acquire the JV assets in full at some point in the future. Today's acquisition has much in common with the integrated cracker joint venture that we established and started up with Bora in China.
Just a few weeks ago when the 2 JVs 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 from project execution timing uncertainty and opportunity costs that are typically incurred during the multiyear construction of these facilities, And we are acquiring this world scale integrated cracker at a very attractive valuation. In addition, we're not placing a big bet by building a project that depends upon a single geographic market or feedstock position. Between our Bora JV and this transaction with Sasol, we expect profitable returns shortly after closing with half of the capacity in the world's fastest growing market and the other half benefiting from some of the world's lowest feedstock costs. Turn to Slide 4. Let's specifically talk about the joint venture with Sasol in Louisiana.
The Lake Charles Joint Venture's integrated polyethylene business is at the core of the largest value chain in LyondellBasell's portfolio and will serve to increase the extent of our global production arising from advantaged, low cost North American feedstock. We believe that our And both partners believe the value of these assets will be enhanced by leveraging LyondellBasell's global operational experience and know how which will encompass over 17,000,000 tons of annual olefin capacity and 16,000,000 tons of polyolefin capacity upon the completion of this transaction. Our diligence confirmed the assets are very well built with the scale, technologies and feedstock advantage required to succeed in the global market. Partners have identified quick, low cost opportunities to debottleneck capacity that will enable the joint venture to capture synergies In addition, we believe that LyondellBasell's knowledge and experience in operating similar facilities provides opportunities to increase utilization by improving operational uptime. The joint venture's low density and linear low density polyethylene capacity complements LyondellBasell's existing North American capacity, which is predominantly high density polyethylene.
And while it might be unlikely that integrated polyethylene margins will soon return to the high levels we saw in 2015, We believe the joint venture is positions where LyondellBasell's skills and competencies could add value through our ownership. Turning to Slide 6, allow me to highlight some of the ways that and the Lake Charles employees are well aligned with LyondellBasell's fundamental focus on safety. That cascades benefit through reliable operations, reduced waste from implementing the best practices identified by our benchmarking and continuous improvement initiatives across a global system of 13 ethylene crackers, and dozens of polyethylene production lines. And LyondellBasell's global innovation capabilities will serve to further enhance value creation from these assets. Finally, please turn to Slide 7 and allow me to describe how this transaction is consistent with our commitment to disciplined capital allocation and our investment grade credit rating.
We've been clear that LyondellBasell has no intention to begin building a new integrated ethylene cracker in North America for the foreseeable future. Instead, we are making deep value investments in recently built existing capacity without the risks that frequently hamper returns from capital intensive projects. Our investments will provide returns within the 1st months instead of a distant future. The joint venture is expected to provide an unlevered internal rate of return in the mid teens for LandelBasell. And it is expected to be accretive to both earnings per share and cash flow within 1 year, exceeding our value minded thresholds for investment.
We expect to fund the acquisition in the we should rapidly improve our credit metrics to ranges that are consistent with a solid investment grade rating. Let's turn to Slide 8 and conclude today's presentation with a few key takeaways. LyondellBasell is making a deep value investment in leading assets during trough conditions where we believe there is significant opportunity for cyclical upside. We are leveraging our advantaged positions to maximize joint venture returns for both partners. We remain steadfast to our disciplined capital allocation principles with a dual focus Today's joint venture announcement represents another measured approach to extend 1 of LyondellBasell's core businesses and increase free cash flow.
Over the next three years, we look forward This additional EBITDA will come from the following. Over $200,000,000 in annual synergies from the A. Schulman acquisition $180,000,000 to $200,000,000 in annual estimated EBITDA from our capacity to at our new Hyperzone polyethylene plant based on historical margins. Initial returns from our Chinese joint ventures with Bora and Sinotech as well as today's joint venture in Louisiana with Sasol. Lastly, 400,000,000 to 450,000,000 in annual estimated EBITDA in 2023 from the capacity at our new POTBA plant, again, based on historical margins.
The end result is over $1,000,000,000 of incremental EBITDA from We expect substantial additional EBITDA improvement as margins normalize and volumes recover from the depths of the pandemic across our existing asset footprint, particularly in value chains that serve transportation fuels and automotive manufacturing. When combined with our aggressive management of working capital, incremental cost saving initiatives and reductions in CapEx, we believe LyondellBasell is well positioned to increase free cash flow. And we will continue our highly disciplined approach to capital deployment. This additional free cash flow will initially be directed towards deleveraging our balance sheet followed by strengthening capital returns for our shareholders. With that, we'd be
you. Our first question comes from Jeff Zekauskas with JP Morgan. Your line is open.
Thanks very much. Two questions. The first is, what's the level of leverage of the joint venture at its inception And what might be the likely leverage of leverage ratio of the joint venture over time?
So, Jeff, this is, equity finance. So there's no joint venture level debt. We will take on debt at our level at the LyondellBasell corporate level.
Okay. And in with the 300 kilotons of excess ethylene beyond the polyethylene that you'll pick up, Are there any constraints on the sale of that ethylene for you? That is do you have to sell it at a cost plus basis back to Sasol or some other entity? What are you unconstrained?
Well, we presume that, as as what occurs with other merchant sales, there's probably a combination of market based and cost based sort of sales I think, Jeff, where we potentially can create more value with those pounds is that, we have a very strong network in terms of pipelines, on both on the Texas side, if you will, of the Gulf Coast. And now with the network, and some connectivity that we'll get through this transaction, we'll be able to sell ethylene in both Louisiana and in Texas directly.
But just to be clear, Jeff, it's, each partner is on encumbered. It's essentially a totally JV route than it, something more complicated.
Our next question comes from Steve Burns with Bank of America. Your line is open.
Yes, thank you. It's our understanding that Sasol had planned to push at least 2 thirds of the polyethylene from this complex into the U. S. Market. What will what will you guys do with that net increase in production?
And is it possible you would export more out of the Houston Ship Channel and move some of this more into the U. S, but But basically, what's the net effect? Is it likely to reduce the risk of putting pressure on the premium price in the U. S?
Yes. So the plan is for LyondellBasell to market 100% of the product of the polyethylene and ldpe and LVP. And our plan, Steve, is to, plug that into our global network. And the idea is to maximize value, wherever wherever we can, we can do that. So, and as you know, we sell directly in many parts of Asia, we don't have all capacity in Europe.
So we could potentially supplement through sales through Europe. So I think that's one of the other values we bring to this venture is a global marketing network that sells directly in most of the major markets.
Our next question comes from Arun Viswanathan with RBC Capital Markets. Your line is open.
Great, thanks. Good morning, guys. Congratulations on the transaction. I guess, I did want to dig a little deeper on the strategic rationale here. I guess, our perception was, that Lyondell was potentially moving a little bit more into LyondellBasell into harvest mode.
And yet you have made some significant investments here, with the Bora JV and this one with Sasol. And I guess we do understand that effectively you're making lower risk investments here later in the production process. And so I guess in effectively adding about a cracker's worth of production. So I guess, just a great value for you? Or, again, maybe that $2,000,000,000 could have been redirected towards capital return or deleveraging a little bit sooner.
How did you kind of get to this position that this was absolutely essential at this point? Thanks.
Yes, thank you Arun. That's a good question. So, some of the things I'm going to repeat back to you, which you said, which is that certainly lower risk As I mentioned in my prepared remarks, both projects essentially were running at the time we put the equity in. Certainly, Sasol, the JV is running. And Borrow was ramping up at the time.
I think really what this does is it strengthens our core business. We're able to be opportunistic and strengthen our core business the cyclical upside that I highlighted, we think is a big driver in terms of why do this as opposed to delever or do buybacks. We think it's just a unique opportunity to acquire world scale new assets in both JVs frankly. And in the case of the Bora JV, we remember that's a 1 third equity, 2 third debt. So, so our capital or equity required there was a lot less.
The other thing I really like about both of these ventures is that In one case, we're leveraging low cost feedstocks and the other we're producing in the fastest growing market in the world. So it's kind of a we're not just betting on one thing here. We're doing both. And I think in the case of our Bora investment, it'll really give us far better insights into the market in China. And remember, for that project, all of the production will stay in China.
So our intention is not to re export any of that. And lastly, we think all of this kind of positions us for higher returns, especially when you think through new build cost versus, what we paid, in both, frankly, and then the cyclical upside, that still lies ahead. So we really saw these as unique opportunities, strengthen the core right time in the cycle, low risk. Thank you.
And sorry, if I could just ask one quick follow-up some of those numbers you gave, I guess when you say historical margins, are you which period are you referring to? I guess, Is that like the 'fourteen through 'nineteen period or maybe a little bit longer or how should we think about how to frame the benefit from this?
I wouldn't go all the way back to 2014 because we don't think oil prices are going to get back to those kind of levels. Think about the last 3 years. That's really how we think about historical margins.
Thank you. Our next question comes from Kevin McCarthy with Vertical Research Partners.
Yes, good morning and congratulations, Bob. Can you tell us about the option that you have to acquire the balance of the 50 percent ownership to achieve full ownership in these assets over time?
Well, so, Kevin, it's not, a formulaically kind of hardwired into the agreements, but, but the partners have an understanding that, over a period of time, you know, Sasol have indicated that they would they would focus on other derivatives at the site and, and doing the 100% of the marketing and operating the site positions us to take that next step at the right time when both partners are ready. So I think that's that's probably the firmest indication of the next step is that, essentially we're operating and marketing.
I see. And then secondly, can you talk a little bit about the specific sources of the $50,000,000 in synergies that you envision and how that might flow through over time?
Yes, Kevin, a lot of that is just increasing the uptime and really kind of running closer to nameplate capacity through our experience with running multiple units around the world, whether it's crackers or polyethylene assets. And then secondly, thinking through value on the marketing side by marketing directly through our network globally.
I see. Thank you very much. Thank you.
To one question. Our next question comes from David Begleiter with Deutsche Bank.
Thank you. Good morning and congrats on the deal, Bob.
Good morning, David.
Bob, how much new debt do you expect to issue in conjunction with this transaction?
Hey, it's Michael. So I mean, just a couple of things I'd point out. So, we ended the 2nd quarter with liquidity of almost 6,000,000,000 And then we ended the 2nd quarter with cash of just over $3,000,000,000. It would be our intention in the not so distant future. To finance this asset, probably a little bit of cash, and the majority of it being debt.
And then we probably take that opportunity to do some refinancing of some of our near term maturities as well.
Good. And Michael, how will this JVP can afford, consolidated or equity or equity?
Yes. So it's going to be accounted for essentially very similar to our PO JV in Europe. It won't be consolidated. So, equity accounting, but we will be able to record our proportional share, both revenue and EBITDA.
Thank you very much.
Thank you. Our next question comes from Vincent Andrews with Morgan Stanley.
Good morning and thank you for the question. This is Angel Castillo on for Vincent. Just a quick question, a follow-up on your investments, are there any other assets out there that you're considering or in terms of potential future acquisitions that would continue to expand on this strategy of kind of acquiring things that are further down the construction path? Or should we assume that you're kind of done with M and A or invest at this point?
Angel, we don't really see any other assets, that are like this that have the kind of strategic rationale that I laid out. So our focus now is going to be to get to closing as quickly as possible, get the rates to where we want to get a solid marketing plan in place. And, and as I mentioned, we're coming into a period as a company or we're going to harvest the value from these investments we've been making over the past 5 years. So, so I'm looking forward to riding kind of the cyclical upside here with more assets than we had going into the pandemic. So, and the cash flow, again, and our aim is to de lever 1st and foremost and get to a solid investment grade rating.
And we think there's still going to be opportunity to do buyback couple of years down the road.
Understood. And then maybe just one quick follow-up on, on this asset, what's the cost basis of assets that are going to be included in the JV as opposed to the full projects cost?
No, it would be our acquisition cost essentially is what we bring across. So, I think if you're asking me if there's some kind of write down associated with our acquisition, that would not be on our side.
Got it. Thank you.
All right. Thanks.
Thank you. Our next question comes from P. J. Juvekar with Citi. Your line is open.
I have a follow-up question on a previous question. And then I have another question. Just quickly on this, your option to acquire the entire joint venture. Is there a trigger for that? Is that your option or is that, Sasol's option?
Well, as I mentioned earlier, it's not hardwired, but it's sort of the intent of the parties. And I think what sets us up for that is that we're essentially the marketer and the operator. So it's something it's a principle that we've aligned around between the two partners.
Okay. And your deal, this deal may be opportunistic, but how should we think about, line still staying upstream in commodities versus going downstream into specialties, excuse me, because based on your Schulman acquisition. Some people thought that you might be going downstream. So can you just give us your thoughts about how do you think about that?
Sure. So, you know, I think of Schulman as an extension of the value chain that we participate in today. And you'll remember that when we acquired Ace Schulman, we essentially doubled the existing compounding business. At the time, we had about $200,000,000 of EBITDA in our base business. We acquired $200,000,000 of compounding EBITDA from Schulman.
And then we put in about $175,000,000 on Catalloy and Polybteen-one to comprise what we call today the APS segment. So I don't, P. J, I don't think about that as a specialty versus commodity. I think about it as value chain. And I think about sort of differentiated commodity or differentiation and participation closer to end uses with, our compounding business.
But I don't look for us to, to do a lot in real specialties. That's really not our business. Will stay within the value chains where we participate today. And going as far downstream is compounding, makes a ton of sense for us because we make the base resins in polyethylene, polypropylene, we have the technology, we have the olefins, we make the catalyst for the polyolefins. So if you think about integration, it makes a lot of sense in our ability, in the case of compounding, to be able to bring innovative solutions Thank you.
Thank you. Our next question comes from Mike Sison with Wells Fargo. Your line is open.
Hey, Bob. I
hope you're happy. The browns have a winning record,
but
This is a it's a big investment during uncertain times. I'm just curious is there and you must have improved confidence, I guess, that the industry can get back to better profitability over the next couple of years. So anything in particular you're seeing near term that gives you confidence that, we can get back to those margins over time?
Sure. So as I mentioned in one of the previous questions, I, I'm not implying that we get back to 2014 kind of margins. But I think getting to the past 3 years, 2017, 2018, 2019 over the next 3 to 5 years very doable. So, 1st of all, if you look at how polyethylene demand has developed here during the pandemic, We actually see year over year demand growth globally. We see year over year demand growth in U S.
We see year over year demand growth back to almost normal in China. So demand growth in China year to date through August has grown something like 4% to 5%. U. S. Is 1.5 percent kind of range year over year growth.
So, almost 2. So, you know, and also on the supply side, Mike, we're starting to see delays, cancellations partly because of visibility on oil price partly because of financial wear with all of those who might want to build. So I've been through a lot of cycles over the 30 some year, 30 plus years that I've been in the business And this is kind of how cycles work. And I think what's key is that, that you pay or have valuations at the bottom of the cycle that reflect bottom of the cycle. And I think, you know, in a way we've been able to achieve that and really, you know, really high quality assets, that we're going to participate in here.
Great partner. We're looking forward to working with Sasol. And I think together, both Sasol and ourselves can can, ride the cyclical upside with the world scale assets.
Great. Thank you.
Thank you.
Our next question comes from Jonas Oxgaard with Bernstein. Your line is open.
Good morning.
Hey, good morning Jonas. I have 45 questions, but I might settle for the top 2 or so That was wondering, you can ask me one now and the other 44 days later
I blame the pandemic.
So I was wondering, you
already quite long in ethylene. And with this deal, you're getting longer still. Does this change your strategic thinking about your ethylene position and should we expect some derivative units being built soon?
Yes. So first of all, Jonas, after the start of our Hyperzone plant, we're about 500,000 tons long before this deal. So if you add another $300,000, we end up at $800,000, which gets us to under $2,000,000,000 roughly in terms of pounds of ethylene in the U. S. We've been kind of in the 1 to 2 range for a few years now.
And I don't think that's, that's too long. We have, we have a very extensive pipeline network many longstanding relationships, Sasol selling some of that ethylene today. So, so I think it's still modest. When you think about our overall portfolio and percent merchant position on a percent basis, it's still quite low. And your second question about would we consider building more derivative units, not now, but in time, perhaps, I think we need to see how the business develops, how operating rates develop over the next 3, 4 years.
But that could be a middle of the decade or second half of the decade sort of decision. But to be clear, I do not anticipate us doing anything on derivatives in the next 3 to 4 years. We will maintain this, this net long position and we think it's very manageable.
Thank you.
Thank you. Our next question comes from Matthew Blair with Tudor Pickering Holt. Your line is open.
So it was reported there
are other parties interested and it looks like you got a pretty good deal
to us. Does this just simply come down to who had the highest bid or were there some non monetary considerations that helped you win out?
Well, I mean, it's always hard to gauge competitive dynamics. And I don't want to speculate on a call like this, but, but I think, you know, for us, what I hope our partners saw was, the value that we brought from an operating and marketing standpoint, ability to plug into a global network on marketing immediately from day 1 and the possibility for them to retain 50% and ride some of the market upside before they made a decision on the 2nd 50%. So, that's kind of what I hope and know, the remaining competitive dynamics difficult to really say.
Thank you.
Thank you.
Our next question comes from Asan Ahmed with Atlantic Global. Your line is open.
Good morning, Bob.
Good morning, Asan.
Bob, the question on valuation, if I take a look at greenfield replacement value of most of the projects that came on stream in the U. S. Over the last couple of years. On a sort of replacement value basis, you guys seem to be sort of purchasing these assets at a significant discount relative to those replacement values. So the question really is, does that just highlight, what a good deal you guys have gotten?
Or have you seen a meaningful sort of decline in new build sort of replacement values as sort of the E and C side of the business has slackened a bit with sort of the flurry of new builds slowing down.
Yes, Hassan, it's a great question. It is not an indication of lower costs on the new build side. I think it's more reflective of the cycle, and kind of where we are in the cycle today. So, as I mentioned in my earlier remarks on one of the other questions, is that, it's opportunistic But I do think that, that we're kind of at the bottom of the polyethylene cycle. And, as there have been many public announcements about delays that are or a cancellation of projects on the supply side and on the demand side, we're really seeing good growth even through a pandemic.
And with the recovery we might even see a year of above kind of average growth. We think that, the cycle should turn up here And I think it's just timing in terms of where we are in the cycle and the ability to, to get this done at this time.
Perfect. Thanks so much, Bob.
Thank
you. Our next question comes from Roger Spitz with Bank of America. Your line is open.
Hey, good morning. What do you estimate the replacement cost of the assets, including the associated infrastructure you're buying is on 100% ownership basis meaning you're in their part? I think, and I'm going to give you a very kind of round number here around range. My sense is that a really well executed project that is low cost, relatively speaking, with including the utilities and the infrastructure, likely close to $6,000,000,000 for a well executed project, 100% basis. So half of it would be about $3,000,000,000.
Perfect. Thank you very much.
Thank you. Our next question comes from Duffy Pfizer with Barclays. Your line is open.
Yes, good morning, Bob.
Good morning, Duffy.
Just a quick question to help us with the cash flow from this maybe like the first 3 years. So you talked about there won't be any interest because there's no debt. But what would the CapEx look like the 1st couple of years you want to make some tweaks that maybe would indicate more CapEx than normal for a new project? How much working capital will you need cash to put into? And then is there any reason to think that the taxes on this will be different than U.
S. Corporate taxes?
Yes, good question. So, first of all, in terms of CapEx, we do not intend to, do anything unusual in terms of CapEx It'll just be a little bit of maintenance capital, but as you know, I mean, these are new facilities. So should not require much CapEx at all. On interest expense, I mean, there will be some interest expense incrementally because we will borrow part, partly to fund but at today's rates, it's very low in terms of interest expense. There could be some tax benefits for next year that we're thinking through.
Don't have anything really firm to discuss today, but we'll work our way through that. Tuffy, my sense is that As I mentioned earlier, I think, well within the 1st year, we're going to see positive cash flow It's going to be by mid ye/ar, hopefully even sooner than that. There's not a lot of integration work to do here. It's single asset. We're we don't intend to have kind of incremental costs or be a little bit of kind of cost to achieve in synergies, but it's nothing like what we've talked about on Asia Omen, right, with which was a global company that we acquired.
This is a single asset deal in a way. The size turns out to be very similar in terms of value. So I expect that we'll be contributing cash this JV will be contributing cash flow for a good bit of 2021.
Perfect. And then, could you walk through maybe big picture, what are the contractual obligations with the other Sasol assets that sit on the site in your JV?
Yes, I mean, there will be we'll supply some utilities here and there, but for the most part, they're separate we were the cracker and the 2 polyethylene plants are really segregated because they were built new There will be some small utility type agreements back to, assess all of the site.
Perfect. Thank you guys.
Thank you.
Thank you. Our last question comes from John Roberts with UBS. Your line is open.
Good morning. This is Matt Skowronski on for John. You said you think of the historical margins as the ones we saw the last 3 years I imagine this deal shows your confidence in ethane advantage longer term, but what's your view of ethane in the near term and maybe over the next 3 years?
Yes, good question. And on ethane, I mean, I think you've seen some of the price volatility recently with, with some supply offline, we've seen ethane come back off again. You know, likely, I think we've kind of chopped around in the range where we've been recently. And as oil prices recover and a few rigs come back in the Permian, maybe it's not until the second half of next year, But I think given that sort of a modest outlook for supply, there's enough ethane to supply the crackers that are here on the Gulf Coast, and more and the exports that are already committed, if you will. And your broader question about feedstock advantage, the way I've kind of thought about this is that, it's unlikely as a feedstock advantage goes back to what it was back in 2014.
When we had oil to gas ratio of like 40.50. But I do think that we can see oil to gas ratio in the 20s very consistently That provides significant advantage for assets that are already on the ground, but it may make challenging new investments that looked a lot better when oil to gas was 40 to 50 instead of mid-20s. So to be clear, with a mid-20s kind of oil to gas, I feel quite good about the cash flow generation capability of the assets that we have on the ground, including now our JV with Sasol.
Very helpful. Thank you.
All right. Thank you. All right. So that was the last question. Well, thank you very much for joining us on such short notice and We look forward to engaging with all of you further in answering your questions.
Hope you have a great day and a great weekend. Thank you.
That concludes today's conference. Thank you for participating. You may disconnect at this time.