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 $16 $12 Revenue & EBITDA (1) SABIC LYB Products LYB Global Position (3) Chemicals Ethylene 5 Propylene 6 Propylene Oxide 2 Last 12 Months EBITDA ($USD billions) $8 LyondellBasell DOW BASF Polymers Polyolefins (PE + PP) 3 Polypropylene 1 Polyethylene 5 Polypropylene Compounds 1 $4 DuPont (2) Refining & Oxyfuels Oxyfuels 1 $0 $0 $20 $40 $60 $80 $100 Last 12 Months Revenue ($USD billions) 5 Technology and R&D Polyolefins Licensing 3 World-Class Scale with Leading Market Positions (1) 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. (2) DuPont revenue and EBITDA excludes Chemours business in previous 12 months. (3) Global positions based on LyondellBasell wholly owned capacity and pro rata share of JV capacities as of December 31, 2014.
Production Costs ($ / pound) US Chemicals: Beneficiary of Shale Gas $1.20 World Ethylene Cost Curve $1.00 $0.80 $0.60 $0.40 $0.20 $0.00 Middle East Middle East China United States Western Europe Other NE Asia Pre Shale (2005) United States 0 73 136 172 247 307 China Global Supply (Cumulative in billions of pounds) Western Europe Other NE Asia Post Shale (2011) Shale development in US improved competitive position of US petrochemicals in the early 2010s, compared to the prior decade. 6
US Feedstock Price Advantage (indexed to 2003) 400% 300% 200% 100% Indexed Commodity Prices Natural Gas Crude Oil Propane Ethane 0% 2003 2005 2007 2009 2011 2013 2015 YTD (4) Shale natural gas has caused NGLs to diverge from crude oil prices. Energy costs can represent 70 80% of the total cost of most petrochemical products. U.S. chemical prices are generally aligned with global crude oil price. US petrochemical production costs aligned with regional (U.S.) ethane / propane prices. (4) 2015 year to date (YTD) is as of September 2015. 8
Lower Oil Price Changed Ethylene Cost Curve Ethylene Production Cash Costs ($ / ton) $1,400 1,200 Sept. 2014 Brent: $98 / bbl 1,000 800 Nov. 2014 Brent: $79 / bbl 600 400 200 ME Ethane N. Am. Ethane N. Am Naphtha Asia Naphtha W Europe Naphtha Sep. 2015 Brent: $50 / bbl Other 0 24 48 66 102 120 150 Cumulative Annualized Production (million metric tons) Even with lower crude prices, the North America shale advantage continues, although at a lower range 9
Crude Oil Impact on US Olefins and Polyolefins ($ / bbl) ($/ton) $140 120 100 80 60 40 20 Brent Crude Oil Chain Margin US Ethylene Margin US PE Margin 1,400 1,200 1,000 800 600 400 200-20 -200 US ethylene margins declined with crude oil prices but have been mostly offset by PE margin expansion, due to tighter supply-demand in the 1 st half of 2015. 10
US Shale Oil Has Much Flatter Cost Curve Breakeven (US$/bl) 110 Top 420 Breakeven of Developing Oil Projects by Category 100 90 Deepwater Heavy Oil Ultra Deepwater 80 70 Traditional Shale Oil 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 (Oil Rig Count) 1,800 1,600 1,400 1,200 1,000 800 600 400 200 US Crude Oil Rig Count & Production US Shale Basin Initial Production US Shale Basin Drill Time Oil Rig Count Crude Oil Production (millions bbl) 10 8 6 4 2 (bpd) 700 600 500 400 300 200 100 0 (days) 50 40 30 20 10 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 Engineering Materials & Equipment Construction Houston Area Welding Costs (5) USD per hour 35 30 25 20 2010 2011 2012 2013 2014 2015E Recent shale field activity declines beginning to stabilize markets Engineering costs: labor shortages and inexperienced staffs Skilled labor: years of significant wage increases Peak industrial labor demand forecasted in 2016-17 USGC Industrial Construction Labor Balance People, thousands 40 30 20 10 0-10 2013 2014 2015 2016 2017 2018 2019 2020 (5) This information represents the hourly wage of combo-pipe welders in the Houston market. 14
Economics of a New U.S. Cracker Complex ($ in billions) $8 $6 $4 Greenfield vs. Debottleneck Cumulative Cash Flow Profile (6)(7) LYB Ethylene Expansion Program $2 $0 -$2 -$4 -$6 2012 Greenfield 2014 Greenfield 2014 Greenfield (reduced margins) -$8 0 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 LyondellBasell ethylene expansion program is more economical than building a greenfield cracker. (6) 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. (7) 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 Three Months Ended Six Months Ended Six Months Ended Last Twelve Months In Million of Dollars March 31, 2014 June 30, 2014 September 30, 2014 December 31, 2014 2014 March 31 2015 June 30, 2015 June 30, 2015 June 30, 2014 2014 June 30, 2014 June 30, 2015 June 30, 2015 Net Income Attributable to the Company Shareholders $ 945 $ 1,178 $ 1,258 $ 793 $ 4,174 $ 1,166 $ 1,330 $ 2,496 $ 2,123 $ 4,174 $ (2,123) $ 2,496 $ 4,547 Net Loss Attributable to Non-Controlling Interests (1) (2) (1) (2) (6) (2) (1) (3) (3) (6) 3 (3) (6) (Income) Loss from Discontinued Operations (1) (3) 3 5 4 3 (3) - (4) 4 4-8 LCM Adjustments, After Tax - - 28 455 483 58 (6) 52-483 - 52 535 Income from Continuing Operations Excluding LCM Adjustments 943 1,173 1,288 1,251 4,655 1,225 1,320 2,545 2,116 4,655 (2,116) 2,545 5,084 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 Interest expense, net 86 89 79 65 319 58 72 130 175 319 (175) 130 274 Add: LCM Adjustments, Pre Tax - - 45 715 760 92 (9) 83-760 - 83 843 EBITDA Excluding LCM Adjustments 1,668 1,941 2,080 2,121 7,810 2,044 2,177 4,221 3,609 7,810 (3,609) 4,221 8,422 Less: LCM Adjustments, Pre Tax - - 45 715 760 92 (9) 83-760 - 83 843 EBITDA $ 1,668 $ 1,941 $ 2,035 $ 1,406 $ 7,050 $ 1,952 $ 2,186 $ 4,138 $ 3,609 $ 7,050 $ (3,609) $ 4,138 $ 7,579 18