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. David Kinney, Director of Investor Relations. Sir, you may begin. .

Thank you, operator. Hello, and welcome to LyondellBasell's Third Quarter 2020 Teleconference. I'm joined today by Bob Patel, our Chief Executive Officer; and Michael McMurray, our Chief Financial Officer..

Before we begin the business discussion, I would like to point out that a slide presentation accompanies today's call and is available on our website at www.lyondellbasell.com..

Today, we will be discussing our business results while making reference to some forward-looking statements and non-GAAP financial measures. We believe the forward-looking statements are based upon reasonable assumptions, and the alternative measures are useful to investors.

Nonetheless, the forward-looking statements are subject to significant risks and uncertainty. We encourage you to learn more about the factors that could lead our actual results to differ by reviewing the cautionary statements in the presentation slides and our regulatory filings, which are available at www.lyondellbasell.com/investorrelations.

Reconciliations of non-GAAP financial measures to GAAP financial measures, together with other disclosures, including the earnings release, are also currently available on our website..

Finally, I would like to point out that a recording of this call will be available by telephone beginning at 1 p.m. Eastern Time today until November 30 by calling (888) 566-0568 in the United States and 203-369-3064 outside the United States. The passcode for both numbers is 6541..

During today's call, we will focus on third quarter results, the current environment, our near-term outlook and provide an update on our growth initiatives..

Before turning the call over to Bob, I would like to call your attention to the noncash lower of cost or market inventory adjustments, or LCM, that we have discussed on past calls. These adjustments are related to our use of last in, first out or LIFO accounting and the recent volatility in prices for our raw materials and finished goods inventories.

During the third quarter, we recognized pretax LCM benefits totaling $160 million compared to LCM charges of $323 million during the first half of 2020. During the third quarter, we also recognized a noncash impairment of $582 million that reflects our expectation for reduced profitability from our Houston refinery.

Comments made on this call will be in regard to our underlying business results, excluding the impacts of the refinery impairment and the LCM inventory adjustments..

With that being said, I would now like to turn the call over to Bob. .

Thank you, Dave, and good day to all of you participating around the world. We hope that you, your colleagues and your families are all staying healthy and safe during these challenging times. We appreciate you joining us today as we discuss our third quarter results..

Let's begin with Slide 3 and review the highlights. In the third quarter, LyondellBasell's businesses benefited from improving volumes during the initial months of a recovering global economy.

After excluding the noncash impacts of LCM inventory benefits and an impairment of our refinery, third quarter EBITDA was approximately $900 million, an improvement of more than $200 million relative to the second quarter.

We continued to focus on cash generation and retention by efficiently converting more than 90% of our EBITDA into cash from operating activities and by carefully managing our working capital to end the quarter with approximately $5.5 billion of cash and available liquidity..

Our strong balance sheet has served us well by allowing the company to capture opportunity during this downturn through the establishment and start-up of a new integrated polyolefin joint venture in China, followed by the announcement in October of our intent to form another integrated polyethylene joint venture in Louisiana before the end of this year.

Both of these joint ventures offer unique opportunities for LyondellBasell to grow one of the core areas of our business by investing in new, already operating, high-quality assets that have significant upside as market conditions continue to improve.

These transactions are prime examples of our strategy to identify, develop and capture opportunities through business cycles..

Let's turn to Slide 4 and review our recent safety performance. Our employees and contractors maintain their focus on performing work safely to eliminate injuries, prevent virus spread and minimize emissions from our assets. During September, we had one recordable injury across our global workforce of more than 19,000 employees.

Although our goal is always 0 injuries, the September year-to-date recordable injury rate across both our employees and contractors is on track to improve upon the top decile industry performance we achieved in 2019..

Our protocols for workplace sanitization, facial covering, social distancing, health screening and contact tracing have been successful in minimizing the spread of coronavirus across our global facilities. We have no evidence of work-related COVID infections across our global workforce.

Our major manufacturing locations operated continuously throughout the pandemic as an essential industry. Our office workers have returned to work in Asia, and we are gradually increasing our office populations across the rest of the world in accordance with local regulations and safety metrics, driven by both employee and community infection rates.

We are using a safe and responsible approach to gradually increase the number of personnel at our Houston headquarters during the fourth quarter..

In September, our company released our annual sustainability report, the cover of which is shown on Slide 5. We hope that you will all take some time to review the report. You will note that the cover image of our report does not depict images of solar arrays, wind mills or a pristine beach.

Our products make modern life possible and often have a favorable environmental footprint relative to the alternatives. We recognize that plastic waste represents a substantial challenge for society, and our goal is to play a central role in developing pragmatic solutions that balance the needs for environmental, economic and social sustainability..

eliminating plastic waste, addressing climate change and supporting a thriving society. Over the next decade, we will continue to develop successful waste management projects through the Alliance to End Plastic Waste that will recover and reuse millions of tons of plastic waste.

By 2030, we aim to produce 2 million tons of recycled and renewable polymers across our asset base. We are targeting a CO2 intensity that will be 15% lower by 2030 than it was in 2015. And the events of this year have led us to redouble our efforts to ensure a culture of inclusion across our diverse global workforce.

We hope you will find that this year's report not only tracks our progress on meaningful metrics for investors, but also describes the increasing scope of our company's ambitions and strategies to support the transition to a low-carbon circular economy and drive solutions for a more sustainable and thriving society..

Let's turn to Slide 6 and briefly review how we are advancing on our growth strategy with the Sasol joint venture that we announced on October 2.

In summary, LyondellBasell has agreed to purchase a 50% interest in a newly built ethylene cracker, 2 polyethylene units and the associated utilities and infrastructure located in Lake Charles, Louisiana for $2 billion. LyondellBasell will operate the assets and market all of the polyethylene produced by this joint venture.

As we discussed a few weeks ago, this transaction will enable both partners to maximize the value of these world-class assets while advancing our respective strategic objectives. While no formal process is set out in the agreements, LyondellBasell will have the potential to acquire the JV assets in full at some point in the future..

In addition to the Louisiana joint venture, we also established and started up a joint venture with Bora in China just a few weeks ago. We have been very clear that we have no intention of building a new integrated ethylene cracker on our own for the foreseeable future.

But when these 2 JVs in China and Louisiana are taken together, we are essentially acquiring the full capacity and immediate financial benefits of a new and operational world-scale integrated cracker complex with minimal exposure to the risk from project execution, timing uncertainty and opportunity costs that are typically incurred during the multiyear construction of these types of facilities.

Plus, we are acquiring this world-scale integrated cracker at a very attractive valuation. With respect to our joint venture with Sasol, both partners are working diligently and making good progress towards obtaining the required approvals that should allow us to close the transaction before the end of this calendar year..

With that, I'll turn the call over to Michael, who will describe our financial results over the past quarter. .

Thank you, Bob, and good morning, everyone..

Please turn to Slide 7. While the recession and subsequent recovery has presented challenges for our business, we have also found great opportunities in the debt capital markets to reduce our interest costs and extend maturities by refinancing some of our debt as we raise capital to support the formation of the Louisiana joint venture.

Immediately after announcing our agreement with Sasol, we renegotiated covenants, extended our revolving credit facility by 1 year and issued $3.9 billion in new bonds. These bonds were very well received by the market with an order book that was more than 5x oversubscribed.

We locked in favorable rates with a weighted average coupon of 2.72% across 6 tranches with maturities ranging from 3 to 40 years. The new bonds serve to reduce the weighted average interest rate across our debt portfolio by 34 basis points.

After redemptions planned for the coming days, we will have both accessible near-term maturities as well as staggered long-term maturities without any large maturity towers..

With the completion of the Sasol joint venture, we will prioritize deleveraging over share repurchases and work toward improving debt ratios to levels consistent with a stronger investment-grade credit rating. We expect to continue to fund our dividend primarily from operating cash flows.

One more modeling item, in the fourth quarter, we'll have a charge of approximately $80 million for loss on extinguishment of debt associated with our refinancing activities..

As Bob mentioned, our cash conversion remained strong in the third quarter. On Slide 8, you can see that over the last 12 months, more than 100% of our EBITDA was converted into nearly $4 billion of cash from operating activities.

Our business teams remain highly focused on aggressively managing inventories through these dynamic markets while prioritizing cash generation and liquidity..

Now please turn to Slide 9, where we provide further details on cash generation during the third quarter. We closed the third quarter with cash and liquid investments of $2.8 billion.

Capital expenditures of $425 million declined more than 25% relative to the second quarter, largely due to the reduced pace of construction on our new PO/TBA facility in Houston..

In March, we announced that we were reducing activity on the PO/TBA project to both prevent virus spread at the construction site and conserve capital as we prepared for an uncertain economic environment from the pandemic. We have recently begun to reactivate the project and expect to return to a full pace over the coming weeks.

We now expect the project to be completed in the fourth quarter of 2022, approximately 1 year later than our original schedule. The delayed timing of the start-up should provide benefits from a more fully recovered global economy as well as another year of global demand growth for the products.

Higher costs arising from the delayed project execution, more extensive civil construction and unexpected tariffs on materials are expected to add at least 30% to our original cost estimate of $2.4 billion. We plan to provide a more definitive update on the estimated cost after activity is fully restored on the project early next year..

In the third quarter, we also funded the $472 million equity contribution for our joint venture with Bora in China and paid $352 million in dividends to our shareholders. We ended the quarter with $5.5 billion of cash and available liquidity..

The recognition of the impairment of our refinery during the third quarter has substantially changed the math for computing our 2020 forecasted tax rate. We now believe that our effective tax rate will be significantly lower than our prior guidance of a less than mid-teens percentage rate.

Due to the uncertainty regarding the impact of the CARES Act and the timing of certain discrete events, we will not be providing more specific guidance at this time. On the other hand, the refinery impairment has resulted in our cash tax rate being higher than previously communicated.

While it's difficult to forecast a specific percentage, we expect that our cash tax payments, net of refunds for 2020, will be approximately $200 million..

With that, I'll turn the call over to Bob. .

Thank you, Michael. Let's turn to Slide 10 and review our third quarter performance. As mentioned previously, my discussion of business results will be in regard to our underlying business results, excluding the impacts of the noncash LCM inventory changes and the impairment of the Houston refinery..

Our global footprint and diverse business portfolio continued to provide resiliency in this challenging market environment. EBITDA for the third quarter was nearly $900 million, more than $200 million higher than the prior quarter.

The upward trajectory supports our belief that pandemic-driven reductions in demand for our products bottomed during the second quarter.

Our Olefins and Polyolefins segments continue to serve strong consumer demand for products used in packaging and health care markets, while demand increased for intermediates and polymers used in durable goods applications. Volumes rebounded for compounded polymers from our Advanced Polymer Solutions segment as automotive manufacturing reopened.

Our Refining segment and the Oxyfuels & Related Products business continued to be challenged by decreased mobility that has reduced demand for transportation fuels. We expect that our diverse portfolio of businesses will see further improvement over the coming quarters as global economies continue on the path to recovery..

polyethylene and transportation fuels. Let's turn to Slide 11 and review the growth in polyethylene demand during the pandemic. In a typical year, global polyethylene growth rate is approximately 4%.

As you can see from the chart, in spite of the pandemic and recession, global polyethylene demand has still grown by 1% over the first 9 months of this year. As expected, Europe has seen a decline, but polyethylene demand in the U.S. and Canada and Northeast Asia regions has grown.

Despite capacity additions, China demand will continue to far exceed its domestic production and incentivize North American exports. Low industry operating rates during the second quarter, along with Hurricane Laura in August and strong demand, tightened supply on the U.S.

Gulf Coast, which led to polyethylene contract price increases totaling $420 per ton over the months of June through September. The recovery in demand for transportation fuels continues to be stubbornly slow..

On Slide 12, you can see that while U.S. passenger and commercial vehicle travel has returned to within 10% of 2019 levels, U.S. flights and associated jet fuel consumption is still down by 40%. In March and April, refiners reduced operating rates in response to low demand and shifted distillate production from jet fuel to diesel.

While gasoline and jet fuel inventories are currently at manageable levels, the excess distillate capacity has driven diesel inventories to levels 30% above the same period last year.

Industry consultants believe that up to 3 million barrels of global refining capacity will need to be rationalized over the coming years to support more normalized margins since it is unlikely for airline travel to rebound to full utilization of the available refining capacity.

As a result of an extended challenging outlook for refined product demand and margins, we recognized an impairment of the value of our refinery during the third quarter..

Now let me summarize how these trends have come together for our company on Slide 13. In these initial months of economic recovery following the pandemic lockdowns, demand for our products has proven to be resilient. As you can see in the comparison to the third quarter of last year in the top chart, our sales volumes are largely intact.

Further progress is needed to drive margin recovery..

Comparing our performance relative to the second quarter in the bottom chart, you see the stepwise improvement. Volumes are up and margins have improved in all of our businesses, except for those serving transportation fuels markets.

With continuing recovery in gasoline demand from passenger cars, we expect that our Oxyfuels business should recover more quickly than the broader refining market..

Let's review the third quarter results for each of our segments. As mentioned, my discussion will describe our underlying business results, excluding the noncash impacts of LCM inventory changes and the impairment of the Houston refinery. I will begin with our Olefins and Polyolefins – Americas segment on Slide 14..

Third quarter EBITDA was $404 million, $194 million higher than the second quarter. Improved demand for polyethylene and higher ethylene prices resulted in higher margins and volumes. Olefins results increased approximately $220 million compared to the second quarter.

Industry ethylene supply tightened, which led to price increase that improved olefins margins. Volume increased due to higher demand and the completion of planned maintenance at our Channelview cracker in the second quarter. Polyolefin results increased by about $25 million during the third quarter.

Increased polyethylene demand drove higher margin and volume, partially offset by a decrease in polypropylene margin. We anticipate both volume and margin improvement for our O&P-Americas segment during the fourth quarter. Recent polyolefins price increases are expected to find support from industry supply constraints and robust demand.

If global economies continue to improve, this momentum could persist for the remainder of the year..

Now please turn to Slide 15 to review the performance of our Olefins and Polyolefins – Europe, Asia and International segment. During the third quarter, EBITDA was $131 million, $88 million lower than the second quarter. Integrated profit margins were impacted by rising feedstock costs.

Olefins results decreased approximately $30 million, driven by a decrease in margin. Ethylene margin decreased as higher feedstock costs outpaced an increase in ethylene prices. Combined polyolefins results decreased $20 million compared to the prior quarter.

Polyethylene volume decreased due to summer demand and polypropylene margin declined on lower spreads. Although equity income decreased by approximately $10 million during the quarter, we were pleased to record a positive contribution for our Bora joint venture in September, the very first month of its operations.

In October, we've seen a slight decline in integrated polyethylene margin. Over the fourth quarter, we expect a typical seasonal decline in demand as we approach the year-end holiday season..

Please turn to Slide 16. Let's take a look at our Intermediates and Derivatives segment. Third quarter EBITDA was $245 million, $124 million higher than the prior quarter.

Volumes rebounded with increased demand from durable goods markets in our Propylene Oxide & Derivatives business and the completion of planned maintenance in the Intermediate Chemicals business.

Third quarter Propylene Oxide & Derivatives results increased by approximately $45 million, driven by higher volumes from increased demand for polyurethanes in automotive, construction and furniture markets. Intermediate Chemicals results increased about $40 million, mostly driven by higher volumes after the completion of our planned maintenance.

Oxyfuels & Related Products results increased approximately $10 million as a result of slightly higher margins due to higher product prices. In the coming quarter, stable demand for durable goods should continue to support profitability across most of the businesses in this segment.

In October, oxyfuels prices and margins have come under additional pressure with lower seasonal driving demand..

Now let's move on and review the results of our Advanced Polymer Solutions segment on Slide 17. Third quarter EBITDA was $117 million, $94 million higher than the second quarter. Volumes rebounded significantly, driven by higher demand for our products. Third quarter integration costs were $7 million.

Compounding & Solutions results increased approximately $90 million due to higher volumes driven by increased demand for our polypropylene compounds utilized in automotive end markets. Advanced Polymer's results were relatively unchanged.

Although the demand for our products is improving, we expect typical seasonality to affect fourth quarter profitability for the Advanced Polymer Solutions segment as activities in the automotive and construction market slowdown at the end of each calendar year..

At our Investor Day last September, we updated our targets for synergies from the A. Schulman acquisition to $200 million. I'm happy to say that we have successfully implemented our synergy plan, and we believe that the annual run rate of more than $200 million will become increasingly visible with volume recovery in this segment..

Now let's turn to Slide 18 and discuss the results for our Refining segment. Third quarter EBITDA was negative $121 million, a $107 million decrease versus the second quarter of 2020. As I discussed earlier, this excludes the impact of both LCM and the onetime impairment of the Houston refinery.

Results for the quarter were pressured by excess industry capacity and reduced demand for transportation fuels..

In the third quarter, lower demand for gasoline and jet fuel negatively impacted both margins and volumes. Margins declined in the third quarter due to the absence of a hedging gain recorded in the second quarter, unfavorable byproduct spreads and a decrease in the Maya 2-1-1 benchmark crack spread.

During the quarter, the Maya 2-1-1 crack spread decreased to as low as $7.75 per barrel and ended at a historically low quarterly average of $9.89 per barrel. In response to sluggish demand, we reduced the utilization rate at the refinery to 81%, with an average crude throughput of 216,000 barrels per day.

Refining margins are expected to remain compressed until demand for gasoline and jet fuel returns closer to pre-COVID levels. We plan to operate the refinery at about 80% of nameplate crude capacity during the fourth quarter..

Let me be clear that we are leaving no stone unturned in our efforts to reduce expenses and minimize losses at the refinery.

We are deferring nonsafety-related discretionary activities and reducing the salaried workforce by approximately 10% at our refinery through early retirements and potential worker redeployments to our other facilities in the Houston area.

We are evaluating every possible option with regard to procuring crude oil and optimizing production from this asset..

Please turn to Slide 19 as we review the results of our Technology segment. Third quarter Technology segment EBITDA was comparable to the prior quarter at $111 million. Licensing revenues increased, while catalyst margin and volume decreased.

Based on the anticipated timing of upcoming licensing milestones and catalyst demand, we expect that the fourth quarter Technology business profitability will be similar to the first quarter of this year..

to increase free cash flow by harvesting new sources of EBITDA generation while moderating our capital expenditures. Earlier this year, we accelerated our plans to reduce capital expenditures to $2 billion or less. We intend to maintain our capital budget at these levels for the next 3 years..

In the second quarter, we started a 500,000-ton per year polyethylene plant in Houston, utilizing our next-generation Hyperzone HDPE technology. At full nameplate capacity and average margins from 2017 to 2019, we estimate this asset is capable of generating $170 million of annual EBITDA..

On September 1, we established a new joint venture in Northeastern China with Bora. This investment has already contributed earnings in September, and recent margins indicate the joint venture is capable of generating $150 million of annual EBITDA for our company..

In 2018, we expanded our compounding business by acquiring A. Schulman and we formed the Advanced Polymer Solutions segment. With integration completed, we are on track to capture $200 million in estimated synergies that should become increasingly visible as volumes recover in the markets served by this segment..

We expect to close the transaction for the Louisiana joint venture with Sasol before the end of this year. At full capacity and historical margins, this investment is capable of contributing $330 million in EBITDA to our company..

In our Intermediates and Derivatives segment, the combination of 2 new propylene oxide investments in China and Houston starting in 2022 and 2023 could together add almost $500 million of annual estimated EBITDA. The formula is very simple.

More EBITDA and moderating capital expenditures should result in higher free cash flow at any point in the business cycle..

Let me summarize this quarter's highlights and outlook with Slide 21. During the third quarter, LyondellBasell's leading and advantaged global positions enabled us to capture value and deliver resilient results.

We demonstrated commercial agility by matching production with continued demand from packaging and health care markets and increasing volumes from automotive and other durable goods markets. We are seeing higher demand for our products from recovering global economies.

Our North America polyethylene exports are increasing to support growing demand in Asia. Markets for discretionary durable goods are improving..

As global mobility increases, the demand and margins for transportation fuels will eventually show improvement. Our financial strategy continues to support our commitment to an investment-grade rating.

With sound cash generation and disciplined capital deployment decisions, we are focused on maintaining the continuity of our dividend and prioritizing deleveraging upon completion of the Sasol transaction. Our goal at LyondellBasell is to capture opportunities throughout all points of business cycles.

Over the past several years, we have carefully planted the seeds for profit-generating growth by building, acquiring and partnering on assets that expand our reach with new capabilities to sustainably harvest profitability from advantaged feedstocks, expanded product ranges and an increased footprint in the world's fastest-growing markets.

We look forward to discussing our progress on maximizing cash flow from these investments over the coming quarters..

We are now pleased to take your questions. .

[Operator Instructions] First question in the queue is from John McNulty with BMO Capital Markets. .

So it looks like there's -- normally, you have a seasonal dip as you go from kind of 3Q levels to 4Q for a whole host of reasons.

But it seems like given this year is a little bit of an atypical year, we'll call it, where you've got polyethylene prices surging throughout the third quarter and into the fourth and you've got maybe not quite as big of a delta around transportation fuels and that type of thing, I guess, how should we be thinking about your ability to maybe buck the trend of the normal seasonal dip going into 4Q? Is that something that's possible as the economies are recovering or is that maybe too much of a stretch?.

John, indeed, especially in polyethylene, as you noted, this year -- and polypropylene, to an extent, this year, because of the hurricanes, and prior to that, the inventory reduction that we undertook as a company and generally as an industry, likely if there's some slowdown in demand, certainly, we, as a company, will take the opportunity to rebuild some inventory.

We're at very, very low levels today and really kind of hand to mouth on many products. And I suspect that, that will get us through the seasonally soft period and get into next year. So I suspect that will be the case in polyolefins for the most part. .

Next question is from Steve Byrne with Bank of America. .

Just curious about this Bora JV. Is the $150 million EBITDA projection, is that effectively a net income number, kind of how would you compare that to your other assets in terms of the margin? And the reason I ask is, naphtha pricing has been pretty volatile over there, and I don't know whether that's fair to be looking at for that joint venture.

Is it more likely that you're really getting the naphtha linked to oil prices from your refinery JV partner?.

Yes. So Steve, the $150 million will be at the EBITDA level. So it's like equity earnings. Think of it that way. We do not expect dividends from Bora for a couple of years because the priority will be to delever. You will recall that the financing was roughly 1/3 equity, 2/3 debt for Bora.

So the way we've outlined the joint venture and how the bank covenants work, we need to prioritize delevering first. We'll get some incremental commission income from the sales of polyolefins. The likely dividend income will come in year 3, 4 and onwards. .

Next question is from Jeff Zekauskas with JPMorgan. .

Brent prices have moved down from about, I don't know, $44 a barrel to $37 over the past month.

Do you think that will make a difference to global petrochemical prices?.

Yes, Jeff. So it may, but I think right now what's driving global petrochemical prices and especially polyolefin prices, it's more about the heightened level of demand that we've seen, very low levels of inventory.

And I think that's really what's going to drive near-term pricing and provide support potentially for the final increase that's been announced here in the U.S..

The other thing to note about a falling oil price is that it should benefit our European business. Because typically when oil price declines, we see margins open up in Europe. We saw the opposite of that in Q3 as oil prices actually increased, and we saw a bit of margin squeeze as we couldn't pass all of that through to the end users.

So I think net, probably a benefit for Europe and near-term supply/demand likely drives pricing more so than Brent price. .

Next question is from Aleksey Yefremov from KeyBanc. .

Your O&P-Europe EBITDA has been sort of all over the place over the last 4 quarters with crude oil moving around, just like you just said, Bob.

What's a good normalized number for the current environment for this segment? Is this closer to $130 million, $140 million that you just printed in the third quarter or maybe around $220 million EBITDA that you had in the first half of this year?.

Yes. Aleksey, right now because there's so many moving parts, I hesitate to give you a normalized number. I think you've put your finger on a few of the drivers, which is the direction of oil price. Also, Europe has been one of the softer regions in the world.

We've seen improvement in Europe from Q2 to Q3, but it has not been to the degree that we've seen in China and the U.S. So I would say more of a mixed market in Europe and more clear strength in the U.S. and in China.

Well, let's wait until next quarter and we'll try to help you with that normalized number, but today I hesitate just given all the moving parts. .

Next question is from Duffy Fischer with Barclays. .

Question about 2 of your assets. So first one is just the refinery. With the write-down, what is the current book value of that asset? And are we in the ZIP code where we're actually thinking about maybe shuttering the asset? And then the second one is just PO/TBA, the increase in costs there and the delay.

What's that going to do to the return on that project?.

Duffy, on the refinery, book value will be a little over $500 million, and we'll post that in our Q later today or Monday. So that's after the write-down. On the PO/TBA project, certainly, returns will be lower, we think, probably in the 10% range on returns for PO/TBA.

I think in the end, we're going to net out kind of the delay of the project in this way. I think, first of all, it gave us some cushion on cash flow this year that given the uncertainty at the time we made the decision back in Q2, I still continue to believe it was the right thing to do.

Secondly, when we do start up, it will be timed better when markets are recovering or fully recovered, hopefully by then. And we'll be bringing new capacity online at a time where it's more likely to be needed.

So in the end, I think balancing near-term needs with long-term market demand, I think this was the right call to make, and we continue to believe it was the right call. .

Next question is from P.J. Juvekar with Citigroup. .

Polyethylene goes in disposables like plastic bags and packaging. So the European PE demand, down 3% versus North America up 4%, that was quite a stark difference between the 2. And I thought Europeans stuck at home would be doing the similar things like ordering from home and packaging demand goes up with that.

Is there something underlying in Europe that's going on besides just the weak economy?.

So from our perspective, we really saw the industrial part of the demand be very weak. And you will recall that the automotive sector was essentially shut down. For example, we produce polyethylene that goes into fuel tanks. And so that's continued to be weak.

The automotive sector has not come back in Europe as strongly as it has in the U.S., industrial bulk containers, things like that. So the industrial part of demand was softer in Europe..

I think on the packaging side, we saw similar strength of what we've seen in the U.S. So it's more about the level of activity. It didn't resume to the rate that we had expected. And lastly, in Q3, we still saw some seasonal slowdown from a typical European holiday season.

There's the European kind of vacation season where some of the factories shut down. There was still some of that and enough that it caused some seasonality in Q3. .

Next question is from Bob Koort with Goldman Sachs. .

Bob, I was wondering if you could comment a little bit on ethane. I was looking at the nat gas markets are up 80% or 90% from the summer and the ethane markets look like they're only up about $0.10. The strip on ethane looks fairly subdued.

But I guess if the oil markets are terrible, maybe there's less drilling and there's some more -- the downtime curtailments start to dissipate.

Do you see a potential run on ethane in the first quarter? And is there something you guys can do proactively to insulate yourself if that were to happen?.

Bob, so first of all, we estimate that ethane rejection rates are still pretty high, probably north of 500,000 barrels per day. I've heard numbers much higher, almost double that. But likely, the rejection is probably happening in regions that are further away from the Gulf Coast.

So there's probably some in the Permian, but probably more as you get out towards the Rockies and certainly in the Marcellus. So today, you see ethane in the low 20s. I wouldn't be surprised to see ethane move to the mid-20s, especially here in the winter as natural gas prices rise a little bit more.

I don't think we'll see a spike only because higher prices will likely incent more supply to come online. And maybe, as you say, with more crackers starting up, we may, on the margin, need more supply from further away regions. And if that were to happen, then maybe ethane does move to the mid-20s.

But I still think there's so much rejection out there that a little bit of price will incent more supply. .

Next question is from David Begleiter with Deutsche Bank. .

Bob, just on polyethylene for the October increase. One of the leading consultancies have declared that increase not successful.

Do you agree with that assessment?.

Well, so David, first of all, there are kind of timing effects on when these price increases get implemented, and it's phased over a 2-month period depending on contracts and size of buyer and that sort of thing. But if you kind of step back and look at the market environment today, as I mentioned earlier, inventories are still really low.

And in fact, this morning, I was just looking at ACC data and days on hand is like 10% lower than where it was last year. And that's days on hand, so including a lower sales rate, the absolute inventory levels are incredibly low today. So I think that points to a tighter market..

Secondly, we don't see demand really letting up yet. Our order books are filling up quickly for November. And as I said earlier, likely if there's some softness, certainly, our approach is going to be, we're going to have to build back a bit of inventory because of the impacts of weather and also just stronger demand.

So let's see how it plays out, but it seems to me that, from our perspective, the increase is still on the table. .

Next question is from Vincent Andrews with Morgan Stanley. .

Just getting back to the polyethylene demand dynamics. If this year, let's just say, it finishes the year plus 1%, it's supposed to grow 4%.

How do you think about next year? Do we have an above 4% year next year because some of the rebound maybe in the auto and industrial part as you suggested or do we just have had this air pocket this year and we don't make any of it up?.

Yes. So Vincent, so U.S. PE demand so far year-to-date has grown about 1.7%. And if you look at Q3, the year-over-year is like 2.5%. So you can really see the higher level of demand growth post the low Q2. So I think Q2 was kind of a lost quarter..

Just to kind of round out the regional look. In Europe, demand is up 2.5% year-to-date. And in China, it's up almost 5% year-to-date. And in China, imports are up about 5% year-to-date as well. So a really good growth rate globally in polyethylene.

And to your point about, is there some catch-up growth next year, I do think in the industrial and auto areas. Now auto impacts polypropylene more than it does polyethylene. But I think when the recovery really takes hold, we should see above trend line growth for a year to 18 months. And I still expect that to be the case.

We'll probably see that more dramatic in polypropylene just given that there's more durable good end-use in polypropylene. .

Next question is from Hassan Ahmed with Alembic Global. .

Bob, wanted to sort of continue with some of your thoughts around polyethylene. I was taking a quick look at Chinese polyethylene import data that just came out for September. Imports were up 36% year-on-year. Month-on-month, they were up 17%. And obviously, that's with the backdrop of continued sort of supply additions out there.

So as you look at the near term, call it, 2021 and things start sort of normalizing, but obviously, more capacity keeps coming online, how should we be thinking about the pace of Chinese polyethylene imports?.

Yes. So if you look over the next 2 to 3 years, it seems that if you use historical demand growth, the new capacity likely won't be enough to meet demand growth. And so they're going to need to incrementally import more polyethylene. And we don't think imports have leveled out yet in China. And we think that will be the case.

I don't know about next year because of timing of projects, whether they're delayed or not. But if I look over the next 2-, 3-year horizon, likely their import needs grow..

Another thing to think about, Hassan, is that if you look at Q2 to Q3, as U.S. demand came back in polyethylene, exports actually declined significantly from Q2 to Q3 out of the U.S. And if you look at U.S. next year, there's very little new capacity in polyethylene coming online.

So speaking to the prior question about, will we see higher demand growth in the U.S. if there's catch up demand, I think if that's the case, there will be less being exported out of the U.S. and likely that will create a tighter global market..

And lastly, if you look out further on polyethylene supply/demand, you're already seeing many projects that are being canceled or delayed. So it seems to me that we're seeing kind of a classic setup of a cycle here as we sit in the trough. You're starting to see delays, starting see cancellations.

And let's assume China brings on all of the capacity that's announced, they still need to import more. .

Next question is from Arun Viswanathan from RBC Capital Markets. .

I guess, I just wanted to go back to polypropylene. Could you just remind us how much of your portfolio is levered there across O&P-Americas, Europe and APS? And what is your outlook there? I guess you mentioned a lot of durables exposure, obviously, could remain quite depressed, especially if we go into another round of lockdowns.

But maybe you can just offer your thoughts on the polypropylene market and the impact on LyondellBasell. .

Certainly. So Arun, at a high level, polyethylene certainly is a bigger driver than polypropylene if I look globally. In the U.S., polyethylene is a bigger business for us than polypropylene. In Europe, polypropylene is a bit bigger than polyethylene, not by a lot. And in APS, post the acquisition of A. Schulman, we're much more diversified.

Prior to the acquisition of A. Schulman, right, 100% of our compounding was essentially polypropylene and about 90% was automotive.

And you will recall back when we announced that transaction, that was part of the rationale was to have more diversity and participation in the end use segments, in packaging, in medical and have more polyethylene content. So I'd say on APS, we're probably still 60% polypropylene, 40% other, just as kind of a rough breakdown..

On the polypropylene outlook, certainly, polypropylene has struggled this year, especially in Q2 because of the higher durable good and auto content. Polypropylene demand is down year-to-date by 1% to 2% in Europe and U.S., up significantly, though, in China. So China polypropylene demand is up some 15%. It's a very, very large increase.

So our view is that polypropylene will be very constructive. We don't see kind of a wall of supply. And actually, I think that as the economies recover around the world, durable goods will likely grow faster into a growing economy and a recovering economy, which probably favors polypropylene even more than polyethylene. .

Next question is from Kevin McCarthy with Vertical Research Partners. .

A financial question for you. It looks like your net debt balance increased about $425 million on a sequential basis. I heard you call out the payments to Bora. So if I adjust for that, the net debt would have trended flat to down, let's say.

My question is, are there other issues, I don't know, working capital, timing issues, other onetime events that would have prevented you from deleveraging more in the third quarter?.

Yes, it's Michael. Yes, really Bora is the big one to call out. There's really nothing else of any significance to call out. .

Kevin, if you look at this year, our operating cash flow will more than cover dividend and all the ongoing expenses. So we should have a surplus pre the Bora equity infusion. .

Yes. .

Next question is from Frank Mitsch with Fermium Research. .

If I could just follow-up on that. Bob, you mentioned when you were talking about the Sasol JV that perhaps in the future you might acquire all of those assets. And obviously, you also discussed that the priority right now is to delever.

How should we think about the potential timing of doing something with Sasol in the future? And then I guess, just kind of an overarching theme, should we think that Lyondell might do some more M&A in terms of making acquisitions in '21 or really will the delevering be front and center?.

Yes. Frank, so first of all, I just want to be real clear on our capital allocation priorities. Maximize cash flow, continuity of the dividend and solid investment-grade rating through the cycle, we're committed. Whatever we decide to do, we're committed to the dividend and the investment-grade rating.

Having said all that, timing of a Step 2, probably 3 to 5 years out. So I think we have a window to delever before that decision is upon us..

Now of course, a lot of that depends on the pace of the recovery, how much excess free cash flow we generate in '21, '22 and '23. But remember that Sasol, the first half of the JV will be contributing excess cash flow beyond the additional interest expense that we'll take on. So we think that will be accretive or additive to cash flow for next year.

Based on our current outlook, we think next year we can cover the dividend from operating cash flow. So I think our priorities are going to be to delever, first and foremost. And I think there's enough time before the Step 2 will be upon us. We'll be able to delever meaningfully. .

Next question is from Mike Sison from Wells Fargo. .

I apologize if I misheard this, but I thought you mentioned that OP Americas would improve in the fourth quarter versus the third quarter. Hopefully, The Browns continue that rout as well.

But when you think about that margin green in Slide 14, was the bulk of that achieved in September? And is that sort of the run rate as we head into the fourth quarter?.

Yes, Mike. So the -- indeed, the timing of price increases, except for that last 5, most of it was implemented kind of later in the quarter as the way it all lays out. So I think that's probably a reasonable way to look at it is the September would be the run rate going into Q4. I think the thing we'll have to watch for is the seasonality.

As I mentioned earlier in response to some of the other questions, my sense is that the market is so tight and the inventories are so low that I don't think we'll see the degree of seasonal softness that we've seen in past years this year, but let's see..

And to your comment about The Browns, let's hope they continue to strengthen as we go into Q4. .

Next question is from Jonas Oxgaard with Bernstein. .

Looking at the compounding business. So it sounds like your synergies are captured and automotive is coming back. Polymer prices are, for lack of a better word, normalizing.

So can you give us a sense for how do you think about sustained or sustainable earnings in that business? And how are you thinking about a strategic outlook for it? Is this something you're looking at adding to?.

Jonas, so first of all, on APS, I think you're really in Q3 starting to see what a fully synergized APS represents and the earnings power. As volume grows, more of those dollars will flow straight to the bottom line in a much more efficient platform post our synergies.

If you go back to pre-COVID and around the time of the acquisition, the LyondellBasell business that was in APS, that is in APS today was earning at that time about $375 million of EBITDA. We acquired $200 million from A. Schulman, and we achieved $200 million of synergies. So nearly $800 million of EBITDA, that was kind of the run rate back in '18..

So the question now is, what's the trajectory to get back to that kind of earnings rate? And I think, as you mentioned earlier, a lot of that will be tied to the recovery in automotive, looks very good in U.S. and in China. Europe needs to improve meaningfully for us to firmly be on the path to get to those kind of numbers that we had back in '18.

But again, I think as volume increases, we should see a large part of that revenue fall to the bottom line on the margin because the fixed costs are now all covered and we have a synergized platform. So normalized earnings, if you go back to '18 conditions, should be closer to $800 million. .

Next question is from John Roberts with UBS. .

Do you need to write down the TBA assets as well like you wrote down the refinery? Or because it's integrated into the PO operations, the value doesn't need impairment?.

Yes. So exactly, as you said, first of all, it's a co-product in our I&D business. But more importantly, John, the market characteristics for TBA are a bit different than what we see for our refinery because the margin in TBA is based on upgrading butane to MTBE. So whereas in the refinery, part of our margin is the light-heavy differential.

And there, we think there's a longer road to recovery to get more sour crude back on the market. I would characterize the TBA downturn as cyclical and perhaps part of the refining downturn as being a little bit more lasting because of this lack of supply of sour crude. So we will not be writing down our PO/TBA or our TBA assets.

Think of that as being more cyclical. .

The last question in the queue is from Matthew Blair with Tudor, Pickering, Holt. .

Are you still planning a refinery turnaround in 2021? And if so, can you share any details on the cost and the scope?.

Yes. So Matthew, you've got us in the middle of thinking through that. So I'll be able to give you a definitive answer at the next earnings call. We're thinking through our cash needs for the company, how the markets will develop.

We want to make a really thoughtful decision because we still think that our refinery is an asset that makes it through this downturn. So partly what I'm trying to balance here is near term versus long term and how do we position the refinery best for when markets do return. So we're going through all that math now.

And certainly, we're going to do whatever we need to do to manage the regulatory requirements and all of the safety-related projects that we need to do. And those are a primary focus for us. And then beyond that, the turnaround timing is part of a broader set of decisions that we're trying to make next year for the refinery. So stay tuned. .

I'm showing no further questions at this time. .

All right. Well, thank you. Well, let me offer a few closing remarks..

Our team at LyondellBasell, we're continuing to focus on near term maximizing free cash flow, continue the dividend and maintaining a solid investment-grade rating through the cycle, as I've consistently mentioned over the past few calls.

At the same time, I think we're really well positioned to emerge stronger from the pandemic because we'll have a lot more assets, a synergized APS platform, we'll have lower CapEx as we come out of the pandemic as well. And I think all that sets us up to really accelerate on free cash flow generation with our initial focus being on delevering.

But I think our company is really setting up for coming out of this downturn in a very good way, much stronger than when we entered..

So thank you for your interest in our company, and we'll look forward to updating you at the end of January, have a great weekend and be safe. .

This concludes today's call. Thank you for your participation. You may disconnect at this time..