LyondellBasell touts strengthened post-merger balance sheet, interest cuts

By Paul Deckelman

New York, Nov. 27 - LyondellBasell Industries NV, which recently got a two-notch ratings upgrade into investment-grade territory from Moody's Investors Service, has generated what its chief financial officer described as "very strong free cash flow generation," allowing it to sharply bring down its leverage and interest costs since its merger-driven formation nearly five years ago, while maintaining ample liquidity and regularly returning cash to its shareholders.

The strong free-cash flow "resulted not only in our funding our capital growth programs," executive vice president and chief financial officer Karyn Ovelmen told participants at Citigroup's Basic Materials Symposium on Tuesday in New York, but also "allowed us to reduce our overall leverage, resulting in a reduction of our interest expense from around $800 million annually to around $250 million annually."

"It also resulted in a more longer-dated, staggered maturity schedule," she added.

Debt falls, liquidity grows

The Rotterdam, Netherland-based chemical company was formed via the December 2007 acquisition of the then-Houston-based Lyondell Chemical Co. by Basell Polyolefins - a Dutch joint venture originally between BASF and Royal Dutch Shell.

Billionaire investor Leonard Blavatnik's Access Industries acquired Basell Polyolefins for $5.7 billion in August 2005 and bought Lyondell in 2007 for $12.7 billion. The U.S. operations were re-organized under Chapter 11 from January 2009 to April 2010, and the combined company began trading on the New York Stock Exchange in October 2010.

"We improved the capital structure," Ovelmen declared, using the company's hefty free cash flow.

She noted, "We had borrowed about $7 billion at 10% a little over a year or a year and a half ago. We worked that down to $4.3 [billion] at 5½%."

According to data contained in materials the company released in connection with Ovelmen's presentation, the $4.3 billion of total debt at the end of the third quarter included only about $1 billion of net debt - down from about $3 billion at the end of 2011.

The CFO said: "This was all completed while we were returning significant cash directly to our shareholders, with the increase in our regular dividend that we had last year," supplemented with significant special dividends in both 2011 and 2012. The latest was a $2.75 per share special dividend payable on Dec. 11 to shareholders of record as of Nov. 19, the date of the announcement. That comes on top of the interim regular dividend of 40 cents per share declared at the same time and with the same conditions.

She said that LyondellBasell was able to do "all of this while maintaining ample liquidity on our balance sheet."

As of the end of the third quarter, the company had total liquidity of some $6 billion, according to the presentation materials, equally split between cash and credit facility availability.

"As a result," she further pointed out, the company recently got its ratings upgrade from Moody's, which upped the rating on LyondellBasell's senior unsecured debt to Baa3 from Ba2 on Nov. 18, with a stable outlook.

Moody's said the upgrade "reflects conservative financial policies, extremely strong financial metrics" and the declining equity ownership by its two main shareholders, who are affiliates of Apollo Management and Access Industries.

Ovelmen called the agency's action "really reflective of this balance sheet restructuring, as well as our very prudent and disciplined cash deployment. So we're very happy with that, just another great milestone for the company."

The CFO explained that the company's profitability is largely driven by the truism that "[natural] "gas is cheap and crude is expensive."

With most of the company's operations using feedstocks derived from natural gas rather than crude oil, as so many other chemical companies do, LyondellBasell's North American and Saudi Arabian joint venture operations enjoy about a 30-cent per pound cost advantage over "two-thirds of the rest of the world," an advantage which she called "the main driver of our profitability."

More cash to shareholders

During the question-and-answer portion of the proceedings that followed her formal presentation, Ovelman was asked whether LyondellBasell plans to continue to return excess cash to the shareholders.

She replied, "We've been very fortunate in terms of our free cash-flow position in terms of being able to put in a regular dividend, which, for us, the key is having a regular dividend that's sustainable through the cycle. So we'll continue to look at that, in particular, as new projects come on as well."

However, she cautioned, "That doesn't mean we want to be able to maintain that if we have to raise debt, and we'd have to reduce [the dividend] to pay that through the cycle. So putting that at the right level is important.

"As we move forward into 2013, and you've seen some selldown by private equity, we do have a little more capacity now to really start considering share buybacks going forward. The key message, I think, is that we will look at this more frequently and look at it with more varied amounts as we go forward. But we do have opportunities there.

"I think the chief message being that we have, from a company perspective, a management perspective, shown our willingness and have established a pattern of giving back excess cash flow directly to the shareholders, when we have it," she said.

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