LyondellBasell Industries N.V. (LYB) Q1 2016 Earnings Report, Transcript and Summary

Hello, and welcome to the LyondellBasell Teleconference. At the request of LyondellBasell, this conference is being recorded for instant replay purposes. Following today's presentation, we will conduct a question-and-answer session. [Operator Instructions] I'd now like to turn the conference over to Mr. Doug Pike, Vice President, Investor Relations. Sir, you may now begin.

Thank you, Michelle. Well, hello and welcome to LyondellBasell's First Quarter 2016 Teleconference. And I'm joined today by Bob Patel, our CEO; Thomas Aebischer, our CFO; and Sergey Vasnetsov, our Senior Vice President of Strategic Planning and Transactions. Before we begin the business discussion, I'd like to point out that a slide presentation accompanies today's call and is available on our website at www.lyb.com. I'd also like for you to note that statements made in this call relating to matters that are not historical facts are forward-looking statements. And 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. And actual results could differ materially from those forward-looking statements. Now for more detailed information about the factors that could cause our actual results to differ materially, please refer to the cautionary statements in the presentation slides and our financial reports, which are available at www.lyb.com/investorrelations. And reconciliations of non-GAAP financial measures to GAAP financial measures, together with any other applicable disclosures, including the earnings release, are currently available on our website at www.lyb.com. And finally, I'd like to point out that a recording of this call will be available by telephone beginning at 2 PM Eastern Time today until 1 AM Eastern Time on May 23rd, by calling 866-513-4385 in the United States and 203-369-1984 outside of the United States. And the pass code for both numbers is 42216. During today's call, we'll focus on first quarter results, the current environment and the near-term outlook. Before turning the call over to Bob, I'd like to call your attention to the non-cash, lower of cost or market inventory adjustments or LCM that we've discussed on past calls. As previously explained, these adjustments are related to our use of LIFO accounting and the recent decline in prices of our raw material and finished goods inventories. And during the first quarter, we recognized LCM charges totaling $68 million, any comments made on this call will be in regard to our underlying business results, excluding the impacts of these LCM inventory charges. With that being said, I'll turn the call over to Bob.

Thanks, Doug. Good morning to all of you and thank you for joining our first quarter earnings call. Let's begin with Slide 4 and review the highlights from the first quarter. Our first quarter diluted earnings per share improved relative with fourth quarter to $2.48 per share with EBITDA of $1.9 billion. This excludes the $68 million lower of cost or market inventory adjustment. The sale of our Argentine subsidiary Petroken resulted in a gain of $78 million, which impacted earnings by $0.18 per share. We continued to deliver with three of our five operating segments improving in profitability relative to the fourth quarter. During the quarter, our downstream integration in polyolefins and other derivatives enabled us to capture profitability as margin moved from monomer into polymers and other downstream products. Our chemical and polymer operations generally ran well across most sides and we completed a planned maintenance turnaround in our refinery. After the close of the quarter, we completed our second Indian polypropylene compounding acquisition. We continued to execute on our financial priorities during the first quarter and Thomas will provide you, with an update on this progress in a few moments. Slide 5 reflects the outstanding safety performance that our employees and contractors achieved during the first quarter of this year, by reducing injuries to almost, the already low rates of the past several years. We strongly believe than an unrelenting focus on safety provides benefits to our operations and ultimately profitability. Good operating reliability across our chemical faculties supports this belief. And now Thomas will discuss our financial highlights for the first quarter.

Thank you, Bob and good morning. On Slide 6, we outline our quarterly and trailing 12 months segment result. As Bob mentioned, three of our five business segments improved relative to their fourth quarter 2015 performance. In olefins and polyolefins Americas results were similar to the fourth quarter. Olefins and polyolefins, EAI benefit from falling after prices and continued strength in polymers. Intermediates and derivatives benefit from a strong global styrene market and improved production following fourth quarter maintenance work. The refineries for low seasonal margins and reduced volumes largely due to a planned turnaround. Overall, despite the substantial fall in the price of crude oil and global economic uncertainties. Our profitability has remained strong with $7.9 billion in EBITDA over the past 12 months. Please turn to Slide 7, which provides a picture of cash generation and use. During the first quarter, we generated $1.3 billion of cash from operations and utilized the similar amount in dividends and share repurchases. We also took advantage of favorable interest rates to borrow €750 million at a coupon rate of 1.875%. Our maintenance and growth capital investments increased to $527 million, during the first quarter. With the majority of these investments focused on our Corpus Christi ethylene expansion and turnarounds at the refinery and our Berre, France facility. During the first quarter, we increased our cash and liquid investment by $577 million to end with a balance of nearly $3 billion. Over the past 12 months, we generated $5.7 billion of cash from operations and again used a nearly equal amount for dividends and share repurchases. After investments in our capital program, our borrowing and other activities, the cash and liquid investment balance inclined by approximately $600 million. Slide 8 provides a longer perspective as well as some current financial metrics. Our strong results and cash flow generation over multiple years positioned us to steadily raise our dividend and purchased shares. Additionally, it has allowed us to access favorable credit markets while maintaining a strong balance sheet and BBB plus, EAA 1 credit rating. We finished the quarter with approximately $5 billion of liquidity and the total debt-to-EBITDA ratio of 1.2. Our share repurchase program continued during the quarter with another 12.3 million shares purchased. Since the inception of the program, we have repurchased approximately 155 million shares or approximately 27% of the initial shares outstanding. At the end of the quarter, we had approximately 3 million shares remaining on the existing authorization. In our proxy statement filed with the SEC in early March. We proposed that our shareholders vote to authorize an additional repurchase program of up to 10% of our outstanding shares. During February, we received gross profits of $184 million from the sale of Petroken, our wholly owned subsidiary in Argentina. The Petroken polypropylene sale provided an after-tax gain of $78 million, $57 million is booked to the O&P Americas segment, while $21 million is related to the PP compounding business and booked to O&P EAI. The gain represents an $0.18 per share impact from our first quarter earnings. Before, I wrap up. I want to point out a few other items that may help you modeling of our company. First, our effective tax rate for the quarter was 29.5%, slightly higher than our annual estimates. The first quarter was impacted by discrete [ph] tax events and our estimate for the full year remains unchanged at 28%. Depreciation amortization and interest expenses are currently running at rates in-line with our previous annual estimate. With that, I'll turn the call back to Bob.

Thanks, Thomas. Let turn to Slide 9 and review segment results. As mentioned previously, by discussion of business results will be in regard to our underlying business results excluding the impact of the LCM inventory charges. In our olefins and polyolefins, Americas segment. First quarter EBITDA was $878 million, a $44 million improvement over the fourth quarter. This includes a $57 million gain from the sale of Petroken. Relative to the previous quarter, olefins results were relatively unchanged. Ethylene prices declined by approximately $0.005 per pound and our margin slightly declined as we incurred and estimated $20 million negative impact related to ethylene purchases in preparation for our Corpus Christi plan turnaround. Our operating rates remained strong during the quarter. Averaging 94%, with similar high rates seen across the North American industry. 69% of our ethylene production was from ethane and approximately 88% came from NGLs. In polyolefins, combined results declined by approximately $20 million. Results were driven by lower polyolefins spreads of approximately $0.04 per pound, with price declines partially offset by lower ethylene cost. Declines in polyethylene were partially offset by improved polypropylene results, which spread the expanding by approximately $0.06 per pound over the fourth quarter. Polypropylene volumes were relatively unchanged with improved US volumes offset by the absence of Petroken volumes from also the first quarter. During April, spot ethylene prices have improved over first quarter averages, as supply has tightened during a heavy industry turnaround season. The quarter is benefitting from a $0.05 per pound March, polyethylene price increase. Polypropylene prices may decline by few cents during the quarter, but demand and margins remain strong. Our Corpus Christi ethylene turnaround and expansion began last week with completion plan during the third quarter. We currently estimate this to impact second quarter results by approximately $10 million and third quarter by approximately $40 million. Let's turn to Slide 10 and review performance in the olefins and polyolefins, Europe, Asia and international segment. During the first quarter, underlying EBITDA was $549 million or $98 million higher than the fourth quarter. These results include a $21 million gain from the Petroken sale. Olefins results improved by approximately $65 million with reduced cost for naphtha and other fees, outpacing a decline in ethylene prices. Our ethylene production volume was relatively unchanged as both periods included the impact of a planned turnaround. Utilization of an advantaged feedstocks increased by 7% of ethylene production to provide a $15 million advantage over naphtha during the quarter. Operating rates for the ethylene industry during the first quarter had been reported at 91%, a level that has not been seen in Europe since the first quarter of 2008. In polyolefins, improved results were driven by higher margins. European polyethylene spreads increased by approximately $0.01 per pound, while polypropylene spreads improved by approximately $0.02 per pound. Our polypropylene compounding and equity income was relatively unchanged. During April, global markets continued to tighten on strong demand with occasional reports of olefins and polyolefins shortages across various geographies and end uses. Next week, we anticipate completion of our Berre turnaround. Now please turn to Slide 11 for discussion intermediates and derivatives segment. First quarter EBITDA was $354 million, an improvement of $68 million from the fourth quarter. Results for propylene oxide and derivatives and oxyfuels were relatively unchanged. The improvement in I&D was largely driven by higher volumes and margins in the intermediate chemicals business. Styrene margins improved by approximately $0.02 per pound versus the fourth quarter. Our asset yields, C4 chemicals and the ethylene oxide and derivatives businesses all benefited from volume improvements relative to the fourth quarter, when we performed maintenance. Oxyfuels were relatively unchanged as low seasonal margins were offset by volume improvements. April has exhibited continued tightness for styrene that has supported strong pricing. Oxyfuel margins have started to rebound from winter levels. And methanol prices continued to be pressured by additional capacity entering the market, with some offset from higher crude oil prices. Let's move to Slide 12 for discussion of the refining segment. First quarter EBITDA was $14 million, a decline of $54 million from the prior quarter. During the first quarter, the Maya 2-1-1 spread declined by $0.69 per barrel to average $17.86 for the quarter and crude throughput averaged 186,000 barrels per day. Rates were impacted by our planned turnaround and some unplanned maintenance. The cost of the RINs was relatively unchanged from the fourth quarter. And you may be aware, a fire occurred in one of our two corporate processing units at the refinery on April 8. While we have not yet completed the investigation to determine the cause and full impact of the incident. We have continued to operate the refinery during the two weeks, following the fire and we expect to operate, at approximately 75% of full throughput during the second quarter. At the current time, we expect that repairs to return the refinery to full processing capability can be completed before the end of the second quarter. At current market conditions and repair expectations. We estimate a $40 million to $70 million second quarter impact. Our technology segment continued to perform well, with an $18 million improvement to $73 million of EBITDA during the first quarter. Turning back to the O&P segments, Slide 13 describes how our integrated positions in the ethylene chain help provide consistent profitability. The left chart illustrates the balance of ethylene production and consumption among products in the US and relative to our wholly owned and joint venture share globally. In the US, typically less than 20% of our sales are into the merchant markets. In addition to our polyethylene integration. Approximately one quarter of our US ethylene production is consumed internally in products and processes including ethylene oxide, styrene, vinyl acetate and metathesis. On a global basis, our ethylene positions relatively balanced. The right chart illustrates, how polyethylene is partially offsetting moderation of regional ethylene margins and improving our capture of the full obtained margins established by global price of polymers. Turning to Slide 14, this slide provides a similar view of the propylene chain. In the US, our propylene oxide business consumes approximately one-third of our propylene production. Although, we're short of propylene both in the US and globally. We're comfortable with our strong, long-term supply arrangement in all regions. With the addition of new on purpose propylene production from PDH and MTO technology around the world. We believe, that the world will be well supplied for the foreseeable future. In expansion of polypropylene margins illustrated by the prices and spreads on the right chart, has leveraged our leading global position in the propylene market. And with lower propylene pricing, the lower absolute price of polypropylene has driven strong demand growth globally. Slide 15 illustrates the impact of new capacity and new technologies on the global ethylene market. As we've discussed before, we believe that global demand growth in ethylene chain will continue to support effective operating rates between 90% and 93%. This is the zone, that we have operated in since late 2014 and where the market will typically behave in a balanced type manner, depending on maintenance schedules and operational reliability. While the upcoming capacity additions may create periods of disruptions in local markets. The global market should be able to absorb these additions, reasonably quickly. In the first quarter of 2016, the industry appeared to shift from a balanced market toward the high-end of this transitioning zone. We estimate that, first quarter industry effective operating rates were 95% in the US, 91% in Europe and about 90% in Asia. Today, global conditions are quite tight. The chart on the right, describes why we believe that new and rapid additions of methanol to olefins based ethylene capacity in China, is beginning to play a role in establishing a high cost floor for global ethylene chain pricing. While naphtha and LPG economics drive the majority of global ethylene supply. The last incremental global supply is increasingly filled by production from new China MTO price. Early in the first quarter, ethylene price was supported by this high cost floor and as we entered the spring demand and turnaround season, global supply demand tightened and March prices reflect the transition from a balance to tight global market that is approximately $0.15 per pound above this high cost floor. With approximately $0.25 per pound lower cost than MTO. US ethane-based production should continue to benefit from strong operating rates. Let me conclude with Slide 16. The first quarter developed, as we anticipated. We continued to see strong and growing demand for our polyolefin products in all regions. This supported full chain margins for our O&P business. Our I&D segment benefitted from higher volumes after completion of fourth quarter maintenance and strengthening styrene margins. Refining results were impacted by the turnaround and seasonally lower industry spreads. We're actively managing our portfolio, with a successful European bond placement. The completion of our Argentine divestiture, our second polypropylene compounding acquisition in India and continuation of the share repurchase program. Looking forward, we see olefins and polyolefins markets remaining tight during the near-term. There are heavy turnaround schedules in both the US and Asia. The recent rise in crude oil prices provides tailwinds for both pricing and demand, as customers no longer feel incentives to delay purchases, in hopes of future declines in product prices. In field markets, we're realizing typical seasonal spread improvements that support both our oxyfuels and refining businesses. Planned maintenance at our facilities is expected to impact second quarter results by approximately $20 million to $30 million and the refinery repair will impact results by an additional $40 million to $70 million. The supply and inventories of natural gas and NGL feedstocks remain strong and we expect pricing to remain favorable for the foreseeable future. We're now pleased to take your questions.

[Operator Instructions]. Our first question comes from the line of Stephen Byrne of Bank of America.

I'm curious to your view on whether you think the European polyethylene price premium over the US is sustainable longer term and the opposite on polypropylene pricing, with the premium in the US, is that sustainable longer term? And then secondly, as the US polyethylene industry shifts to a more export-oriented market down the road, here in the next few years. Where do you anticipate your incremental exports are going to go? Can you move them into Europe?

Good morning, Steve. First of all, on the European markets and even your question about US. So I think you got to step back and look at operating rates globally. I think, we're in a regime where operating rates are balanced, in that balanced zone to tight zone. In Europe, PE prices have held up well. We think operating rates are relatively high. We're moving into a seasonally strong period. So I suspect that, generally polyolefin prices will be pretty resilient in Europe, for the foreseeable future, going into Q3. In the case of USPP prices, a very large gap had developed between Asia and the US. And we had anticipated that some of that gap would need to be narrowed. Now part of that's happened with Asian polypropylene prices moving up in Q1 and part of that has been with PP price declining some in the US. I think, those things are coming back in the balance. But if you step back, we'll likely land in a zone, where margins are very good from a historical perspective. And I suspect that, given where operating rates are. We should be able to sustain that or for some period of time, you know. In terms of your last question, about exports. Our marginal export from the US, should go to Asia, that's really the destination. To the extent, that we produce products in the US. And we could supplement our production in Europe. We might consider doing that, but we have a big base in Europe already. So we're really well positioned I think to optimize globally. We have a great marketing position in Asia. We have a big presence in Europe and so our shift is really moving more to global optimization in polyolefins, as this new capacity comes on. I think, we're well positioned to capture value in that regard.

Thank you.

Thank you. And our next question comes from the line of Jeff Zekauskas of JPMorgan Chase.

In your refinery operation, in the quarter you just reported. Did maintenance activity lower EBITDA by $40 million or what's the different number?

Well, we didn't really quote a number around the maintenance. And I'll look to Doug in minute, but our refining segment results reflected a few things. We came into the year, as an industry here in the US, with pretty high inventories of gasoline. Diesel demand has been struggling, so we saw margins come in. I mentioned the crack spread declined some, one premiums had come in as well. And then in addition to that, we had our crude unit and coker turnaround which took some capacity out during the period. So it was a combination of both.

Yes, Jeff I think you're in the right, ballpark and the guidance that we gave before and you see it in the volumes being down, so that's where you see that predominantly. But also, what you found in the first quarter versus fourth quarter was there was a Maya 2-1-1 declined a little bit. So you saw some impact from that and naturally, when you're in a turnaround period, your mix and yields tend to be affected. So there's some impact of that, in that quarter. So it's a combination of those things.

Sure. And for my follow-up, what's your tentative date for when you'll be fully up and running after your $800 million pound expansion?

We're expecting the latter half of the year of Q3.

The latter half of Q3. Okay, good. Thank you so much.

Thank you. And our next question comes from the line of Mr. John Roberts of UBS. Your line is now open.

I think you originally expected $162 million in proceeds from the Argentine sale, did it come in at that level?

Yes, generally we came in at the level we had expected.

Okay.

$180 million cash for the proceeds.

Okay, thank you. And then, is polyethylene from recycled material globally larger or smaller than MTO? And kind of where does it sit on the cost curve? I'm thinking that's also been one of the swing factors out there recently in balancing polyethylene markets.

It has some, but we think that as we move into the next couple of years. MTO will really be the bigger picture because if you look at Asian capacity expansions on ethylene. I think about half of them are MTO, CTO type of capacity. So more and more I think that last increment will become more of the price setter as we go forward.

Because you don't think recycled has been a major factor in helping to tighten the market here because it would be high cost as oil came down.

Yes, I think it has been a factor. I think it's been a factor, but it's a combination of that and the need for MTO for new sort of virgin polyethylene, if you will. That's created demand for the virgin polyethylene.

Thank you.

Thank you. And our next question comes from the line of Mr. David Begleiter of Deutsche Bank. Sir your line is now open.

Bob, just on polypropylene. It should also be, I guess a good Q2, but what's your expectation for polypropylene margins in the back half of the year versus maybe the first half of the year?

I think, we're still going to see a pretty balanced type market for some time and there's not really a lot of investment in the Q. And albeit, polymer plants don't take as long, as crackers do to build, it still takes some time to do engineering and get permits and so on. So our expectation is that, the polypropylene market globally should do reasonably well and certainly in the US, operating rates will be fairly high through this year and into next year.

Very good. And just lastly on styrene, Bob. Do you expect these strong conditions continue through the remainder of 2016?

Yes, I think so. I think styrene has been very resilient. Demand is growing, much like polypropylene. It's been under invested for so many years and we're seeing demand growth in the case of styrene in the last couple of years at reasonable levels. So, we think we're again in that operating rate zone. Where any outages would cause margins to stay relatively strong.

Thank you very much.

Thank you. And now the next question comes from the line of Mr. Vincent Andrews of Morgan Stanley. Sir, your line is now open.

Obviously, we all know it is a big turnaround season, underway. But one of things that's changed over the past months or so, is that. The sort of length of the season appears to have extended as a couple of cracker turnarounds have been pushed out, later into the year. I'm just wondering, what impact do you think that will have in terms of how the market, how and when the market will reset itself, close to turnaround season in terms of, it seems like there'll probably be some pretty good pricing into the season. And there's a lot of concern about what happens to price thereafter. So, any thoughts on that would be helpful?

So if you look at April - May timeframe between - planned our outages are around the 10% range. But I think the shift of that, one cracker turnaround into the fall creates a tighter environment in the fall as well. Now so, our view is that, that with these planned outages being at a higher level now in the fall as well. We see a pretty tight market through Q3 and so far, we see pretty good demand growth, not only in the US, but globally. So, we expect pretty good market conditions through Q3 certainly.

Okay and just as a follow-up, Sasol recently announced delay in the start-up of their Gulf Coast cracker and it appears there are some subtext from that, was that in the low oil price environment, there's some funding issues. As you look around the world to some of the other planned capacity over the coming years, do you think it's plausible that we'll see delays for funding reasons as well?

Well, I think the delays could come from, not only funding but just general project delays from executions as well. I think, Vincent that this, so called second wave of cracker certainly would need to be evaluated and to what degree globally the MTO capacity will come on and. We have in our materials, the operating rates for ethylene and you see based on the current planned production increases in 18, there's a slight dip in operating rates and certainly, some of the delays occurred, it could see a much flatter operating rate curve in that balanced zone. And I think there's a possibility of that, that's an outcome of this lower oil price environment. And we've talked about this in other venues, in other in IR sort of meetings that in a lower oil price environment Greenfield cracker investments looked to high single-digit kind of returns. So I think it's feasible that some of this could get pushed out.

Thanks very much.

Thank you.

Thank you. And our next question comes from the line of Mr. Arun Viswanathan of RBC Capital Markets. your line is now open.

I guess I had a question, maybe can you describe the inventory environment out there. Do you think, your customers have built inventory in Q4 and Q1 as well, ahead of the turnaround season?

I think the inventories are at normal level. I don't think they're overly excessive downstream because while there was turnaround season anticipated, oil prices were also dropping. So that caused people not to build too much because maybe there was some expectation, of prices coming down and polyethylene prices did decline earlier in the first quarter and then they moved up recently. So, I don't see Arun. I don't see inventory is being theme here. The bigger theme is, is improving seasonal demand which we typically see in this April - May timeframe not only in US, but globally. And fairly heavy turnaround season here in the US and in Asia.

Okay, thank you. And then maybe you can just describe, your views on the refining segment. Would you still characterize that as core or and something you'd invest in or is it harvest mode [ph], what are your plans are there, thanks?

It's a refinery there, that you know it's very complex, large scale refinery. It's here in Houston in very prime real estate. We like it, we like the asset and it generates good cash flow that we can deploy elsewhere. I don't think it's a segment where we would aim to grow, but certainly we view it as an important part of the cash generation capability of our company and deploying that cash, elsewhere in other segment that we see as being more strategic perhaps.

Thanks.

Thank you and our next question comes from the line of Aleksey Yefremov of Nomura Securities. Your line is now open.

Back to MTO question, what percent of global demand do you think is supplied by non-integrated MTO? So merchants methanol buyers and also, what are the operating rates for those MTO units currently?

The amount is maybe in the 2% to 3% range. It's not a lot, but it's enough and is needed today to meet that last increment of demand and as I mentioned earlier. If you look forward and you look at the amount of expansion that are planned in Asia, quite a bit of the new capacity is going to be based on MTO and CTO. So I think it's important to think about that becoming a more meaningful slice of demand that will be price setter. And then in terms of operating rates, that's more difficult question to really asses because it's need based right. So, we do know that today MTO is needed and that's really to the extent that I can answer that question.

Thank you. And as a follow-up, turning to asset yields and VAM specifically. Two of your competitors announced plans or at least consideration for VAM expansion in North America. Have you looked into this and have you made a conclusion whether this is, all of interest to you or not?

Well, we're basic in methanol. VAM, we see as another ethylene derivative. So just kind of bit a high level and we would evaluate VAM, like we would any other ethylene derivative. So, you know that's how we think about it. It's one of our ethylene derivatives.

No current plans or evaluation of?

No, nothing that we've announced, no.

Okay, thank you.

Thank you. And our next question comes from the line of Mr. Don Carson of Susquehanna Financial. Your line is now open.

Bob, I want to go to Slide 15. You outlined your views of global ethylene supply and demand. Can you talk a bit about your outlook for feedstocks in the US specifically ethane availability and do you see propane perhaps you know capping, how high ethane can get on the basis of increased demand from these new crackers?

Yes, I mean I think certainly that interplayed between ethane, propane and butane as important. and as we come into the summer months, propane and butane tend to price lower and are more abundant here in the US. But let me talk a little bit about ethane and we know, this is a topic that's on a lot of people's mind. If you think about different time horizons. Think about the very near term. We still think, there's a significant amount of rejection that's occurring in the US and some of that nearby the Gulf Coast in some of the shale play like the Eagle Ford and the Permian and so on. So we think in the near-term, there's plenty of ethane available and certainly during this turnaround season. There's a little bit less ethane demand. As we go into the second half of the year in Q3, there's still quite a bit few turnarounds. So I think between that and propane and butane becoming more competitive in the cracker feed slate in the summer month, ethane should do quite well. Longer term, I can't help to think that with all of the reduction in E&P CapEx that eventually, this should be a price response, in oil. And we've seen a bit of that already with fairly big move in oil price recently. And as the oil price moves higher presumably that makes propane and butane more valuable. And likely I think wet gas more desirable to develop. And so we think that, that the crude to gas ratio should be favorable. We think, that wet gas ought to be more desirable to produce and that in the end, that ethane demand increase overtime will be met with more supply and we've seen that in the past, where the midstream space is able to respond pretty quickly. The infrastructure to the west is still fairly scalable. New fractionation capacity can be added very quickly. The capital cycle is far, far less than that for crackers. So in the end, I mean I think if I stand back, I think about there's a plenty of hydrocarbon here and ethane available. It's a matter of degree of advantage and I do think that, Greenfield investment will need to be undertaken more carefully in a $60, $65 oil environment compared to the $100 plus kind of oil environment. So that's how I see ethane, you know short, medium and longer term.

Thank you.

Thank you. And our next question comes from the line of Mr. P.J. Juvekar of Citi. Your line is now open.

I just wanted to ask you another question on this ethane, propane. And it's, as you see the new cracker start-up and also you have this ethane exports. And at what point in time at what price, you think the ethane export has become unviable and how do you see, exports playing a role in ethane pricing?

Yes, I think some of the ethane exports are needed for just feedstocks. I don't - I think they're going to be independent of price and some are more sensitive to price. And the thing you have to look is propane based, ethylene economics in Europe, compared to landed ethane from the US and what economics that would infer about ethylene in Europe. So some of that could change, but again more importantly I think P.J. there will be a reasonable supply response, if ethane prices were to rise and I think fundamentally there's plenty of ethane available and the ability - for ethane to provide a turn on, is a relatively shorter time period then that for ethylene.

Thank you and for follow-up. I think Bob you mentioned that, roughly 20% of your ethylene is merchant ethylene and you announced potentially a new polyethylene plant. Would that basically close your merchant position, when the plant comes online?

No, it wouldn't close it completely. And frankly, P.J. we'd like to have some merchants positions. It's for us, that's another sort of optimization now that we have. Our ethylene and derivative value chain and as many of you know, we also can convert ethylene and propylene through our metathesis process. So when we think about merchant, we can kind of balance through producing propylene, but our aim longer term, is to have that merchant position somewhere in the 10% to 15% range overtime, and if you think about back in 2013 and 2014, that merchant position clearly served as well as part ethylene prices expanded. And so we'll have those kind periods and we think that, having some merchant position provide the opportunity to optimize the value chain even more.

Thank you.

Thank you. And our next question comes from the line of Mr. Hassan Ahmed of Alembic Global. Your line is now open.

Bob, just wanted to revisit the whole MTO side of things. It seems to me that last couple of quarters, as ethylene prices have continued to come down. It seemed that there were a few new sort of MTO facilities in China, which were mechanically complete, but are still waiting for some sort of stability or positive inflection in ethylene pricing to start up. Now what's your view? Are those facilities beginning to come online? And the reason I asked that because obviously that could have a meaningful impact on methanol demand in pricing.

Well certainly, and it's difficult to assess unit-by-unit, but again if you step back and you look at demand growth. It seems to me, that more of the demand growth in Asia will be met by, it will be met with MTO-based polyethylene production. And so, today we're kind of in this period of trying to assess how many units are running or not and so on. And I think as we move through this year and go into next year. MTO will be an important part of satisfying their last increment of demand. And will be a more consisted price setter.

Fair enough. Now moving onto the I&D segment. The sort of production volume numbers that you guys provide on a segment-by-segment level basis. Within that, if I take a look at the asset yield silo. It seems that there were big sort of jumps up on a year-over-year as well as quarter-over-quarter basis. If I have these numbers right, asset yields was up production volume-wise 28% year-over-year and 13% quarter-on-quarter. Now I know, there was some turnaround activities in Q4, but I'm just trying to get a sense of the sustainability of these sort of big volume moves.

I think, it is turnaround, but that turnaround was a very big turnaround in Q4 and it went a little longer that we had expected. So, I would say Q4 volume was lower even more so than we had expected because of the turnaround and the volumes are sustainable. Our contract portfolio is set up such that, Q1 volumes are kind of what you're expecting.

So but what sort of underlying call it with within acetate and VAM, what sort of underlying demand growth are you seeing globally?

We're seeing reasonably good demand growth. I don't think it's anything unusually above trend line. But it's fairly steady from our perspective.

Hassan, I think the larger changes that you're seeing are really related to the two methanol plants and their output and turnaround in maintenance activity with them. And if you know as you look back, recall in 2014, the channel, the plant didn't run at full capacity. Adjustments were made in 2015, we bring that to full capacity late in 2015. You had the report [ph] turnaround. So I think what you're seeing is basically methanol volumes and maintenance and turnaround schedules.

Very good, thank you guys.

Thank you.

Thank you. And our next question comes from the line of Mr. Bob Koort of Goldman Sachs. Your line is now open.

Bob, I was looking into your supply demand curve, it looks like maybe there's a little iteration for some slower demand there. So the operating rate comes down a little bit, more than maybe we'd seen in the past going into 18. And I guess relative to the interesting chart, you have on the right side of the Slide 15. I'm wondering, how should we think about the margin half, as we go to those operating rates that look similar maybe there's 2012 or 2013 period. I mean, I recall back then the naphtha guys in Asia didn't make any money. So should we assume pricing would go on top of that MTO, north of Asia MTO price or is, there's some reason to think maybe they could retain some margin in that kind of global operating rate environment.

I think again, it depends on how that balance develops, but if we step back. The way I think about this cycle, whatever it turns out to be. It looks to be fairly shallow. I think there's a few characteristics about what lies ahead that's different then what we've had in the past. In the past decades or past cycles. Now this time, first of all we don't see operating rates dropping into the low 80s, like we've seen in the past. This is kind of around 90% plus or minus depending on timing of capacity expansion, how demand develops as you say. The other thing that I think is very different about this cycle was, the US is positioning in the top quartile of the cost curve. So we're going to run our asset hard. And if you think about the fourth quartile, MTO does become more meaningful, as time goes on. And so to your point, that ought to be more and more the price setter. And as all price rises going into presumably rises, going into 17 and 18. We ought to see, the slope of this cost curve maybe you know inch up some and so, you got to look at margins I think in that context. And also the operating rates, they're going to be on either side of balance. They're not dropping as low as 80%, as they have in the past.

Got it, that's helpful. Thank you.

Okay, thank you.

Thank you. And our next question comes from the line of Mr. Jim Sheehan of SunTrust. Your line is now open.

Could you take a little bit about free cash flow in the quarter? It dipped a little bit. What is your outlook for free cash flow for the rest of the year? And do you think, that working capital changes influence what happened in the first quarter?

Well, I'll start with that and then Thomas will supplement certainly. I think, first of all working capital changes. We don't think they're going to significantly - we're not going to be really material with our cash flow development. If you look back at the last 12 months, our free cash flow yield is been about 10%, 11% in that range. They've been double digits for quite some time. So I think our cash flow generation should continue to be pretty strong and Thomas, I don't know if you want to add more.

No, I don't think I can add more here. The cash flow generation for 2016 is going to be strong, as we've seen in the past. As we have talked at our year-end call. The CapEx expenditures are going to be higher in 2016 versus 2015. So that obviously, when we look at the free cash flow perspective were impacted, but we're expecting strong cash flow generation, net working capital no significant changes expected to-date.

Very good and also on, could you talk about the - how you're thinking about M&A these days. Is there any view to diversifying the company further or how would you look at? You've got a very strong balance sheet here. Where does M&A fall in your uses of cash priorities?

Well, there's really no change in our position regarding M&A. I think, I've talked about this entire call, so that we like first of all from a portfolio standpoint. We think that, the O&P and I&D value change provide a very white plain field and then I think, both play to our strengths of running large scale operations, safely, reliability. We know how to manage cost well. We understand cycles and we know, how to do well in all parts of cycle. So as we think about cash flow deployment. And we think about various options and certainly, we study all kinds of alternative. So I don't think our positions has changed on M&A.

Thank you.

Thank you and our next question comes from the line of Mr. Frank Mitsch of Wells Fargo. Sir your line is now open.

And just quickly follow-up on that, that obviously begs the questions. You're on share buyback, you're going to your shareholders to get more approval. Is this 2.8% per quarter rate is at kind of the baseline thinking right now?

Yes, so in May. Frank, hopefully get approval for this next 10% and we'll commence that program. Our approach is been, we would do these 10% programs up to 18 months kind of timeframe. So, we'll evaluate that, you've seen us increase the pace in Q4, when we thought it was even better value in our shares and so, I think we'll continue to evaluate that.

Thank you and then following up on I&D. The PO and derivatives business of material volume growth sequential and you also pointed out, how the PG margins were essentially flat Q1 versus Q4. But you said, that your margins were down due to sales mix. Can you elaborate on what's going on in that business and what we should be expecting in Q2 and beyond?

Well I&D in terms of Q1, it was really on oxyfuels. We had a couple of things going on there. Seasonally, Q1 is usually weak in terms of margins. And in addition to that, as I mentioned during the refining discussion, when premiums came in, gasoline inventories were high. So it was kind of an unusual period where, in additional to the seasonal impacts. We had some down draft in margins and we kind of see, already we see oxyfuel margins coming back. So that was an important feature, but frankly part of that was offset by pretty good styrene margins and we think those should continue.

And frank, within the volumes as you look at the volumes. If you recall fourth quarter, we had maintenance turnaround at our French, PO plant. So that affects both the propylene oxide and the oxyfuels businesses. And then, we also had the maintenance going on across ethylene glycol and the acetyl. So fourth quarter volumes pretty heavily affected by maintenance. First quarter really reflects all assets up and running. There's a little bit of mix effect across PO. You got to compare it as a global business and as different events occur in the industry, often with other players. Which parts of the globe you're going to be supplying. But in general, I think if you went back over our past five years. The way you see is a typical comment about propylene oxide and derivatives is a very stable quarter-to-quarter profitability.

And in terms of the mix effects, that's really a Q1 sort of an issue and not something that we should count on for Q2 and beyond.

[Indiscernible] fuel, seasonality. I think that's when you boil it down, kind of net-net, that's what it is.

Thank you, so much.

Thank you. And our next question comes from the line of Mr. Nils Wallin of CLSA. Sir, your line is now open.

I was wondering, if you could update on your thoughts on PO/TBA plant, when you would expect to make a final decision and if you do go ahead with it, how that might affect your ability or your interest in doing buybacks while it is being built?

So, we're progressing that project. We're doing detailed engineering as we speak and we would expect sometime in the first half of next year to make final investment decision, with a projected start-up date of about mid-2020. And that's currently where we on that project, Nils. And we evaluate lot of different scenarios in terms of our cash flow deployment and so on. And so I would say, more broadly I see us being able to support and continue to invest in that project through whatever is ahead of us in the next three four years and in terms of share buybacks, we're always evaluating that as one of our options in deploying cash flows. So when you look further out, I think we're going to continue to develop a variety of options. But remember, our aim is to meaningfully create shareholder value and continue to generate the strong cash flow, that we've been known to generate.

Of course, that's helpful. Thanks. And just another questions back on ethane. I think that they understand is that those, plenty of ethane out there in terms of you know potential capacity supply and rejection. But I'm curious as the new plants, new ethylene plants come on stream. Do we have to get the sources of ethane from further out locations like the Marcellus or the Bakken and how might those deliver cost to supply the incremental demand effect the ethane price?

I think there could be periods where Marcellus ethane is needed, but if you think about the amount of new consumptive capacity that's coming. It's something in that 400,000 barrels per day sort of range, by mid-to-late 18s. But the price of ethane, I think where it also needs to be considered in the context of, propane price in the context of butane price. And also, if Marcellus ethane is needed then you know my view is that, Eagle Ford ethane and Permian and Haynesville is even more profitable because it's much closer to Gulf Coast. So I would imagine that there would some supply response from more closer in production of ethane and the market is out of balance.

Got it, that's very helpful. Thanks again.

Thank you. And our next question comes from the line of Mr. Laurence Alexander of Jefferies. Your line is now open.

Just two quick ones. What's your thinking now about the incentive to shut naphtha capacity given the MTO dynamic that you outlined? And secondly, as you think about the European prospects in the medium term. The extent that ethane exports can effectively provide an alternate for the price mechanism and possibly provide a bit of support of naphtha margins in Europe.

Well I think first of all in terms of naphtha crackers. We're not expecting rationalization either in Europe or in Asia, for naphtha crackers. Most of what was going to get done earlier in the decade. And as far as ethane setting the ethylene price in Europe. I don't think that's going to be the case because I think the mainstream market still kind of settles on naphtha and supply demand and I expect that to continue. But I suspect that those who have the ability to crack something other than imported methane. Then they'll kind of run those economics and they'll import more or less depending on whether ethane based ethylene make sense in Europe or not. I don't think that will become a price setter in Europe.

Thank you.

Thank you and our next question comes from the lien of Mr. Jonas Oxgaard of Bernstein. Your line is now open.

So question on ethylene North America. So you're adding another couple of hundred thousand tonnes. Other people are adding left and right and no derivatives. How much more ethylene do you think, North America can absorb being going to cash cost? And when would that happen, you think?

Well, I think it's just sort of timing of derivatives and ethylene expansions and when you kind of look at turnarounds and so on, these increments are not that big to change the underlying ethylene supply demand dynamic. So our sense is that, there's still more derivative capacity in the aggregate and that, we ourselves have already a view on, where we're going to place our ethylene. So and longer term, I think we'll see more derivatives come on and some of these cracker start up. So we don't see it quite that dramatic frankly.

Okay, how long would it actually take for you to get your derivatives online, once you finally announce it?

Well, so our polyethylene expansion that we're advancing. We're aiming for sometime in 2019 to have production.

Okay, thank you.

Thank you. And at this point, we have no further questions in the queue. Speakers you may proceed.

Okay, well thank you. Well let me just close with few comments before everyone disconnects. I want to just summarize by telling you, little bit about where I think our priorities are for Q2. To me, they're pretty clear. I think we got to get the refinery expeditiously and safely return to normal operation. We have our large turnaround at Corpus Christi and the expansion that will follow. For as I mentioned, we're aiming to start that up in late Q3. And then ultimately, we had a more higher level. Our aim is to really maximize cash flow during this very balanced and tight market environment, not only in the US but globally. From a financial perspective, assuming that we receive shareholder approval will start our fourth 10% share repurchase program in May and so we look forward to updating you on progress on all these items and others in July. Thanks for your continued interest in our company.

Thank you and that concludes today's conference. Thank you all for participating. You may now disconnect.