Lyondellbasell Industries N.V. (NYSE: LYB) Q1 2020 Earnings Call Transcript

Lyondellbasell Industries N.V. (LYB) Q1 2020 earnings call dated May. 01, 2020

Corporate Participants:

David Kinney — Head of Investor Relations

Bhavesh V. Patel — Chief Executive Officer

Michael C. McMurray — Executive Vice President and Chief Financial Officer

Analysts:

John McNulty — BMO Capital Markets — Analyst

Steve Byrne — Bank of America — Analyst

David Begleiter — Deutsche Bank — Analyst

Vincent Andrews — Morgan Stanley — Analyst

Arun Viswanathan — RBC Capital Markets — Analyst

Kevin McCarthy — Vertical Research Partners — Analyst

Aleksey Yefremov — Keybanc — Analyst

Duffy Fischer — Barclays — Analyst

Mike Sison — Wells Fargo — Analyst

Frank Mitsch — Fermium Research — Analyst

Jeff Zekauskas — JPMorgan — Analyst

Jonas Oxgaard — Bernstein. — Analyst

John Roberts — UBS — Analyst

Matthew Blair — Tudor, Pickering, Holt — Analyst

Hassan Ahmed — Alembic Global Advisors — Analyst

Presentation:

Operator

Hello, and welcome to the LyondellBasell teleconference. At the request of LyondellBasell, this conference is being recorded for instant replay purposes. [Operator Instructions] I’d now like to turn the conference over to Mr. David Kinney, Director of Investor Relations. Sir, you may begin.

David Kinney — Head of Investor Relations

Thank you, operator. Hello, and welcome to LyondellBasell’s First 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 risk 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 slide s 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 1:00 p.m. Eastern Time today until June one by calling (866) 397-1431 in the United States, and (203) 369-0538 outside the United States. The passcode for both numbers is 1160. During today’s call, we will focus on first 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 decline in prices of our raw materials and finished goods inventories. During the first quarter, we recognized pretax LCM charges totaling $419 million. 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 would now like to turn the call over to Bob.

Bhavesh V. Patel — Chief Executive Officer

Thank you, Dave, and good day to all of you participating around the world. I hope that you, your colleagues and your families are all staying healthy during these difficult times. We appreciate you taking the time to join us today as we discuss our Q1 results.

Let’s begin with slide three and review the first quarter highlights. LyondellBasell’s business portfolio continued to deliver relatively resilient performance amid challenges arising from the coronavirus pandemic, rapidly falling oil prices and deteriorating economic activity. Our global asset footprint, feedstock flexibility and disciplined financial strategies are serving us well and enabling us to navigate through these unprecedented market conditions. Our first quarter EBITDA, $1.1 billion, represents a decline of approximately 12% relative to the fourth quarter and 25% relative to the first quarter of the prior year. Despite robust demand for our polymers used in consumer packaging and medical applications, profitability was impacted by soft demand for our transportation fuels and products used in automotive and other durable goods end markets. Events surrounding the coronavirus pandemic and the drop in oil prices continue to evolve and impact global markets for our products.

Let’s turn to slide four and review our approach to mitigate the effects from these headwinds. Currently, all of our major manufacturing sites are operating. In response to lower demand for certain products, we temporarily idled production at several small plants in our Advanced Polymer Solutions segment serving automotive end-markets and appropriately decreased production rates and other plans to match reduced end-market demand. Industry consultants estimate that petrochemical and refining assets in various parts of the world are running at 60% to 80% of nameplate capacity. We expect that the majority of LyondellBasell’s capacity will also operate within that range during the second quarter. Our manufacturing operations have been declared as an essential industry, supporting society’s needs to fight the pandemic in the majority of the regions in which we operate. We implemented best practices recommended by medical professionals and governmental bodies to protect our employees, contractors, assets and the communities where we operate around the world while maintaining business continuity with our customers and suppliers.

Since the activation of our global pandemic response team in late January, we instituted social distancing practices, escalated our sanitization protocols and increased employee health monitoring at all of our manufacturing sites. Our office-based employees worked productively from home as the pandemic spread from Asia to Europe then to the Americas. We are implementing processes to enable a safe and full return to workplaces as conditions permit around the world. The majority of our 1,000 employees in China are now back in our plants and offices. I want to thank and acknowledge our over 19,000 LyondellBasell employees for their tireless innovation, dedication and sense of ownership they have exhibited for our company during these difficult times.

Since the full extent of the pandemic, the drop in oil prices and the economic downturn remains uncertain. We are acting on strategies to respond to a range of economic scenarios. Over the past few quarters, we have been working on meaningful cost-saving initiatives across the company. Those initiatives have been accelerated. In response to falling demand, we instituted more aggressive inventory management policies. When combined with lower prices for raw materials and products, we expect these actions will provide a meaningful release of cash from working capital during 2020. In order to reduce operational and financial risk, we postponed selected growth projects and planned maintenance, including slowing construction activities on our PO/TBA plant. We currently expect these actions will reduce 2020 capital expenditures by approximately 20% from our prior guidance of $2.4 billion to our current outlook of $1.9 billion. During April, strong demand for our investment-grade bonds enabled us to increase liquidity by $2 billion with a successful offering that resulted in the lowest U.S. dollar interest rates in the history of our company.

We remain confident that our resilient cash generation and disciplined approach to capital deployment will serve us well during these challenging times. Our focus on funding the dividend, while remaining committed to a strong investment-grade balance sheet, plays an integral role to our shareholder value proposition. We believe that our actions to reduce operating costs, capital expenditures and working capital will generate sufficient free cash flow over the coming quarters. In the event of a prolonged or deeper downturn, we will act pragmatically and evaluate all prudent options.

In March, lower oil prices and reduced demand for transportation fuels negatively impacted both volumes and margins for our Refining segment and our Oxyfuels & Related Products business within the Intermediates and Derivatives segment. Global shutdowns by automotive manufacturers sharply reduced demand for our polypropylene compounds within the Advanced Polymer Solutions segment. Consumer-driven demand for polyolefins used in packaging and health care products supported relatively stable integrated polyethylene margins in the Olefins and Polyolefins – Americas segment. Lower feedstock prices resulted in higher integrated polyethylene margins for our O&P – Europe, Asia and International segment. While we expect that demand for durable goods will take some time to recover, lasting changes in consumer lifestyles may have beneficial midterm implications for some of our large end-use markets.

On slide five, we show some recent North American market research that suggest changes in consumer buying habits that could endure beyond the current crisis. As you may have experienced, consumer stockpiled home pantries as it became clear that societal restrictions were required to slow the spread of the virus. LyondellBasell felt this surge for our polymers used in consumer packaging to safely deliver food, medicines and other essential products to households around the world. The need for plastic packaging increased as society moved from bulk volumes used in workplaces and restaurants towards smaller package sizes delivered and consumed in the home.

Excessive demand for paper goods has subsided, and thankfully, most stockpiles of home health care products do not require replenishment. But lifestyle changes are creating a new normal as consumer-based demand for frozen, dairy and packaged food has risen by approximately 30%. Surveys indicate that after staying at home during the pandemic, 40% of Americans plan to increase the amount of time they work from home, and 65% intend to eat at home more often. These changes are likely to increase demand for the polyolefin packaging that is typically used in these applications. Let’s turn to slide six and review our recent safety performance. LyondellBasell’s commitment to health and safety has become even more relevant to our employees, contractors and communities during the pandemic. Our employees have continued to deliver top quartile, if not top decile safety performance despite numerous potential distractions through these difficult times. Earlier, I mentioned our precautionary measures to increase the frequency and intensity of our workplace, sanitization, social distancing practices, health monitoring and self-reporting processes to reduce the spread of the virus among our workforce. Our processes have proven effective with limited virus spread across our global employee population. LyondellBasell’s manufacturing operations have been designated as an essential industry to support society’s needs during the pandemic.

Let’s turn to slide seven, where we highlight LyondellBasell’s role in supplying vital products that support health care, hygiene and medical needs. For example, our polypropylene resins are used by customers to produce melt-blown fibers that provide filtration in face masks. Our masterbatch products are used to produce breathable films. Our polyethylene is used for protective clothing, draping and medical packaging. And our polypropylene, ethanol, isopropanol, ethylene oxide and propylene oxide are used to make syringes, tubing, test kits, soaps, disinfectants, medical devices and many other products.

With that, I will turn the call over to Michael, who will lead us through several topics related to our financial performance.

Michael C. McMurray — Executive Vice President and Chief Financial Officer

Thank you, Bob, and good morning, everyone. slide eight illustrates our relatively consistent cash flow performance over the past five years. Over the last 12 months, 90% of our EBITDA translated into cash from operating activities. With approximately $1 billion dedicated to maintaining our assets, our free operating cash flow remained relatively healthy at $3.8 billion. As you heard from Bob, we are putting a significant amount of focus on cash generation and liquidity. Now please turn to slide nine, where we provide further details on cash generation for the first quarter. You can see that our business has generated $500 million of cash from operating activities during the first quarter, down just over $100 million from one year ago. During the first quarter, we increased our cash on hand to $1.8 billion in an abundance of caution with borrowings from our revolving credit, accounts receivable and commercial paper facilities. Capital expenditures were approximately $660 million as we continue to move forward on our PO/TBA plant. In the first quarter, we paid $351 million in dividends to our shareholders.

As Bob mentioned, we have developed strategies to respond to a variety of economic scenarios. slide 10 outlines the actions we have taken to maximize liquidity. We are increasing cash inflows by accelerating cost-saving initiatives and reducing working capital. At the end of March, we had $3.2 billion in liquidity. We further bolstered this liquidity through the successful issuance of $2 billion in senior notes in April at very attractive long-term rates. With the slowdown of our PO/TBA plant construction, postponement of growth projects and some deferral of planned maintenance will reduce our 2020 capital expenditures by $500 million relative to our prior guidance. In the current uncertain environment, we will prioritize liquidity over share repurchases and any potential M&A activities.

We have a strong balance sheet and a favorable maturity profile. slide 11 illustrates the maturities of our long-term debt portfolio after the April 2020 bond issuance. Proceeds from the issuance will be utilized for general corporate purposes, including increasing our liquidity and managing shorter-term debt maturities. With the addition of the new bonds, our weighted average cost of debt remains about 3.8%. Long-term debt due in 2022 includes $500 million borrowed under our revolving credit facility in the first quarter. This borrowing, along with other short-term borrowings, were repaid in April from existing cash and proceeds from our recent bond offering. Our bonds have a well-balanced maturity profile that reduces refinancing risk in any given year, and the company benefits from a good mix of both dollar and euro-denominated debt.

Before I turn the call over to Bob, please turn to slide 12 and allow me to provide an update on the annual financial modeling guidance that we discussed last quarter. As we mentioned, we are reducing our 2020 plan for capital expenditures by $500 million to $1.9 billion. Approximately $200 million of the reduction is associated with profit-generating projects, with the majority coming from the reduced pace of construction at our new PO/TBA facility. The reduced spending will become evident during the second half of this year. We remain committed to the completion of our strategic investment in the PO/TBA project and will resume full activities at the appropriate time. The remaining $300 million of the capital expenditure reduction is primarily associated with postponements and our planned maintenance schedule. In addition to capex savings, we no longer anticipate EBITDA impacts the business associated with major planned maintenance activities for the second half of 2020.

We previously provided a cash interest estimate for 2020. We thought it easier for you to model using our interest expense for 2020, which is expected to be $410 million. This includes a credit for capitalized interest of approximately $45 million. 2020 annual depreciation and amortization continues to be forecast at $1.5 billion. We are reducing our plan for pension contributions in 2020 by $40 million to approximately $80 million, and our pension expense remains estimated at $100 million. We are reducing our estimated 2020 effective tax rate from about 20% to an expectation in the mid-teens. The cash tax rate is expected to remain in the mid- to high-teens.

The lower effective rate is related to both lower profitability and favorable impacts from the U.S. Coronavirus Aid, Relief and Economic Security or CARES Act. The CARES Act resulted in a higher first quarter tax expense due to a revaluation of our deferred tax liabilities that was discrete to the first quarter. The net impact of the CARES Act to the full year is expected to be favorable.

With that, I will turn the call back to Bob for a more detailed discussion of our segment results. Bob?

Bhavesh V. Patel — Chief Executive Officer

Thank you, Michael. Let’s turn to slide 13 and review our first 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 charges. Our global footprint and diverse business portfolio continue to provide resiliency in this challenging market environment. EBITDA for the first quarter was $1.1 billion. Profitability for both the Olefins and Polyolefins – Americas and O&P – Europe, Asia and International segments were supported by our capability to switch amongst low-cost feedstocks and robust polymer demand from consumer-driven packaging and medical applications. Our Refining segment and the Oxyfuels & Related Products businesses within the I&D segment faced challenging market conditions created by reduced margins and demand for transportation fuels. The resiliency of our business portfolio continues to benefit from our relatively high participation in consumer-driven demand for nondurable products and a diverse global manufacturing footprint.

Slide 14 highlights our differential feedstock flexibility relative to our peers at both our United States and European ethylene cracker assets. We can leverage the most economical feedstocks with respect to raw material costs and prices yielded from products. In North America, our two Midwest crackers in Clinton and Morris were built to utilize low cost, stranded ethane and propane. On the U.S. Gulf Coast, three of our crackers can utilize the full range of feedstocks: ethane, propane, butane, Y-grade mixed NGLs, condensate and naphtha, while the fourth cracker can flex amongst the most economical NGLs. This allows us to respond to feedstock prices and alleviate demand pressure on any one of the feedstocks.

Our cracker system offers distinct advantages relative to new build crackers that can only run ethane. In a similar way, we have improved our flexibility in Europe with capabilities to run slightly more than 50% of our fee to eight using LPGs and other potentially advantaged raw materials. On slide 15, we highlight how this feedstock flexibility can provide advantaged margins for LyondellBasell. Integrated polyethylene margins in North America fluctuated in the first quarter as the advantage fee shifted from ethane, propane and butane to naphtha as the price of oil fell during March. We are able to follow the most economical feedstock to maximize profitability by switching among the raw materials used in our flexible crackers. In Europe, integrated polyethylene margins in March were the highest we have seen since 2015. We’ve been able to maximize value across naphtha, propane, butane and other advantaged feeds. With significant asset bases in both Europe and North America, LyondellBasell’s overall results are less volatile than if our business was reliant upon only one region.

With our feedstock flexibility in mind, let’s review our first quarter results, starting with our Olefins and Polyolefins – Americas segment on slide 16. First quarter EBITDA was $477 million, $46 million lower than the fourth quarter. Profitability was driven by robust demand for polymers used in consumer packaging and medical applications, which supported improved polyethylene price spreads over ethylene monomer. Olefins results decreased approximately $110 million compared to the fourth quarter. Margins declined on lower ethylene sales prices, partially offset by a decrease in feedstock prices. Ethylene operating rates fell to about 87% for the quarter due to a planned maintenance turnaround for one of the two crackers at our ChannelView facility. Polyolefin results increased about $95 million during the first quarter, driven by an improvement in polyethylene price spread over ethylene of more than $105 per ton, primarily due to lower ethylene costs.

During the first quarter, we advanced on our growth initiatives by launching production at our 500,000 ton per year Hyperzone high-density Polyethylene plant here on the U.S. Gulf Coast. Our Hyperzone Polyethylene technology provides differential products for applications such as water pipes, industrial drums and intermediate bulk containers. We expect a more challenging second quarter with the unprecedented market conditions as a backdrop. While lower feedstock prices could reduce costs, uncertainties around oil price and weaker underlying demand could reduce polyolefins prices and volumes. Industry consultants predict that U.S. crackers will operate at approximately 75% of nameplate capacity during the second quarter, and our assets are expected to operate in a similar range.

Now please turn to slide 17 to review the performance of our Olefins and Polyolefins – Europe, Asia and International segment. During the first quarter, EBITDA was $225 million $81 million higher than the fourth quarter. Profitability was driven by lower feedstock prices, increased reliability and higher volumes. Olefins results increased more than $135 million, driven by an increase in ethylene margin due to lower prices for naphtha and other feedstocks. Volumes increased as cracker operating rates rose to 95% for the quarter due to improved reliability. Combined polyolefins results were comparable to the previous quarter. Polyethylene volume increased 15% over the fourth quarter with increased consumer-driven demand for packaging due to stay-at-home orders. Polyolefins margins declined, offsetting the improvement in volume. Reductions in both margins and volumes across our joint ventures contributed to a decline in equity income of approximately $35 million.

We expect the second quarter to follow similar trends as the Americas with the benefits from lower feedstock costs muted by lower demand. Our European crackers are expected to operate at 80% to 85% of nameplate capacity during the second quarter. Please turn to slide 18. Let’s take a look at our Intermediates & Derivatives segment. First quarter EBITDA was $281 million, a $48 million decrease versus the prior quarter. Results were affected by a significant decline in gasoline demand that severely impacted oxyfuels margins beginning in February. First quarter propylene oxide and derivatives results increased approximately $25 million due to higher volumes and margins. Intermediate Chemicals increased $15 million, driven by an increase in acetyl margins. Volumes were lower due to planned maintenance at our ChannelView methanol unit. Oxyfuels and Related Products results decreased approximately $80 million as a result of lower product prices.

During February and March, Oxyfuels margins declined with weaker gasoline demand as global travel restrictions and stay-at-home orders became more widespread. We expect further declines for the segment into Q2 as lackluster demand for propylene oxide and polyurethane applications and continued pressure on oxyfuels demand and margins will likely persist through the second quarter. On slide 19, let’s review the results of our Advanced Polymer Solutions segment. First quarter EBITDA was $115 million, $53 million higher than the fourth quarter. Volumes and margins increased with typical seasonal improvements that were muted by pandemic-related shutdowns in automotive end-markets. First quarter pretax integration costs were $14 million. Compounding & Solutions results increased approximately $30 million due to higher margins and volumes. Seasonal volume improvements were partially offset by declines in automotive end-market demand during March. Advanced Polymers results increased about $10 million, supported by improved seasonal construction demand.

Our team is making continued progress on the integration efforts related to the 2018 acquisition of A. Schulman. Integration activities are on schedule to achieve $200 million in forward annual run rate synergies by the third quarter of this year. During the second quarter, we expect profitability for the segment to be increasingly impacted by severe reductions in demand for our polypropylene compounds utilized in automotive end-markets. As I mentioned, we have temporarily idled production at several of our small plants in response to manufacturing plant closures across the automotive industry.

Now let’s turn to slide 20 and discuss the results of our Refining segment. First quarter EBITDA was negative $80 million, $102 million decline versus the fourth quarter of 2019. Results were driven by a decline in crack spreads and an unplanned outage on our fluidized catalytic cracker unit. In the first quarter, the MAYA 2-1-1 industry benchmark crack spread decreased to an average of $17.21 per barrel for the quarter. Unplanned maintenance at our Houston Refinery reduced the average crude throughput by over 40,000 barrels per day to 226,000 barrels per day for the quarter. The refining market has been challenged by falling prices and demand for transportation fuels, including gasoline and jet fuel. We anticipate that these factors will continue to pressure our refining results until societal restrictions ease and demand for transportation fuels returns to typical levels later in the year. Our fluid catalytic cracker unit at the refinery returned to service in late April, and we are currently operating the refinery at 85% to 90% of nameplate crude throughput.

Please turn to slide 21 as we review the results of our Technology segment. During the first quarter, Technology segment EBITDA was $56 million, a decrease of $82 million compared to the record results from the fourth quarter of 2019. Catalyst volumes and margins remained steady, while licensing revenue declined due to fewer revenue milestones during the quarter. Our Technology segment licenses polymer production technologies for new manufacturing plants that enable subsequent catalyst sales to licensing customers over the lifetime of the asset. Individual contract terms and the timing of project milestones results in an uneven pace for licensing revenues. Based on the anticipated timing of upcoming milestones, we expect that second quarter licensing profitability will return to the higher levels of recent quarters.

Let me summarize this quarter’s highlights and outlook with slide 22. During the first quarter, LyondellBasell’s leading and advantaged assets continued to deliver resilient results. Our foundations in leveraging our feedstock flexibility, with our low operating costs and high asset utilization, serves us well during any point in the cycle. We remain consistent with our capital deployment strategy that supports our dividend with efficient cash generation and disciplined allocation of capital expenditures for required maintenance and profit-generating growth projects. All decisions are grounded by our commitment to a strong investment-grade credit rating.

We anticipate that challenges from the coronavirus pandemic and plummeting oil prices that arose during the first quarter will extend for much of the year. Demand and margins for transportation fuels will eventually rebound as various regions emerge from societal restrictions return to work and regain comfort with prior travel patterns. Markets for discretionary durable goods will likely take longer to recover from the downturn. We expect that robust consumer-driven demand for our products in packaging and medical applications will continue. LyondellBasell is addressing these challenges by proactively reducing costs, working capital and capital expenditures while prioritizing and increasing liquidity. Our company is really well positioned to navigate these challenging markets and emerge stronger with the eventual rebound of the global economy. We will now please take your questions.

Questions and Answers:

Operator

[Operator Instructions] And we do have a question in the queue from John McNulty from BMO Capital Markets. Your line is now open.

John McNulty — BMO Capital Markets — Analyst

Yeah, good morning. Thanks for taking my questions. So I guess when we look at this recession, it’s different than past ones because of the quarantining and the impact of that or the compounding effect of that. It seems like when the quarantining starts to end, there’s a couple of your businesses, Refining & Oxyfuels, that should kind of snap back pretty quickly. But how should we think about the rest of the businesses and the potential impact that maybe the quarantine is having on it, where you might, as that ends, start to get relief maybe earlier than just the broader macro? Is there a way to think about that?

Bhavesh V. Patel — Chief Executive Officer

Yes, John. So the way we think about it is we have packaging and medical which is probably nearly half of the company essentially; and then durable goods, auto is probably about 20%, 25%; and then the fuels and oxyfuels and so on is the remainder. I think that we should see demand improve even further if the economies are opened because typically, in the summertime, as you know, we see seasonal effects, and we see increases in demand. So relatively speaking, we could see more of that on the packaging side. And on fuels, you said it rightly that as people get on the road and drive more, our oxyfuels and refining business should improve. So kind of the way we’re thinking about it is automobile production and demand will probably be the slowest to return. But it’s a pretty small part of our business.

Operator

The next question is from Steve Byrne from Bank of America. Your line is now open.

Steve Byrne — Bank of America — Analyst

Yes, thank you. If your Bora project, the cracker and downstream polyethylene plant, if they were if that was onstream today and you were able to receive naphtha as an internal transfer from your partner’s refinery, how would the integrated margin of that complex compared to, say, your naphtha-based margins in Europe and your U.S. Gulf margins?

Bhavesh V. Patel — Chief Executive Officer

Yes, Steve. Indeed, if it was running, we’d have decent margins, probably in the $400 to $500 per ton integrated basis range. You’ll recall that the thesis around that investment is about producing in China for China, and the benefit of that project for us beyond getting a bigger position in China is that the timing of the investment will be such that when we make our capital infusion, it will be very close to start-up. So within a quarter or 2. But decent margins today, if it was running.

Operator

Our next question is from David Begleiter from Deutsche Bank. Your line is now open.

David Begleiter — Deutsche Bank — Analyst

Good morning, Bob, just on polyethylene prices. Consultants said they fell $0.04 in April. Do you agree, and they’re calling for another $0.06 in May and June for combined $0.10 decline in Q2. Again, do you agree? Do you think that’s too severe?

Bhavesh V. Patel — Chief Executive Officer

Yes, David. I think even the $0.04, I would say it’s that may be more of a headline number as opposed to kind of realized when you look through all of the different end-use segments that we supply.

In terms of the outlook, with ethane price rising like it has, difficult to imagine that you’d have that kind of a large step down. And again, as I mentioned earlier on the demand side, packaging-related demand is still very good. We’re coming into the summer season. And as different state economies in the U.S. start to open and outdoor activities actually are safer than indoor activities, and that drives packaging demand. So if we see some increase in demand seasonally, it seems to me that we have a decent market environment. And in our case, we’re running our assets in olefins and polyolefins in the U.S. at about 70% today. So pretty decent rate given the kind of environment we’re in.

Operator

Next question is from Vincent Andrews from Morgan Stanley.Your line is now open.

Vincent Andrews — Morgan Stanley — Analyst

Thanks and good morning everyone. But I’m Bob, wondering if you could talk a bit about the concern that’s out there that with lower oil prices will have less associated gas production and therefore, less NGL production. So as gas does go above $3, $3.50, wherever it goes, what do you think happens to ethane and propane prices?

Bhavesh V. Patel — Chief Executive Officer

Yes. So Vincent, in terms of ethane supply/demand, we’re all working to get our arms around what could happen. But here’s the way I think about it. First of all, there’s quite a bit that’s being rejected today, maybe as much as 350,000 barrels a day of ethane being rejected. So of course, that rejection would get shut off. And then in times past, what we’ve seen is if ethane is still snug and values rise, especially in the low oil price environment, you’d see feedstock flexibility kick in. And a company like us, which who have a lot of feedstock flexibility, we would tilt more towards liquids and LPGs. And beyond that, some of the exports could even get shut off for ethane. So it seems to me that what we’re really trying to think through is could we have another spike as opposed to a sustained period of high ethane prices. Because in the end, we continue to believe that there’s an abundance of ethane available in the U.S. and higher prices will just attract more investment and more supply of ethane over the long term. So it’s more about thinking through transitory effects. And I think a company like ours that has so much feedstock flexibility, we can manage through that probably better than most.

Operator

Next question is from Arun Viswanathan from RBC Capital Markets. Your line is now open.

Arun Viswanathan — RBC Capital Markets — Analyst

Great, thanks, good morning.

Bhavesh V. Patel — Chief Executive Officer

Good morning.

Arun Viswanathan — RBC Capital Markets — Analyst

Great. Hope you’re all well. I guess I just wanted to ask about polypropylene. So when you look at supply/demand and what’s going on with the compounding and automotive, would you expect and then also feedstocks as well. Would you expect any capacity reductions in polypropylene over the next year or 2? Maybe just your comment on your outlook for polypropylene.

Bhavesh V. Patel — Chief Executive Officer

Yes. Arun, it could be that some of the high-cost capacity in Europe or U.S. is idled. But more importantly, what we’ve observed so far is projects are starting to get delayed, excluding China. But elsewhere in the world, if you look up in North America and other parts of the world, those are the first signs of change. And frankly, we’re seeing that even in polyethylene. So one of the outcomes of the period that we’re going through is delays in new construction. And I certainly see that in polypropylene.

Operator

Next question comes from PJ Juvekar from Citi.Your line is now open.

Vincent Andrews — Morgan Stanley — Analyst

Hey, Bob, good to hear from you.

Bhavesh V. Patel — Chief Executive Officer

Good morning, PJ.

Kevin McCarthy — Vertical Research Partners — Analyst

Good morning. ust a quick question. Given the planned shutdowns globally, where are your inventories of polyethylene and polypropylene? Where are they for the industry? And in this type of environment, usually, converters begin to destock, anticipating lower prices. Where do we stand on that? And what kind of working capital do you expect to release given lower raw materials, lower inventories, etc?

Bhavesh V. Patel — Chief Executive Officer

Yes. Thank you, PJ. Well, inventory reduction has been a very, very high focus for us over the last 75 days or so. We started reducing inventories back in late February and early March. And so today, for our polyolefins, we’re sitting at 30 days or so of inventory based on lower demand rates. So we’ve already adjusted for anticipated lower demand rate and we’ll continue to do that. And essentially, what we’re doing is we’re short cycling our product wheel to preferentially produce the products where there’s high demand. And only produce to order, be in areas where we believe there’s low demand or low visibility on demand.

And your question about working capital reduction and cash release, we expect about $500 million of cash release from lower working capital as we work our way through this year. Most of that benefit should come through in Q2 with a little bit of tailing benefit in Q3.

Operator

Our next question comes from Kevin McCarthy with Vertical Research Partners. Your line is now open.

Kevin McCarthy — Vertical Research Partners — Analyst

Yes, good morning Bob, one of the effects of the pandemic seems to be rapidly changing consumer and government attitudes towards single-use plastics. What are you observing in that area? And do you anticipate any backlash reversion that would lead to a structural benefit in addition to the other sort of working and staying at home, cooking at home benefits that you alluded to in the prepared remarks?

Bhavesh V. Patel — Chief Executive Officer

Kevin, we do see some structural benefits, I think, accruing to both polyethylene and polypropylene for some time given what’s happened. Reversal of bag bans on the West Coast, on the East Coast, those could stay for a while. I think what people are realizing is that there are very significant hygienic benefits to plastics, and that single-use has benefits. The key thing that we have to remember that won’t change is that the challenge of plastic waste still remains. And I can tell you that we, as a company, have not lost our focus on that. And I think as an industry, the focus on plastic waste, addressing recycling, increasing capture of waste before it gets in the environment, that’s something that we should continue our focus on as an industry, and we certainly will continue as a company. And then as single-use applications increase in demand, I think society can be confident that, that single-use waste won’t end up in the environment. So plastic waste will continue to be an area of emphasis for us.

Operator

Next question comes from Aleksey Yefremov from Keybanc. Your line is now open.

Aleksey Yefremov — Keybanc — Analyst

Thank you. Good morning, everyone. Bob, you mentioned that benchmark margins for ethylene, polyethylene in Europe were fairly high, close to record. At the same time, your EBITDA was up sequentially but below 2019 and 2019 averages. So A, could you explain why that is? And B, if these benchmarks decline in the second quarter, should your EBITDA decline less than the benchmark would apply?

Bhavesh V. Patel — Chief Executive Officer

Well, so Aleksey, it’s probably more about timing during the quarter in terms of the margins. In Europe, as the oil price decline, we did see a margin expansion. And that’s very typical in Europe. And I think it speaks to, again, the diversity of our asset base. And in a lower oil price environment, we generally see better contribution from our European assets. We likely will see some margin erosion in Europe as we work through Q2 and as things normalize a bit more and the new sort of lower oil price environment sets in. We do expect some margin erosion in Europe. But demand is decent in Europe. Frankly, we’re running our O&P assets at about 80% in Europe today. And as economies over there open up, we think that going into the summer season, we could run at pretty good rates in this 80% to 85% range through the summer.

Operator

Next question comes from Duffy Fischer from Barclays. Your line is now open.

Duffy Fischer — Barclays — Analyst

Yes, good morning, fellas Question just around the differential between, say, U.S. ethane-based and kind of European and Asian naphtha-based. Obviously, as oils come down on paper, at least those two regions look extremely competitive. How quickly do you think, as they ramp up some of their production rates, do you think the by-products from the naphtha will start to readjust to lower levels? So the propylenes, the benzene, the butadienes, that kind of stuff. Can you walk through how you see that playing out the rest of this year?

Bhavesh V. Patel — Chief Executive Officer

Yes. So Duffy, actually, the byproduct disposition is already playing out. And C4 is butadienes containment is a real challenge. And so our strategy is that we don’t want to build inventory on butadiene. And so we’ll crack liquids up to a point where we can move the butadiene and I think that’s already globally been restricting the amount of naphtha that’s being cracked. And so we’ve had over the past 10 years, I was thinking about this, that we’ve had probably two or three periods like this where a coproduct disposition became a challenge. Typically, it doesn’t last that long. And in the current environment, some automobile production coming back and people driving and replacing tires should provide some relief. But I think it will continue to be a constraint through most of this year, especially disposition of butadiene. And again, our strategy, even in the U.S., where we have significant feedstock flexibility, we will maximize liquids up to a point where we’re not building inventory of C4s.

Operator

Next question comes from Bob Koort from Goldman Sachs. Your line is now open. Good morning. This is Dylan Campbell on for Bob. A question kind of on the cash flow profile. You mentioned kind of working capital improvement. Would you be able to size that at any degree in terms of how much of those are your intrinsic improvements versus the decline in oil prices? And then also on capex, what kind of $1.1 billion of growth capex still embedded in the total capex number for the year? Is there further room for that to decline this year?

Bhavesh V. Patel — Chief Executive Officer

Dylan, let me answer the question in terms of how we’re the actions we’ve taken to increase cash flow. So as I mentioned earlier, working capital release, we expect to be about $500 million, mostly in Q2 with some trailing benefits in Q3. capex, we’ve reduced on a cash basis by about $500 million from $2.4 billion to $1.9 billion. Most of that $500 million benefit will be evenly spread across Q3 and Q4. In addition to that, we’ve undertaken we’ve accelerated our cost-reduction initiatives that we started in September of last year. We expect those to provide additional benefit this year on a cash basis of between $150 million and $200 million. So when you kind of total all that up between the working capital, the capex and the cash basis cost reduction, we expect that we should boost cash flow this year by about $1.1 billion to $1.2 billion, and the timing will start in Q2 through the end of the year.

Operator

Next question comes from Mike Sison from Wells Fargo. Your line is now open.

Mike Sison — Wells Fargo — Analyst

Hey, guys. Hey, Bob

Bhavesh V. Patel — Chief Executive Officer

Hey, doing

Mike Sison — Wells Fargo — Analyst

Just sort of a longer-term question. When you think about your EBITDA in olefins, both Americas and EAI, I think you’re going to be down this year, right? And given a lot of the challenges that we have in the economy. So when you think about in a better volume environment, hopefully over time and rebuilding that margin over time, can you maybe walk us through the variables between oil and how much volume recovery comes back in terms of your EBITDA, maybe on a more normalized EBITDA margin basis longer term?

Bhavesh V. Patel — Chief Executive Officer

Yes. I mean I think in the near term, Mike, we have decent visibility here with Q2 and into Q3. Q4, all of us are keeping an eye on whether we’re going to have another wave of the virus or not. And it’s an unknown, it’s something that’s difficult to predict. But if I look beyond the pandemic and look beyond the current period of low oil prices I mean, if history is an indicator, typically, oil prices do rebound within 24 months. Now at the moment, we also have a lot of inventory to work through. So we’re not expecting significant improvement in oil price for most of this year. But I do think that if you were to look 24 months out, you could see oil prices at higher levels. Likely, we’ll also see project delays and cancellations and I think and some demand improvement, benefit from pent-up demand, which should set up a very good supply/demand environment 24 months out 12 to 24 months out. But our focus is to make sure that we maximize cash flow and maximize liquidity in the near term. And make sure that we keep our focus on the long-term projects that we’ve initiated.

Operator

Next question is from Frank Mitsch from Fermium Research. Your line is now open.

Frank Mitsch — Fermium Research — Analyst

Yeah, good morning gentlemen and glad to hear I’m glad to hear you’re all doing well. Bob, you mentioned that all the major plants are running, although some of the smaller plants in APS are idle. I’m just curious, I assume you looked at perhaps idling some polyethylene capacity as others have. What do you come out on the pros and cons of doing that? And what would be the likelihood that Lyondell would go that route?

Bhavesh V. Patel — Chief Executive Officer

Yes. We don’t Frank, we haven’t really seen demand decline to a level where we would consider idling polyethylene capacity. So our sense is that here in April, we’re kind of seeing a near-term bottom in demand because I would imagine that as economies partially reopen directionally, that should help on the demand side. And as I was stating earlier on one of the other questions, that in a partial lockdown or reduced mobility mode for the rest of the year perhaps, we think that packaging is a beneficiary of that. So our expectation is that in the U.S., we’re going to run kind of 70%, 80% across our assets. And olefins and polyolefins in Europe, 80%, 85%, and we don’t really foresee needing to idle for a long period of time in the polyethylene.

Operator

Next question is from Jeff Zekauskas from JPMorgan. Your line is now open.

Jeff Zekauskas — JPMorgan — Analyst

Thanks very much. Bob, when you contemplate the experience of Lyondell, both in its business performance and its share price during the current recession, does it change your view concerning the distribution of dividend increase and share repurchase in the future for Lyondell? That is, do you think that your behavior in allocating your free cash flow in the future will change because of your experience this year?

Bhavesh V. Patel — Chief Executive Officer

Yes. Thank you for that question, Jeff. Well, in the near term, as I mentioned, given lack of visibility in terms of the outlook beyond Q3, really, our priorities are to maximize liquidity. In terms of capital allocation, we’re very consistent in our view that the dividend is a high priority for us, coupled with a strong BBB or investment-grade rating, which today is BBB for us. So I don’t expect that we would undertake buybacks given that we’re prioritizing liquidity.

Our dividend, we expect that we will recommend the May dividend to our Board. We expect that they’ll approve that dividend for Q2. Given the visibility that we have and the improvements we’ve made in terms of working capital, capex and the cash cost savings, we think that we can largely cover the dividend for the full year. And I think your question, we’ll be in a better position to answer when we get to later in the year about capital allocation. Today, the priority is maximize liquidity, maximize cash flow and all of those will allow us to continue enable us to continue to pay the dividend largely from operating cash flow for the balance of the year.

Operator

Next question is from Jonas Oxgaard from Bernstein. Your line is now open.

Jonas Oxgaard — Bernstein. — Analyst

Thank you. question on the refining of the oxyfuels. It seems that the main issues right now is because of the lack of fuel demand. So can you give us an idea for what should those businesses look like after the lockdown is over? Crude is still $30, $40 probably. But we’re driving again.

Bhavesh V. Patel — Chief Executive Officer

Yes. So in refining, Jonas, the light-heavy differential is a very, very significant driver for earnings, followed by diesel cracks. Our refinery, given that it’s a heavy crude oil processing refinery and we make a significant amount of coke as a result, in this environment, it actually favors our refinery because of the amount of diesel that we produce. We’ve mentioned in prior earnings calls and other venues that we expect that our refinery, under more normalized conditions, should earn about $100 million in EBITDA per quarter. It will be a challenge to get to that level this year because we still need more supply of sour crude oil. But we do think that the higher level of diesel production as a portion of the total yield favors us in our refinery. In oxyfuels, we should start to see some benefits from the volume rising. Higher oil price also helps in terms of oxyfuel profitability. So both should directionally improve as the lockdowns are eased and as activity, at least daily activity, returns to more normal levels.

Operator

Next question is from John Roberts from UBS. Your line is now open.

John Roberts — UBS — Analyst

Thank you. I’m glad you’re all so well. If you were able to switch to 100% heavy feedstocks, would you be able to place all of the extra coproducts in this soft market?

Bhavesh V. Patel — Chief Executive Officer

Yes. No, we would not be able to do that. And again, butadiene would be probably our greatest challenge today, and it’s what limits us in terms of how much liquids we can crack. Our capability, we had two crackers at ChannelView that produce about four billion pounds of ethylene in total. We can crack all liquids at those two crackers. And in terms of our Corpus Christi cracker, we can crack about 2/3 non-ethane feed. So we have significant flexibility. But today, we could not place all the C4s. And as I said earlier, we do not intend to build inventory.

Operator

Our next question is from Matthew Blair from Tudor, Pickering, Holt. Your line is now open.

Matthew Blair — Tudor, Pickering, Holt — Analyst

Good morning, Bob, glad to hear you are safe and sound. I just had a question. Could you compare polypropylene demand with PE demand? Which is holding up better and why?

Bhavesh V. Patel — Chief Executive Officer

Matthew, good to hear from you. They’re both resilient for different reasons. In polyethylene, the areas of weakness have been around construction, but we expect that, that’s more seasonal, and that will pick up. In polypropylene, it’s more about auto being weak. But on the other hand, it’s been offset by the melt-blown-type of products that are going into PPE for first responders and there’s quite a bit of packaging in polypropylene. If I really had to call one or the other I would say, maybe on the margin, polypropylene is a little bit weaker than polyethylene just because of the auto content. But both are holding up pretty well. And as I mentioned earlier, we’re running our assets at 70% plus here in the U.S.

Michael C. McMurray — Executive Vice President and Chief Financial Officer

And Matthew, the only other thing I would add is the export market from North America for polyethylene isn’t as strong as it was earlier in the year. So that’s a particular weakness here in the second quarter anyways until China starts producing for the rest of the world again.

Operator

The final question in the queue is from Hassan Ahmed from Alembic Global Advisors. Your line is now open.

Hassan Ahmed — Alembic Global Advisors — Analyst

Good morning, guys. Good morning, Bob, wanted to revisit some of the comments you made about your dividend. Having taken a glance at the 10-K, it seems that as I take a look at the covenants and the like, that if LTM EBITDA net debt-to-EBITDA sort of approaches or exceeds 3.5 times, I guess the verbiage was that there are certain restrictions that are put on dividend outlay. So obviously, LTM kind of looking fairly sort of decent right now. But if this pandemic or certain lockdowns were to last longer, if there was COVID-related sort of lockdowns to pop up later on as we go through the course of the year, maybe if we start approaching LTM levels of I’d say, close to $3 million, slightly north of $3 billion, dividend start becoming a bit more questionable. Just wanted to sort of hear your thoughts about that.

Bhavesh V. Patel — Chief Executive Officer

Yes. EBITDA levels at the kind of levels you’re describing would be extremely low. But I’ll invite Michael to comment on the covenants.

Michael C. McMurray — Executive Vice President and Chief Financial Officer

Yes. So one thing to keep in mind in regards to the covenants, so you’re right. It was there is a covenant related to total debt-to-EBITDA at greater than 3.5 times. You’ll note from some recent filings if you’ve gone through them, we decided it was prudent to actually get credit for cash on sheet. And so instead of a total debt, it’s now a net debt covenant. So again, as Bob said, that outlook from an EBITDA perspective is pretty dire, and it would probably have to continue for some period of time. And then but I did want to point out that we actually did get some covenant relief as well going from total debt to net debt.

Bhavesh V. Patel — Chief Executive Officer

Okay. Good. Well, thank you for all your questions. I’d like to close with a few comments. As I mentioned earlier, we’re anticipating and we’re ready to address continued challenges as we progress through the current year. Our consistent focus on cash generation, disciplined capital allocation will serve us well in this challenging environment. We’re leveraging our leading portfolio, advantaged positions to extend our track record of strong cash generation, profitable growth initiatives and prudent financial policies to deliver sustainable value for you, our shareholders. So we thank you for your interest in our company and look forward to updating you in July on our second quarter results.

So with that, we’re adjourned. Have a great weekend.

Operator

[Operator Closing Remarks]