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Impact of Lower Energy
Prices on US Chemicals
Bob Patel
CEO
LyondellBasell
Forward Looking Statements
The statements in this presentation relating to matters that are not historical facts are forward-looking statements. These forward-looking
statements are based upon assumptions of management which are believed to be reasonable at the time made and are subject to significant
risks and uncertainties. Actual results could differ materially based on factors including, but not limited to, the business cyclicality of the
chemical, polymers and refining industries; the availability, cost and price volatility of raw materials and utilities, particularly the cost of oil,
natural gas, and associated natural gas liquids; competitive product and pricing pressures; labor conditions; our ability to attract and retain key
personnel; operating interruptions (including leaks, explosions, fires, weather-related incidents, mechanical failure, unscheduled downtime,
supplier disruptions, labor shortages, strikes, work stoppages or other labor difficulties, transportation interruptions, spills and releases and other
environmental risks); the supply/demand balances for our and our joint ventures’ products, and the related effects of industry production
capacities and operating rates; our ability to achieve expected cost savings and other synergies; our ability to successfully execute projects and
growth strategies; legal and environmental proceedings; tax rulings, consequences or proceedings; technological developments, and our ability
to develop new products and process technologies; potential governmental regulatory actions; political unrest and terrorist acts; risks and
uncertainties posed by international operations, including foreign currency fluctuations; and our ability to comply with debt covenants and
service our debt. Additional factors that could cause results to differ materially from those described in the forward-looking statements can be
found in the “Risk Factors” section of our Form 10-K for the year ended December 31, 2014, which can be found at www.lyondellbasell.com on
the Investor Relations page and on the Securities and Exchange Commission’s website at www.sec.gov.
The illustrative results or returns of growth projects are not in any way intended to be, nor should they be taken as, indicators or guarantees of
performance. The assumptions on which they are based are not projections and do not necessarily represent the Company’s expectations and
future performance. You should not rely on illustrated results or returns or these assumptions as being indicative of our future results or returns.
This presentation contains time sensitive information that is accurate only as of the date hereof. Information contained in this presentation is
unaudited and is subject to change. We undertake no obligation to update the information presented herein except as required by law.
3
Information Related to Financial Measures
This presentation makes reference to certain “non-GAAP” financial measures as defined in Regulation G of the U.S. Securities Exchange Act of
1934, as amended. The non-GAAP measures we have presented include EBITDA excluding LCM. LCM stands for “lower of cost or market,” which is
an accounting rule consistent with GAAP related to the valuation of inventory. Our inventories are stated at the lower of cost or market. Cost is
determined using the last-in, first-out (“LIFO”) inventory valuation methodology, which means that the most recently incurred costs are charged to
cost of sales and inventories are valued at the earliest acquisition costs. Market is determined based on an assessment of the current estimated
replacement cost and selling price of the inventory. In periods where the market price of our inventory declines substantially, cost values of inventory
may be higher than the market value, which results in us writing down the value of inventory to market value in accordance with the LCM rule,
consistent with GAAP. This adjustment is somewhat unique to our 2010 company formation when all assets and liabilities were measured at fair
value, our use of LIFO accounting, and the recent volatility in pricing for many of our raw material and finished goods inventories. We report our
financial results in accordance with U.S. generally accepted accounting principles, but believe that certain non-GAAP financial measures, such as
EBITDA and earnings and EBITDA excluding LCM, provide useful supplemental information to investors regarding the underlying business trends
and performance of the company's ongoing operations and are useful for period-over-period comparisons of such operations. Non-GAAP financial
measures should be considered as a supplement to, and not as a substitute for, or superior to, the financial measures prepared in accordance with
GAAP.
EBITDA, as presented herein, may not be comparable to a similarly titled measure reported by other companies due to differences in the way the
measure is calculated. We calculate EBITDA as income from continuing operations plus interest expense (net), provision for (benefit from) income
taxes, and depreciation & amortization. EBITDA should not be considered an alternative to profit or operating profit for any period as an indicator of
our performance, or as an alternative to operating cash flows as a measure of our liquidity. We have also presented financial information herein
exclusive of adjustments for LCM.
Reconciliations for our non-GAAP measures can be found in the appendix to this presentation or on our website at
www.lyondellbasell.com/investorrelations.
4
LyondellBasell Overview
Revenue & EBITDA(1)
LYB Products
$16
SABIC
$12
Last 12
Months
EBITDA
BASF
LyondellBasell
$8
DOW
($USD
billions)
$4
DuPont(2)
$0
$0
$20
$40
$60
$80
$100
LYB Global Position(3)
Chemicals
Ethylene
Propylene
Propylene Oxide
5
6
2
Polymers
Polyolefins (PE + PP)
Polypropylene
Polyethylene
Polypropylene Compounds
3
1
5
1
Refining & Oxyfuels
Oxyfuels
1
Technology and R&D
Polyolefins Licensing
3
Last 12 Months Revenue ($USD billions)
World-Class Scale with Leading Market Positions
(1)
(2)
(3)
LyondellBasell (LYB) LTM EBITDA as of June 30, 2015 excludes LCM charges. Other peers not listed included Arkema, Celanese,
ChevronPhillips, Eastman, Huntsman Lanxess and Westlake. Peer group LTM EBITDA as of 6/30/2015 and as reported by Capital IQ.
Capital IQ EBITDA figures include adjustments and therefore may not be comparable to EBITDA reported by LYB.
DuPont revenue and EBITDA excludes Chemours business in previous 12 months.
Global positions based on LyondellBasell wholly owned capacity and pro rata share of JV capacities as of December 31, 2014.
5
US Chemicals: Beneficiary of Shale Gas
World Ethylene Cost Curve
Production Costs ($ / pound)
$1.20
Post Shale (2011)
$1.00
Western
Europe
$0.80
Other
NE Asia
Shale development
in US improved
competitive position
of US petrochemicals in the
early 2010s,
compared to the
prior decade.
China
$0.60
Pre Shale (2005)
Western
Europe
$0.40
China
Other
NE Asia
Middle
East
$0.20
Middle
East
$0.00
0
United States
United States
73
136
172
247
Global Supply (Cumulative in billions of pounds)
6
307
US Feedstock Price Advantage
Indexed Commodity Prices
• Shale natural gas has caused
NGLs to diverge from crude oil
prices.
Hundreds
(indexed to 2003)
400%
• Energy costs can represent 70 –
80% of the total cost of most
petrochemical products.
300%
Crude Oil
• U.S. chemical prices are
generally aligned with global
crude oil price.
200%
Propane
100%
Natural Gas
0%
2003
Ethane
(4)
2005
2007
2009
2011
2013
(4) 2015 year to date (YTD) is as of September 2015.
8
2015
YTD
• US petrochemical production
costs aligned with regional (U.S.)
ethane / propane prices.
Lower Oil Price Changed Ethylene Cost Curve
Ethylene Production Cash Costs ($ / ton)
$1,400
Sept. 2014
Brent: $98 / bbl
1,200
1,000
Nov. 2014
Brent: $79 / bbl
800
600
400
ME
Ethane
200
0
N. Am.
Ethane
N. Am
Naphtha
Asia
Naphtha
W Europe
Naphtha
24
48
66
102
120
Cumulative Annualized Production (million metric tons)
Sep. 2015
Brent: $50 / bbl
Other
150
Even with lower crude prices, the North America shale advantage
continues, although at a lower range
9
Crude Oil Impact on US Olefins and Polyolefins
($ / bbl)
($/ton)
$140
120
Chain Margin
Brent Crude Oil
1,400
1,200
100
1,000
80
800
60
600
US Ethylene Margin
40
20
400
US PE Margin
-20
200
-200
US ethylene margins declined with crude oil prices but have been mostly offset
by PE margin expansion, due to tighter supply-demand in the 1st half of 2015.
10
US Shale Oil Has Much Flatter Cost Curve
Top 420 Breakeven of Developing Oil Projects by Category
110
Deepwater
100
Heavy Oil
Ultra
Deepwater
Breakeven (US$/bl)
90
“Shale
Oil”
80
Traditional
70
60
50
40
30
20
0
1,000
2,000
3,000
4,000
5,000
6,000
7,000
8,000
9,000 10,000 11,000 12,000 13,000
Cumulative Peak Production (kbls/d)
11
US Oil and Gas Production Economics
(Internal Rate of Return, IRR)
80%
July-14
July-15
60%
40%
20%
0%
Despite productivity gains, lower crude oil prices have significantly
reduced returns from US shale drilling.
12
US Shale Oil & Gas Productivity Gains
US Crude Oil Rig Count & Production
(Oil Rig Count)
US Shale Basin Initial Production
(millions bbl)
1,800
10
1,600
1,400
1,200
200
40
500
30
400
300
800
400
8
6
1,000
600
(days)
50
(bpd)
700
600
Oil Rig
Count
4
Crude Oil
Production
2
US Shale Basin Drill Time
20
200
10
100
0
0
2010
2014
Despite lower US drilling rig count, advances in shale drilling technology have increased
volume of US shale oil production, which contributed to continued decline in oil prices.
13
Escalating Project Costs
Greenfield Ethylene Cracker Costs
• Recent shale field activity declines beginning to
stabilize markets
• Engineering costs: labor shortages and inexperienced
staffs
Engineering
Materials & Equipment
Construction
• Skilled labor: years of significant wage increases
• Peak industrial labor demand forecasted in 2016 - 17
Houston Area Welding Costs(5)
USGC Industrial Construction Labor Balance
People, thousands
USD per hour
35
40
30
30
20
10
25
0
20
2010
2011
2012
2013
2014
-10
2015E
2013
2014
(5) This information represents the hourly wage of combo-pipe welders in the Houston market.
14
2015
2016
2017
2018
2019
2020
Economics of a New U.S. Cracker Complex
Greenfield vs. Debottleneck Cumulative Cash Flow Profile(6)(7)
($ in billions)
$8
LYB Ethylene
Expansion Program
$6
$4
$2
$0
2012 Greenfield
-$2
2014 Greenfield
(reduced margins)
-$4
2014 Greenfield
-$6
-$8
Yr
0
Yr
1
Yr
2
Yr
3
Yr
4
Yr
5
Yr
6
Yr
7
Yr
8
Yr
9
Yr
10
Yr
11
Yr
12
Yr
13
Yr
14
Yr
15
Yr
16
Yr
17
Yr
18
Yr
19
LyondellBasell ethylene expansion program is more economical than
building a greenfield cracker.
(6)
(7)
LYB Expansion Program assumes an addition of 2,500 million lbs. of ethylene capacity occurring from years 1 - 6. Greenfields
have a 3.3 billion ethylene capacity and derivatives.
Cash margins are average IHS prices for 2011 – 2015 as of March 31, 2015. Debottleneck uses ethylene margins while greenfields
use polyethylene chain margins.
15
Concluding Thoughts
• US Shale revolution changed the shape of the global ethylene cost curve and US position
on it in the early 2010s. Recent drop in oil price changed the global ethylene cost curve,
although US petrochemicals still remain advantaged vs. most of the world.
• Positive long-term outlook for US natural gas and NGL development, although ethane
supply-demand could become somewhat more balanced after 2018.
• US construction market is getting more constrained, resulting in escalating costs into the
late 2010s and likely delays, thus reducing returns on projects.
• In LYB view, brownfield expansion projects have higher return and lower risk than
greenfield expansion projects.
• Success will be defined by those that can:

Maintain focus on excellent operations to generate cash

Be disciplined with capital: invest wisely and timely

Focus on acceptable project returns, with appropriate adjustment for risk
16
Appendix: Sources
•
Baker Hughes (slide 12)
•
Platts Bentek (slides 11 and 12)
•
Capital IQ (slide 5)
•
Goldman Sachs Global Investment Research (slide 10)
•
IHS (CMAI) (slides 5, 7, 9 and 14)
•
Industrial Info Resources (slide 13)
•
LyondellBasell estimates (slides 6, 8, 10, 11, 12, and 14)
•
Morgan Stanley (slide 6)
•
US Energy Information Administration (EIA) (slide 12)
•
Wood Mackenzie (slide 8)
17
Appendix: Reconciliation of Non-GAAP Measures
Reconciliation of Net Income To EBITDA
Three Months Ended
In Million of Dollars
Net Income Attributable to the Company Shareholders
March 31,
2014
$
945
June 30,
2014
$
Three Months Ended
S eptember
30, 2014
1,178
$
1,258
December 31,
2014
$
793
March 31
2015
2014
$
4,174
$
S ix Months Ended
June 30,
2015
1,166
$
June 30,
2015
1,330
$
June 30,
2014
2,496
$
June 30,
2014
2014
2,123
$
4,174
$
June 30,
2015
(2,123)
Net Loss Attributable to Non-Controlling Interests
(1)
(2)
(1)
(2)
(6)
(2)
(1)
(3)
(3)
(6)
3
(Income) Loss from Discontinued Operations
(1)
(3)
3
5
4
3
(3)
-
(4)
4
4
-
-
28
455
483
58
(6)
52
-
483
943
1,173
1,288
1,251
4,655
1,225
1,320
2,545
2,116
4,655
LCM Adjustments, After Tax
Income from Continuing Operations Excluding LCM Adjustments
Last Twelve
Months
S ix Months Ended
$
2,496
June 30,
2015
$
(6)
52
535
2,545
5,084
-
(2,116)
4,547
(3)
8
Less:
LCM Adjustments, After Tax
-
-
(28)
(455)
(483)
(58)
6
(52)
-
(483)
-
(52)
(535)
Income from Continuing Operations
943
1,173
1,260
796
4,172
1,167
1,326
2,493
2,116
4,172
(2,116)
2,493
4,549
Provision for Income Taxes
383
425
434
298
1,540
440
541
981
808
1,540
(808)
981
1,713
Depreciation and Amortization
256
254
262
247
1,019
287
247
534
510
1,019
(510)
534
1,043
86
89
79
65
319
58
72
130
175
319
(175)
130
274
Interest expense, net
Add:
LCM Adjustments, Pre Tax
EBITDA Excluding LCM Adjustments
-
-
45
715
760
92
(9)
83
-
760
1,668
1,941
2,080
2,121
7,810
2,044
2,177
4,221
3,609
7,810
(3,609)
83
843
4,221
8,422
Less:
LCM Adjustments, Pre Tax
EBITDA
$
1,668
$
1,941
45
$
2,035
715
$
1,406
760
$
7,050
18
92
$
1,952
83
(9)
$
2,186
$
4,138
$
3,609
760
$
7,050
$
(3,609)
83
$
4,138
843
$
7,579