Hello, and welcome to the LyondellBasell teleconference. At the request of LyondellBasell, this conference is being recorded for instant replay purpose At that time, I'd now like to turn the conference over to Mr. David Kinney, Director of Investor Relations. Sir, you may begin.
Thank you, Sue. Hello and welcome to LyondellBasell's third quarter 2018 call. I'm joined today by Bob Bell, our Chief Executive Officer Thomas Abysher, Chief Financial. Before we begin, the business session, I would like to point out that the slide presentation accompanies today's call is available on our website at www.blindhelpsell.com. Would also like for you to note that statements made in this call relating to matters that are not historical facts are forward looking statements.
These forward looking statements are based upon assumptions of Managed which are believed to be reasonable at the time may and are subject to significant risks and uncertainties. Actual results could differ materially from those contemplated. For more detailed information about the factors that could cause our actual results to differ, please refer to the cautionary statements in the presentation slides and our financial which are available at www.londelpatel.com/investorrelations. Reconciliations of non GAAP financial measures to GAAP financial measures together with any other applicable disclosures, including the earnings we're currently available on our website, www.gov.com. Finally, I would like to point out that a recording of this call will be available by telephone beginning at 11:30 am Eastern Time today, until 9:59 pm Eastern Time on December 21st, by calling 888-566-0748 in the United States and 203 3693051 outside the United States.
Passcode for both numbers is 1346. During today's call, we will focus on 3rd quarter results current environment, our near term outlook, provide an update on our growth initiatives. That being said, I would now like to turn the call over to Bob
All right. Thank you, Dave. Good day to all of you for participating around the world and thank you for joining our 3rd quarter earnings call. Let's begin with Slide 3 and review the highlights. During the third quarter, our company overcame headwind from rising feedstock costs, global trade rebalancing and new industry capacity.
We ran our assets well and improved on 2017 profitability in 4 of our six segments. Year to date, LyondellBasell's EBITDA is nearly $250,000,000 higher than 2017. 3rd quarter diluted earnings were $2.85 per share. Our results include $53,000,000 of pretax charges associated with the acquisition of A. Schulman on August 21st, that reduced earnings by $0.11 per share.
After adjusting for transaction and integration expenses from A. Schulman, and gains from an asset sale in the third quarter of 2017, our quarterly results improved by $0.55 per share relative to the prior year. During the third quarter, LyondellBasell's value driven growth strategy achieved several milestones We formed the world's largest compounding company with the acquisition of A. Schulman. We launched the Advanced Polymer Solutions business.
Segment to provide focus and visibility for this new global platform. And in Houston, we began construction of the world's largest propylene oxide and tertiary butyl alcohol plan. We continue to evaluate a potential transaction with Braskem. At the same time, our strong cash flows enabled us to return over $700,000,000 to shareholders during the quarter in the form of dividends and share repurchases. In short, the employees of LyondellBasell are delivering on our promise of value driven growth through a balanced strategy of operational excellence, profitable organic expansion, accretive M and A and generous shareholder return.
Please turn to Slide 4, where we report our safety performance for the third quarter with combined A Schulman results since August 21st. The drive for excellence at LyondellBasell begins with a commitment to safety and environmental performance based on the idea that our assets, the communities in which we operate and our more than 17,000 employees should all finish the days in the same or better condition than they were at the start of the day. Our first communications with the A Schulman employee that joined LyondellBasell in August, consistently emphasized the importance of safe injury free operations. As we complete the fourth quarter, our team has recommitted to ourselves, our colleagues and our families to finish strong, in 2018 with another record year of improved safety performance. On Slide 5, We describe the businesses that form our new Advanced Polymer Solutions business segment.
APS is more than just the former A. Schulman business. This segment also includes MindellBasell's global polypropylene compounds business from our olefins and polyols and Europe, Asia and International segments. To double the volume and add more than twice the EBITDA to the legacy Schulman business. We also moved nearly £1,000,000,000 premium catalysts and PolybuteneONE Polymers from O And P VAI And O And P Americas to complete the new APS segment.
Combined with the adjusted EBITDA of approximately $200,000,000 reported by Aceulman, These businesses generated approximately $640,000,000 of EBITDA during 2017. Slide 6 provides a glimpse of how our new Advanced Polymer Solutions segment extends LyondellBasell's reach into growing and attractive markets. We have grouped the Advanced Polymer Solutions segment into 2 business lines. The Compounding And Solutions business combines LyondellBasell's existing polypropylene compounding business, which is largely focused on automotive application with A. Schulman's more diverse business lines.
Masterbatches are compounds that provide differentiated properties when combined with commodity plastics used in packaging, agriculture and durable goods application. Engineered composites and engineered polymers add value for more specialized high performance applications across a variety of industry. Specialty powders are largely used to mold toys, industrial tanks, and sporting goods such as kayak. Performance color provide powder, palletized and liquid color concentrates for the plastics industry. The Advanced Polymers business of APS consists of LyondellBasell's legacy Catalloy and polybutene 1 polymer product line.
These unique polymers can be used within APS for downstream compounding or it can be sold as raw materials to 3rd party customers. Cataloid is a line of differentiated propylene based polymers that add value in packaging applications and construction materials. Such as the white membranes that are capturing an increasing share of the commercial roofing market. Polybuteneone is a unique polymer that is used in both specialty piping and packaging applications. The Advanced Polymer Solutions segment provides both focus and visibility for LyondellBasell's new platform of profitable growth.
And now Thomas will provide more detail on our financial highlights for the second quarter.
Thank you, Bob, and good day to all of you. Please turn to Slide 7, which illustrates the development of our business tech for 2019. Improved performance, particularly from our intermediate and derivative segments, more than offset compressed margin in ONT, Europe, Asia and International. During the third quarter, we were pleased to see continued strength in ethylene and polyethylene chain margins in North America where robust demand offset headwind from higher ethane costs to support quarter over quarter earnings growth for our Olefins And Polyolefins Americas segment. Our refinery run well during the third quarter.
In the coming days, we will complete our last major plant maintenance event in advance of 2019 when increased demand of low sulfur marine fuel, specified by the international maritime organization is predicted to bolster margins for LyondellBasell's refineries. We were pleased to see that last week's IMO meetings in London reaffirmed the implementation plan for these new standards to reduce ship emission. LyondellBasell's technology business delivered another quarter outstanding results driven by increased licensing revenue. In the 1st 9 months of 2018, LyondellBasell announced new license agreements for 9 polyethylene and polypropylene plants around the world. During October, we announced another 7 new plant licenses, bringing the year to date total to 16 new license agreements the most ever in company history.
The net result is that LyondellBasell's trailing 12 month EBITDA is now approximately $7,400,000,000, more than $550,000,000 higher
than
per share relative to the same quarter last year. While nearly 1four of this improvement is due to higher earnings, nearly 70% of this earnings growth can be attributed to reduction in our effective tax rate due to U. S. Tax reform and other tax planning that decreased our rate by 9.2 percentage points to 17.2% in the 3rd quarter. After excluding our beneficial second quarter tax settlement, we expect the full year effective tax rate to be somewhat lower than our initial guidance of 21%.
On Slide 8, you can see that LyondellBasell's businesses continued to generate over $1,400,000,000 cash from operating activities during the third quarter. Approximately $1,800,000,000 of cash was invested in August to acquire a $5,000,000 of A. Schulman debt. Our strong balance sheet enabled us to continue investing in our organic growth projects while returning over $700,000,000 to shareholders in the form of dividends and share repurchase. The quarter closed with over $2,000,000,000 of cash and liquid investments on the balance sheet with approximately $3,300,000,000 of unused and available credit facilities, we closed the quarter with a total liquidity in excess of $5,000,000,000.
Now please turn to Slide 9. The chart on the left illustrates our cash flow performance over the trailing 12 months. Over this period, LyondellBasell generated nearly $5,700,000,000 of cash from operating activities. This powerful cash generation has enabled our free cash flow to raise at the same time that our capital investments are also increasing. Blindel Brazil's trailing 12 month free cash flow yield was 9.7% at the end of the 3rd quarter.
Capital expenditures during the third quarter were approximately $480,000,000. Investments should increase during the 4th quarter as we continue to construction of our Hyperzone PE facility and accelerate the activity for building our POTDA plant in Houston. Our 3.9 percent dividend yield remains in the top quartile of all S and P 500 companies. Similar to the second quarter, we repurchased more than 3,000,000 shares during the third quarter and finished September with 387,000,000 shares outstanding. With that, I will turn the call back to Bob.
Thank you.
Thank you, Thomas. Let's turn to Slide 10 and review our segment results. In our Olefins and Polyolefins America segment, 3rd quarter EBITDA was $704,000,000, a $33,000,000 increase over the 2nd quarter. Olefins results improved by approximately $120,000,000, compared to the second quarter of 2018 with the price of ethylene increasing approximately $0.04 per pound. Ethylene operating rates increased during the third quarter, averaging 93%.
With the completion of planned maintenance at 1 of our 4 channel view, one of our Channelview Texas crackers, in the second quarter, were able to partially offset the impact of increased feedstock costs. The third quarter, with propylene production from our Flex unit. Approximately 81% of our ethylene production was from ethane, and 93% came from NGL. Polyethylene results decreased approximately $80,000,000 during the third quarter, partially offsetting the improvement in olefin. Polyethylene spreads over ethylene decreased by approximately $6 per pound as the increase in ethylene price was coupled with a decline in polyethylene prices.
Polyethylene chain margins are stable in October as an increase in polyethylene price was offset by higher ethane comps. We may see some margin recovery with the higher polyethylene prices in the fourth quarter and the recent moderation in ethane. Please turn to Slide 11 to review the fundamentals behind the current ethane volatility. While most observers agree that ethane will be abundant in the long term, supply constraints in the recent weeks have caused prices to escalate from below $0.30 per gallon to over $0.60 per gallon. This past week, we've seen prices moderate to below $0.30 per gallon range.
This volatility is driven by an increase in ethane demand from new crackers and exports combined with constraints in midstream pipeline infectionation capacity. The chart on the right illustrates our view of the U. S. Gulf Coast ethane situation. The bars represent ethane demand from both Gulf Coast ethylene crackers and exports.
Many of the older ethylene crackers have the capability to optimize by switching feedstocks as market conditions change. For the years 2018 and beyond, we show this range of feedstock flexibility and the resulting impact to ethane demand. As you can see supply and demand balances can quickly change by switching feedstocks in response to input prices. And reduced demand from ethylene crackers is rapidly reflected in lower prices for ethane. Today, many crackers continue to maximize ethane feed but we will likely see increased utilization of feedstock flexibility as the industry navigate through this period of volatility.
We believe our view of Port purity ethane supply represented by the blue line is conservative and only considers fractionation projects that are underway. In addition to these projects, there is potential for new pipelines, expansions for additional fractionation capacity that can further improve the ethane balances beyond new midstream investments and the increased utilization of alternative feedstocks, any increase in cracker maintenance downtime and the moderation of ethylene capacity additions will provide further relief over the coming quarters. Most supply and demand forecasts indicate that current tightness in ethane should resolve by 2020. In summary, we believe this volatility is temporary and a result of misaligned investment cycles in Petrochemical and midstream industry. Strong underlying fundamentals are supportive and there is attractive earnings growth potential as ethane supply improves while demand growth moderates.
On Slide 12, I would like to size the potential impact of higher ethane prices and highlight how LyondellBasell's feedstock flexibility and diverse business portfolio can reduce this impact. LyondellBasell's fleet of U. S. Gulf Coast crackers have very high fleet feedstock flexibility. The chart on the right shows you the range of feedstocks we can operate.
As you can see, we're able to use as little as 25% ethane and as much as 65% naphtha in our feed. Our olefins optimization team is continuously seeking to maximize profitability across our crackers. Through optimization of feeds and products. We can rebalance NGL feeds within hours and switch to liquids within days to respond to changing economic conditions. Additionally, our 2 Midwest crackers have access to low priced Conway ethane propane mixed feeds.
During October, ethane supplied to our Midwest crackers was priced at approximately $0.13 per gallon. These crackers are not subject to the higher Gulf Coast ethane prices and continue to benefit from very strong chain margins. If you consider our last 12 months, USethylene production and subtract our low cost Midwest volumes and Gulf Coast merchant ethylene sales that pass through the ethane increase costs. You're left with about £5,500,000,000 of annual ethylene volume that could be impacted by higher ethane prices. For this volume a $0.20 per gallon change in ethane price will impact annual earnings by about $380,000,000.
This estimate assumes we continue to crack around 80% ethane and does not take into account benefits from feedstock flexibility. Furthermore, we are assuming in this analysis that prices for ethylene derivative products such as polyethylene, styrene, ethylene, oxide, and VAM do not change. A price increase of $0.03 per pound for both polyethylene and styrene could reduce the impact by $290,000,000. This is another example of how LyondellBasell's diverse portfolio of businesses and assets helps to stabilize earnings during challenging market conditions and produced the resilient results that we delivered during the third quarter. Now please turn to Slide 13 to review the performance of our olefins and polyolefins Europe, Asia and International segment.
During the third quarter, EBITDA was $262,000,000, $93,000,000 lower than the 2nd quarter. Olefins results declined approximately $55,000,000 Volume decreased primarily due to planned maintenance, which began in September at our cracker in vessel in Germany, impacting the quarter by approximately $15,000,000. This maintenance will be completed in the 4th quarter and is expected to impact results by $25,000,000 in Q4. Olefin margins also declined in 3rd quarter as increases in feedstock costs outpaced and increase in at Olefin prices. Combined polyolefin results decreased approximately $45,000,000.
Polyolefin demand followed typical seasonal declines during the third quarter and polypropylene margins have decreased following increases in the price of propylene. Joint venture equity income increased by $15,000,000. The chart on the lower left indicates that European polyethylene chain margins in the third quarter of 2018 were approximately $0.21 per pound. A similar level to the average seen 5 years ago in the region for the full year 2013. European polypropylene margins have also declined, reaching approximately $0.02 per pound in the third quarter of 2018.
Minimal industry investment has resulted in a slight improvement in polypropylene margins compared to the average for 2013. Annualizing the third quarter 2018 profitability from our OMP GAI segment produces a much higher result when we realized than what we realized in 2013. After adjusting for historical profitability from businesses that were moved to our new APS segment OMP EAI is now generating EBITDA at an annual rate that is more than $500,000,000 higher than 5 years ago. Our restructuring efforts for the segment in the early years of this decade and an improved market for polypropylene are producing sustainable earnings improvements for LyondellBasell. During October, European markets for polymers remained pressured with sluggish demand growth and ample supply.
Market pressure is expected to continue during the fourth quarter with typically lower seasonal demand. Low water levels on the Rhine are also causing disruptions for petrochemical transportation and production in Germany that could counter these trends and lead to tighter market conditions. On Slide 14, let's take a look at our Intermediates And Derivatives segment. 3rd quarter EBITDA was $504,000,000, a reduction of $138,000,000 from the prior quarter. While the high number of red arrows in the chart on the upper right clearly indicates a decline, you might recall that we are following a record setting second quarter.
We continue to be very pleased with the margins and business performance of the segment. Planned maintenance on one of our propylene oxide plants in Bayport, Texas impacted 3rd quarter results by approximately $20,000,000. Maintenance will be completed in November and is expected to impact 4th quarter results by approximately $25,000,000. PO and derivatives results declined approximately $50,000,000. Volumes were lower due to planned and unplanned downtime, and we also experienced a seasonal decline in margins.
Intermediate chemicals results fell by approximately $35,000,000, compared to the second quarter, primarily due to a $0.04 per pound decrease in styrene margins. Lower seasonal margins in the 3rd quarter drove a decline in Oxyfuels and related products of $55,000,000. During October, Oxyfuels margins declined with weaker gasoline demand. Margins for styrene and methanol are also expected to moderate as new methanol capacity fully enters the market, and styrene capacity returns, following industry maintenance downtime. Turning to Slide 15, let's review the results of our Advanced Polymer Solutions segment.
As I mentioned, we complete we completed the acquisition of A. Schulman on August 21st, and the results from the new product lines are included from that point forward. Thus, comparisons of underlying business drivers for the second quarter are related to the LyondellBasell legacy product lines of polypropylene compounds, Catalloy and polybutene1. EBITDA decreased by $51,000,000 compared to the second quarter. Transaction and integration costs related to the acquisition or approximately $49,000,000 during the third quarter of 2018.
Results for both compounding and solutions and Advanced Polymers were relatively unchanged versus the 2nd quarter. The addition of new product lines from the acquisition offset seasonal volume and margin declines for polypropylene compounds. Our integration of A. Schulman is going very well. Of the $49,000,000 of costs assigned to the segment during the quarter, approximately 60% were related to the integration and 40% to the transaction.
As of the end of the third quarter, we have focused on reducing redundancies to capture cost synergies at an annual rate of $32,000,000. We are well on in cost based synergies within 2 years. The chart on the lower right provides a good example of one of the attractive and growing markets found in our Advanced Polymer Solutions segment. As I mentioned earlier, Catalloy is a line of differentiated propylene based polymers that can be used in packaging, compounding, or in construction materials, such as the white commercial roofing membranes that we see in a photograph on Slide 6. Polyolefin roofing membranes are becoming the preferred solution for commercial roofing and growing at an annual rate of 7 The unique and desirable properties of LandellBasell's catalyzed polymers provides an advantage for commercial roofing applications and our sales volumes in this market have outpaced the industry and have grown We look forward to sharing more examples of the products and customer solutions that are driving growth for our new Advanced Polymer Solutions segment in future calls.
Now let's move to Slide 16 for a discussion of our refining segment. 3rd quarter EBITDA was $84,000,000, a $20,000,000 decline from the 2nd quarter. Crude throughput at the refinery average 232,000 barrels per day with planned maintenance beginning in September that impacted EBITDA approximately $20,000,000. This maintenance will be completed in November and is expected to impact Fourth quarter results by $45,000,000. While the Maya two-1-1 crack spread decreased by more than $4 per barrel when compared to the second quarter, our refinery benefited from margin improvements driven by favorable Canadian crude oil prices relative to the Maya price.
During October, we continued the safe execution of our planned maintenance at the refinery. Margins are moderating with spread, driven by length in gasoline inventories as the summer driving season ends. On Slide 17, would like to review the drivers These are opportunities that we focused on during the third quarter and will continue to advance during the coming months. The completion of the Ace Schulman acquisition is improving our vertical integration and expanding our reach into growing and attractive markets. Our integration management office is rapidly driving integration and capturing synergies.
The startup of our Hyperzone polyethylene capacity in 2019 will meet the rising demand and favorable markets for high density polyethylene to improve our capture of integrated chain margins. Our intermediates and Derivatives team has diligently driven structural improvements within their business, which continues to benefit from favorable market conditions. Our team at the Houston Refinery has delivered 6 consecutive quarters of highly reliable operations with improved margins. And going forward, our refinery is well positioned to benefit from new regulations for marine fuels during the latter half of next year. Turning to Slide 18, let me summarize this quarter's highlights.
During the third quarter, our company delivered year over year and year to date EBITDA improvements and 4 of our business segments. We overcame the challenges of new industry capacity and rising feedstock costs, to increase third quarter profitability for our O And P Americas segment. Over the past 12 months, Our company generated approximately $5,700,000,000 of cash from operating activities that contributed to funding for our increased capital investment, paying a top quartile dividend, completing over $800,000,000 in share repurchases and completing the acquisition of Hey Schulman. We have built the world's largest plastics compounding business We're progressing on integration that will capture significant synergies in this new segment. We've advanced on the construction of our new polyethylene in POTBA capacity, and we're continuing to evaluate the Braskem opportunity.
Our global portfolio of businesses provides confidence in our ability to remain resilient, flexible and advantaged in this environment. Going forward, We look forward to the safe and timely completion of our fourth quarter planned maintenance that will allow us to capture this advantage during 2019 and beyond. With that said,
The first question is from Robert Koort with Goldman Sachs. You may go ahead.
Thanks very much. Good morning.
Good morning.
Well, the ethane flexibility slide you showed us was quite interesting. And you mentioned you've got pretty quick ability to switch. So I'm curious in light of when ethane got up to $0.60. Can you give us your spread across those different input molecules, what you use ethane, the propane butanes and the naphtha?
Well, so we, as I mentioned in my prepared remarks, we can change very quickly. And in some cases, we were able to switch the liquids very quickly channel view and corpus Christie are our most flexible crackers, and that's where we tend to focus on pushing more liquids. So, I don't have the exact numbers with me at that point in time, what we did, but we did start
reflexibility you referred back to 10 years ago. It seemed like there's been a wave of conversions or upgrading to ethane feedstock ability. Are you pretty confident that most of those, and I guess speaking from your own assets that you can go back to where you were 10 years ago in terms of liquids processing capability?
Yes. In our case, certainly we've accounted for, our ability to process the co products from heavier feeds. And we've retained all that capability Again, primarily a channel view. So, and we did our best estimate of the rest of the industry and took into account what capacity was converted versus what account which part of the capacity was made more flexible.
Thank you. The next question is from Steve Byrne with Bank of America.
Bob, I was wondering if you have the ability to crack Y grade, if there's a surplus of it with not enough fractionation capacity, can you crack Y grade or do you have downstream limitations on recovering that methane?
Yes. So Steve, we do have capability of cracking Y grade. And in fact, we're working on increasing that capability and we're able to, make some relatively low cost investments and increase our flexibility to crashly grade and we're working on that right now.
Interesting. And then a quick one on, on all the media attention on recycled thick and so forth. Do you see that as, is this kind of peripheral noise or are you hearing it from your plastics customers where they have a meaningful interest in increasing the the blend of recycled plastic into their product that could create a pull?
Well, I think Steve, the area of plastic waste and so is continuing to get more interest, and rightfully so. But I think it'll take time for the infrastructure to develop and the capability to develop to increase recycling. As you know, we we have a joint venture with Suez in the Netherlands, what we call QCP, and that's very much that. It's a platform that eventually we will grow to have more recycled content. But if you step back and think about plastics demand growth, demand growth for plastics is still growing at a multiple of GDP.
So to the extent that there's more recycled content, I still think the growth story is in place for plastics. Thank you. Thank you.
The next question is from Jeff Zekauskas with JP Morgan.
Ethane has come down quite a lot, Bob, recently. Do you think that that has to do with different crackers being turned around? Or do you think that the industry is already switching over to other feedstocks. And so what that data set lessened demand for ethane and brought the price down, how do you diagnose the price change?
Yes. Good morning, Jeff. Slide 11, in our presentation, really shows how balanced the market is on ethane. And when we reach this sort of balance between supply and demand, small shifts in supply or demand, tend to make the price dynamic. And I think what's happened in the recent weeks is that, there's been some planned maintenance on on some fairly large ethane crackers.
There's also been some switching to other feedstocks. So I expect that for the next few quarters, we're going to see this sort of dynamic pricing on ethane when some of these crackers return, you could see ethane price rise again. And that's why we wanted to size the impact to LyondellBasell on, on, you know, a large change in ethane, if it were to be sustained an entire year. And what you see is given our portfolio of crackers, and given our 2 Midwest crackers, the impact to us is not as great as one might think before flexibility based mitigation. So, if we just continue to crack a lot of ethane, we've sized the impact on page 12, If we flex to other feeds, then the impact would be less.
So I think we're going to see, ebbs and flows through next year, we'll have turnaround season again in the spring. So likely, that'll reduce ethane demand. And, and, in the meantime, more fractionation capacity is coming in 2019, more pipeline capacity is being built. So we're going to go through a period of sort of timing of when peak stock is built out and when new consumptive capacity comes on.
So given that there seems to be some switching to probably NASPA. When you think about propylene values, for next year. Do you think propylene will be a little bit looser in 2019 than it was in 2018 given feedstock switches and other considerations?
Possibly, but it'll be episodic, I think, right, because as feet's legs change. It won't be consistently well supplied. So I think ultimately, Jeff, what changes the propylene situation as new PDHs are built. Those are sort of structural increases in supply. And, and to your point about NASA, there's actually also switching to propane and butane.
And there are more LPGs coming from West Texas down the Y grade line. So there's a lot of propane and butane on the Gulf Coast.
Thank you. And then next question is from Frank Mitsch with Fermium Research.
Thank you, and good morning, gentlemen. Bob, I'm guessing a little less stressful this third quarter than where we were a year ago with Harvey. I wanted to ask about Braskem. When do you think you're going to have a decision there? And obviously, I'm wondering if that might also play a role in your pace of buybacks here in Q4 with the market turmoil.
Can you add a little color as to what investors might be able to expect in terms of M and A versus buyback and kind of the timing on that?
Frank, we're still, we're continuing to work, diligently and thoughtfully through our analysis around the Braskem transaction. There's really no timing to report at this point. We're continuing our work and thinking around shareholder value creation And so, as we consider a buybacks, to me, those are sort of independent decisions today, and whatever it is we decide in terms of our, allocation of capital, we're aiming to create shareholder value. So Stay tuned.
All right, great. So the decisions are kind of independent at this point. Fair enough. And then I also I was struck by the title in discussion on slide 17, tangible earnings growth over the next 12 months. Obviously, there's some debate out there as to what happens on margins on the olefin polyolefin side of things.
Should we be interpreting that, that statement to say that you're anticipating EBITDA over the next 12 months to be higher that EBITDA over the previous 12 months?
Well, what we're trying to indicate there is just sources of earnings growth. We haven't netted against, against polyolefin's market conditions. But I think clearly our IND business has had a step up in earnings this year, we, at the last earnings call, talked about a 15% or so increase that's sort of structural in our business in IND compared to our prior run rate. Refineries running better we think second half of next year. There will be some, some fuel switching as IMO starts to take hold and, and people get ready for March.
Of 2020. And our new polyethylene plant in the second half of next year will consume ethylene today that essentially is selling near its costs. So those are 3, we think meaningful sources of earnings growth next year.
Alright, very helpful. Thank you.
Thank you. The next question is from Alex Yefremov with Nomura Instinet. You may go ahead.
Thank you. Good morning, everyone. Bob, European polypropylene margins declined meaningfully this year and in U. Polypropylene margins held out pretty well. What any of you explains this difference and where do these regions are likely to convert sure, is Europe likely to improve or are you as declined?
Well, I think Alex globally, polypropylene is still very constructive. There's operating rates are still relatively high. I think in Europe, as we've had in years past, typically in the summer season, we see seasonality that the vacation periods are longer and often, converters shut down for periods of time demand growth is a little bit slower this year in Europe. So, we think that partly also contributes But if I step back and look at the global situation in polypropylene, I think polypropylene still looks to us to be, very balanced tight for the coming year or so. And so we would expect that, that polypropylene should hold up pretty well.
And as a follow-up on polypropylene, you've indicated that you're looking some polypropylene capacity projects in the U. S. And Europe and also PDH. Have you moved the sort of the likelihood of those projects higher or lower over the last 6 to 9 months or so?
Well, we're still working through our early engineering estimates, we're thinking through, on the Gulf Coast locations, which location would be better given propylene supply and And, we've had a few other things going on in the company. So we're still working through it, and we think that polypropylene is an area where we'd like continue to invest.
The next question is from P. J. Juvekar with Citi.
With ban on single use plastic bags in many large cities around the world, do you see that end market for polyethylene coming under pressure? In other words, historically, people have assumed a JV multiplier of 1.3 times or 1.4 times on polyethylene. You think that comes under pressure in the future?
Well, P. J, it's not a large part of the overall polyethylene market. And, so, you know, segment by segment, there are different drivers, but if I kind of step back and think about polyethylene demand growth, it's more about food packaging, polyethylene pipe and, and some other sort of durable goods where I think polyethylene demand will continue to be driven. With respect to the single use bags, some parts of the world have mandated thicker bags that can be reused. So ironically, If that were the case, then more polyethylene would be consumed, because the bags are thicker.
And I can tell you when I lived evidence, we, we used to buy those thicker bags and reuse them. So I don't know that demand, really sort of goes away for those bags. It just made it converts to, to, other forms of, packaging.
Okay. Thank you for that. And secondly, what are your views on the second way of these ethylene crackers in the U. S? In light of this volatility in ethane, do these companies say that this ethane situation would be resolved by the time these crackers come online.
So they'll continue to build, or do you think they get sort of get pushed out because of the situation?
Well, it's it's difficult for me to predict what others may do, but certainly for us, you know, we think through, long term supply. And, and, and, essentially, the returns that we can earn on, on new investment and, and, I've, you know, we want to see more of the fractionation capacity and more pipeline capacity investments actually come to fruition before we would consider further ethylene investment in the U. S. Now we're a bit uniquely placed because we've already invested in ethylene earlier in the decade and our focus for the coming 3, 4 years is really about now investing in derivatives to consume the ethylene that we've already expanded. But I would imagine that this volatility and impact on the global cost curve should be a part of the equation as new investments are contemplated.
Okay.
Thank you very much.
Thank you. The next question is from Vincent Andrews with Morgan Stanley. You may go ahead.
Thanks and good morning everyone. Just on U. S. Polyethylene, we saw a surprising sort of price decrease in August then we had the ethane spike in September and then got the price back. And now there are, I believe, for both October, which is almost over November.
So could you just sort of reconcile what's going on in the U. S. Market with that surprise increase and now the increases and maybe contrast it to some of the weakness we're seeing in the Asian PE markets? Thanks.
Well, I mean, it's, you know, it's difficult to predict here what how, how prices will evolve. But the increases and decreases, Vincent, to me, say that the market is, is relatively balanced. And, in, in, in the face of a significant cost push there was some increase that, that went through in the market. And I suspect that if, that, as we look at operating rates, globally, not a lot will change, even though there's new capacity coming, demand is growing as well. And we've, we've gone through this in prior earnings call slides where we've shown operating rates are still 90 plus percent And so, you know, I suspect that prices will be dynamic based on, on, on how costs develop as well.
Okay. And maybe just on that. This whole ethane thing seemed to come, we all seem to get blindsided by it, analysts and producers alike. As you guys did your sort of look back on what's happened over the past 3 months, what do you think the blind spot was for everyone that we didn't see that big spike coming?
Yes, it's a great question Vincent. You know, I think that the thing that many of us missed was the fact that ethane was being rejected in the Permian. In favor of more propane and butane moving on the wide grade capacity, line capacity that's already there. In the past, we were of the mind that, that the, the Y grade that comes from, from West Texas is very rich in ethane. And it's been wetter and wetter as time has gone on.
But when that ethane got rejected, the composition of the Y grade that came to Bellevue had less ethane. And I think that's what we didn't see. And you can imagine from a midstream gas processor perspective by rejecting some ethane, they can actually move more y grade in total, out of the gas pool. So I think that's the part that we probably missed.
Okay. Thanks very much guys.
Thank you.
Thank you. The next question is from John McNulty with BMO Capital Market.
This is Pavesh Laddaya for John. So one more on the ethane and on the U. S. Ethane advantage as such. So which we have enjoyed for quite quite many years for now.
So while you may see flex economics come into play, it's also more likely that that comes into play when ethane rises significantly here. So are we going to enter a period where the entire NGL barrel kind of like raises in value? And what does that do for the U. S. Ethane advantage as you look forward the next few years?
Yes, I think it's really the ethane advantage still looks very durable to us because it's based on a view that there's an abundance of ethane supply. So what we're seeing today is just a little bit of mismatch in timing of new cracker capacity for ethane consumption and new fractionation and pipeline that brings ethane to market. So, we view this very much as temporary and we think that the U. S. Will continue to enjoy some advantage, over the long term.
The thing that, that certainly our company is, is watching is the degree of that advantage and how that might result in investment returns for new capacity. So You know, in the early days in our company, we, we made a conscious choice to not convert ethane clacking. We retained our flexibility and we concentrated it around a couple of our crackers. And I think that'll serve us well as we manage through a dynamic market environment like we have today.
Okay. And then one on the Technologies segment, some impressive wins with new licenses there. And we are also seeing a very strong 1st 9 months compared to the previous year. Can you share what the breakup is between the catalyst and the licensing revenues then and how sticky are some of these earnings?
Yes. So, you know, first of all, as we licensed technology, the catalyst sales go with it. So, So the, the catalyst revenue and earnings tends to be more consistent and growing The licensing can be cyclical based on investment cycles. But at the moment, we're seeing quite a bit of interest in our technology, especially in, in Asia. And there's been some shift in the licensing landscape for polyolefins as well, which is, work to our benefit So, and ultimately, I think the investment that's occurring around the world speaks to the confidence in plastics demand growth at, greater than GDP levels.
So, you know, we're quite, we're quite optimistic about our technology segment, and we continue to invest in new catalyst capacity as we sell new licenses we anticipate that we'll be selling more catalysts over time as well.
Thank you. The next question is from Kevin McCarthy with Vertical Research Partners. You may go ahead.
Bob, as you survey your portfolio, are you witnessing a normal demand pattern from a seasonal perspective across your major product lines in October and to the extent you have visibility into November? Or are there areas either by product line or geography where destocking is more pronounced than you would normally expect from a seasonal point of view?
Yes, Kevin, good morning. You know, we're we, we see very typical demand here in the fall. Europe is slightly weaker, I would say, but otherwise, the rest of the world, we see demand being, being quite good. And we're running our assets extremely hard around the world.
And then just to follow-up on the technology licensing activity, obviously impressive results there. Do you think that you can go higher in 2019 from an investment cycle perspective in polypropylene plants, for example, or not?
No, I mean, the rate at which we're doing licenses today is quite high. So just to sustain these rates, gives us great earnings potential as we go forward. Again, typically, we see the catalyst income from a license 4, 5 years later And when we do these, when, when we sign these licenses, there are progress payments that occur over 3, 4 years. So there's kind of a, there's a tale of earnings that, that come. And so there's been a meaningful step up here, and I think we can we can certainly continue this level for next year.
Thank you. The next question comes from David Begleiter with Deutsche Bank. You may go ahead.
Just on ethane in 2019, how are you thinking about prices both at an absolute level as well as a relative level relative to its fuel value?
Well, you know, David, I've been saying for quite a long time that ethane is going to trade over time $0.07 to $0.10 over its fuel value Given that supply and demand are much more balanced today on ethane than they have been in the past few years, we could see that, price over fuel value increase. I do think that it's going to be, it's, it's it's going to move around depending on, turnaround season. So, you know, in the spring when there are turnarounds and there's less ethane, consumption, then, you know, prices could moderate. New fractionation capacity is coming I think it's estimated to be online sometime in around the middle of next year and new Y grade pipelines. So It'll be dynamic, but I think given that our overall thesis is there's lots of propane, there's a lot of butane, And if some of the ethane that's being rejected today, in the Permian, if it ends up coming back into the pipe, and coming down to Bellevue, then we just need 500,000 barrels a day more of ethane to change the supply demand balance.
And so, so I think it'll be dynamic in companies like us. We just need to make sure that we're, we're looking at economic weekly as we do and shift our feature length to maximize profitability.
Very good. And just on Braskem, how did the recent bazillion election results impact or affect your thinking on Braskem?
Well, I read everything that you read about the new president And so, you know, I mean, for now, we're very much focused on the fundamentals and value creation potential. And so as I said earlier, we're working through the analysis and thinking through the value proposition.
Thank you. The next question comes from Duffy Fischer with Barclays.
Good morning.
Question, just, you had mentioned that spot ethylene is close to cash breakeven with Indorama about to start up a cracker where they'll back out some spot purchases that they've done historically do you think you'll be able to continue to run full out or will you actually have to run at lower operating rates, do you think, until you get your polyolefins absorption online later next year?
Yes, Duffy, I expect it will continue to run pretty full. I don't expect us to slow down on ethylene.
Okay. And then, just one more on brands, Kim, for the majority of the dance, at least that we've been privy to kind of know about with Braskem, your stock price was circa $110 a share now that it's 90, does that change the way you look at Braskem or your share value is disconnected in your mind from the value of Braskem?
Look, I mean, again, it's really about long term value creation in a transaction like this. And so we're firmly focused on just like we did with Chulman thinking through, how we can create value with something like this. So, hasn't changed. And as you can see, as evidenced by the third quarter, we've, we've, had still significant amount of share buybacks. So nothing has really changed in my mind.
Thank you. The next question is from Jim Sheehan with SunTrust.
Good morning. Can you talk about the Rhine River impacts? You said that this could tighten up some product chains for you. What about your ability to either obtain raw materials or ship products or supply raw materials to property tenants in Westling and things like that. Do you see any downside risks
Yes, Jim. So our European team is hard at work in managing through, the low Rhine levels and We do see some very modest downside and downside risk in our EAI segment, as a result of the low Rhine levels. So, just on a, on an output basis, not considering any increase in product prices, we could see in Q4 $30,000,000 to $40,000,000 of impact across the quarter. If, if the situation continues and we don't get rain over there. So, you know, it's pretty modest and we've had one of our crackers down for a turnaround.
So that actually reduces the impact. Our larger cracker wrestling is is down for turnaround and will be coming up in November. So as we bring that up, really, our consideration will be, do we bring it up to full rates? Do we bring it up to, a little bit lower than full rate. So, so that maybe helps you size the Rhine River impact.
It's quite modest.
Terrific. And on IMO 2020, are you confident that the EPA will not be able to delay this process or reduce enforcement of the standard?
Well, it's difficult to predict what, what regulatory agencies may do, but it seems to me that there's a lot of momentum around the world, around this, this change in regulation. And many ship owners have acknowledged that this will happen. So, the only thing we do is make sure that we're prepared to run our refinery at full rates. And given that we're just finishing our, our maintenance on crude unit in the coker, one of the 2 coker units at our refinery, we're set up for virtually no planned maintenance in the second half of 'nineteen through 2020. So I think we're really well positioned to take advantage of whatever IMO turns out to be And frankly, I think it's degrees of upside.
Thank you. The next question is from Arun Viswanathan with RBC Capital Markets.
Great. Thanks. Good morning. Just a question on I and D. You know, the business has been performing very well in 2018.
Do you see that business kind of moderating in coming years back to 1.6% or 1.7% in annual EBITDA or do you see a trajectory towards $2,000,000,000 in kind of continuing? Thanks.
Well, so the run rate, if you look back before last before this year, our run rate's been about $1,500,000,000 plus or minus. And I've talked about a 15% to 20% step up structural. And I think that's how you ought to be thinking about it off of the 15 number. You know, and then there's some seasonality, as you know, with our Oxyfuels business, that puts some seasonality in that segment. But over an entire year, a 15% to 20% step up over the 15% number as I think a good basis going forward.
Great. Thanks. And just on polypropylene, maybe you can just give us your assessment of supplydemand. There hasn't really been a lot of new supply added. I mean, what's your view on whether the market could bear something like that or your own footprint?
Thanks.
Yes. So polypropylene, I mean, in the U. S, there's not a lot of new capacity coming in the next 12 to 18 months or 15 months, let's say. There's a few debottlenecks here and there, including we have a couple of small ones that we're implementing now. I think, you know, in the absence of new capacity and demand growing, at 3%, 3%, 4% a year in the U.
S. Market looks to be, very solid in the U. S. Globally. It seems that operating rates are still going to be quite high and around the world demand growth for polypropylene been extremely strong and especially in the Far East in China.
So I expect polypropylene to be a very constructive business going forward. Thanks.
Olympic Global Advisors. You may go ahead.
Good morning, Bob.
Good morning, Hassan.
I have a 2 part question on Braskem. First, obviously, you talked a bit about Brazil and the Brazilian elections and the like, but obviously, there's been a government change in Mexico as well. And at least recently, I've been reading more and more articles pertaining to the Mexico contract that it's below market. They may reconsider that contract. So first part to the question is how does that sort of go into your calculus about the deal?
And then the second part is, obviously, valuations have come down tremendously across the board, but certain product areas have been hit harder, like polyurethanes in particular. So how are you thinking about other deals as well above and beyond Braskem in light of some of these valuation moves?
Yes. Good question. So we're first of all, on, on Braskem, just kind of repeat what I said earlier, we're working through our analysis and obviously thinking through the Mexico situation is part of our analysis. And so we'll work through that. But, but, you know, it's a fairly new asset that, that they have down there.
So, we consider that as well. As far as other alternatives, you know, it's just it's, it's, we just need to work through kind of one opportunity at a time and think through value creation. So, we're quite, we're very focused on understanding the various aspects that have been raised on this call and things that you've read and, being thoughtful about how we can create value for our shareholders.
Understood. Now as a follow-up, Bob, on the China pollution side of things, again, sort of mix messages out there, some people sort of talking about how, regulation is going to move from federal to provincial levels and that may sort of make things a bit more lax. Meaning thereby that maybe capacity comes back online. But then the flip side of that is that people are talking about the 2+26 being a expanded to 11 more cities. So what are you guys seeing on the ground there?
How do you see that in terms of influx of new capacity or further curtailments?
Well, I think directionally environmental pressure will continue in China and there will be some ebb and flow in terms of news. But, but I think directionally, there is a, there is a move towards reducing coal and improving, you know, air quality in China. And I don't think that changes. So you know, hence, more methanol being consumed for olefins. I mean, I think that, that will get its cleaner than coal based olefins.
So, so we could see that. And, and, you know, some, some naphtha crackers, I suppose, But I don't see the environmental pressures easing. I think over time, they'll continue to get more stringent as the rest of the world is.
Very helpful. Thanks so much. All right.
Thank you.
Thank you. The next question comes from John Roberts with UBS. You may go ahead.
Thank you. We started with that thing. Maybe we'll finish with that thing here. But on Slide 11, again, in 2019, Bob, you have the supply line above the minimum. In mid year, doesn't the supply line kind of touch the minimum after we get a couple more crackers starting up?
And then in the upper right hand corner, you've got $0.25 to $0.60 a gallon, which is the historical range. But I think ethane, even at a dollar a gallon, still export polyethylene is still breakeven. So do you think if we get tighter in mid-twenty 19, we could spike above $0.60?
First of all, I don't know about the dollar analysis. I'll have to get my team to look at that, but, depends on oil price. And depends on that, the price. So there's a lot of factors. You know, it's difficult as you can imagine to forecast a spike or to predict.
I mean, I suppose, you could see spikes, but they're very much just that their spikes. And they come back down. I think one thing you've seen over the past few weeks and even years past that this industry and the cracker fleet in the U. S, does exert its flexibility when needed. And we, as a company, certainly are well positioned to do that.
As I mentioned earlier, in response to one of the other questions that, we're also increasing our ability to crack Y grade. So, so I think that'll be another dimension of flexibility that will continue to enhance. And our 2 crackers at Channelview and corporate and the Corpus Christi cracker are extremely well positioned to be flexible given proximity to, Eagle Ford. And then when you think about our Midwest crackers, you know, that's, almost £2,500,000,000 of ethylene that is unaffected by ethane price, on the Gulf Coast. And enjoys a significant advantage.
So I think, you know, the line sort of touching the blue part or not, we're going to have next year new cracker startup and new fractionation and new pipeline capacity as well. So there will be the price will be a bit more dynamic next year. But again, I step back and think about the overall supply of ethane. And I think it's abundant If even a little bit less gets rejected and comes down the pipe to Bellevue, that could change the equation very quickly. Okay.
Thank you. Thank
you. The next question comes from Lawrence Alexander with Jefferies. You may go ahead.
Hi, 2 quick ones. Given the sort of the discussions or the way you're seeing the IMO impact play out in for the refining industry. Would you be open to reconsidering, structures for the refining asset? And, treating it as a noncore asset? And secondly, how do you see Lyondell's role in the microplastics debate?
I mean, do you want to be at the forefront or is it more going to be see how the regulatory landscape shifts and then, grow the recycling side of the business accordingly?
Yes. So, two very different questions. On the refinery, Lawrence, our view hasn't changed. Our focus has been running the refinery better and better. And I think we've demonstrated now with 6 quarters of really great operating performance which we expect to continue.
We've been positioning ourselves for IMO by completing our maintenance so that we can run essentially full in, 1920. And so I think we're really well positioned to capture value from IMO. And, you know, we're not really detracted from that, if you will. And so that's going to be continue to be our focus and we'll think through how best to capture that value. So really nothing further to add in terms of the refinery.
In terms of microplastics, and perhaps if I could broaden that to plastic waste, I think really one of the best ways a company like ours can, can influence, what happens and how we engage is through the various associations around the world, like American Chemistry Council, Suffolk, and there's, there are, there's a lot of work going on through industry associations to engage in essentially ending plastic waste and thinking through over the long term, how we can increase Circularity. So, you know, stay tuned. I think there will be some, some, some definitive sort of things that will come out as we go through the next couple of quarters. But I think this is best done from our perspective through the industry associations, which we participate in and have leadership positions on, in many cases,
Thank you.
Thank you. Our last question comes from Matthew Blair with Tudor, Pickering, Holt. Thank you. You may go ahead.
Hey, Bob. It looks like in Refining, you outperformed some of your Gulf Coast peers in the quarter. You mentioned you saw some benefits from heavy Canadian barrels, which estimate are approximately 15% to 20% of your crude slate. Could you talk about any potential efforts to increase WCS runs further whether that be by, maybe crude by rail or whether you're looking at additional pipeline commitments on some of these new Canadian pipelines?
Yes. So on, on Canadian Crude, we've really maximized what we can do on Canadian Crude Maybe incrementally something around crude by rail, but I would not expect a meaningful change in the amount of Canadian crude we're cracking And as you, I'm sure, know, those pipelines are on allocation. So we really can't get more allocations. But we are maximizing. And I think, you know, over time, we hope that that will, that will impact Maya pricing and and bring that back into balance.
Sounds good. And then in IND, you mentioned the PO results were off $50,000,000. I think $20,000,000 of that was due to the turnaround. I guess the remaining, $30,000,000 or so, is that due to the market slowing? And is that an issue, perhaps with, just slower demand growth from potentially weaker housing market?
No, nothing structural there. That's just have been flow of the market. Nothing structural to read into that.
Got it. Thank you.
Okay. All right. Well, thank you. Well, let me offer a few closing remarks. Thank you for all of your patience as we run over a little bit.
So, you know, as we look ahead from Q4 and into 2019, while we've talked a lot about ethane on this call, and we know it'll be dynamic next year. For LyondellBasell, we do see meaningful sources of new earnings from our Ace Hillman acquisition, our new polyethylene plant, step up in I and D earnings, IMO impacts in the second half of the year. So I think a lot of these sources of earnings growth can can offset potential impacts from new PE capacity and ethane. So we look forward to updating you on that. As well as all of our growth initiatives on the next call.
That concludes today's conference. Thank you all for participating. You may disconnect at this time.