BASF should benefit from China energy curtailments, more divestments potential – bank

LONDON (ICIS)–BASF should benefit from China’s curtailments in industrial energy use due to the integrated nature of its Verbund site currently being built in the country, Credit Suisse analysts said on Thursday.

The German chemicals major could also undertake more divestment within its portfolio, with all eyes on BASF’s subsidiary for oil and gas, Wintershall DEA.

Due to the positives, the analysts expect BASF’s earnings in the medium term at a higher level the company itself is forecasting.

BASF published this week its third-quarter financial results, with booming sales and earnings on the back of historic high selling prices and healthy volumes.

BASF’s CEO Martin Brudermuller, however, was less triumphalist speaking to reporters from its headquarters in Ludwigshafen, warning that the high margins enjoyed year to date are “not the new normal” and likely to normalise when demand and supply align.

VERBUND A BIG HELP
At BASF’s Verbund sites, located in Ludwigshafen and soon in Shanghai – which is still under construction with capital expenditure (capex) expected at $10bn – production plants, energy and material flows, logistics, and site infrastructure are all integrated.

According to Credit Suisse chemicals analysts, that could be the company’s blessing in disguise as China seeks to reduce its energy consumption, which adds a large financial burden to its industry as most of it has to be imported.

“Operationally, in the short/medium term, we believe BASF should be a relative beneficiary from China’s power crunch, given the preferential carbon footprint realised through Verbund and preferential feedstock,” said Credit Suisse.

“This should enable some volume and pricing benefits from competitor curtailments. Longer term, given the (downstream) industry’s focus on reducing Scope 3 emissions, we believe BASF’s green initiatives should also yield pricing benefits and market share gains from less sustainable producers.”

Scope 3 emission of greenhouse gases (GHG) are those emitted by assets not owned or controlled by the reporting company, in this case BASF.

Scope 3 emission sources include emissions both upstream and downstream of a company’s operations.

WINTERSHALL DEA: ON SALE
The subsidiary, of which BASF owns a 72.3% stake, has for years been on the table as a potential candidate for an initial public offering (IPO) on the stock exchange, but the company’s management ruled out that option earlier in the year until at least 2024.

However, Wintershall DEA published this week booming financial results on the back of high prices for crude oil and gas, which revived the talk about an IPO to take advantage of that momentum.

Analysts at German investment bank Baader Bank also said this week the booming results at the subsidiary boded well for an IPO.

“Financially, BASF is still a net seller of assets over the medium term. The more immediate focus surrounds Wintershall; despite the intention to IPO this business being unchanged per company commentary,” said Credit Suisse.

“We believe the necessity to do so in the short term may be somewhat reduced given: 1) the current level of group earnings means divestments should not be necessary to fund capital deployment initiatives.

“2) the somewhat natural hedge Wintershall provides to rising gas prices; and 3) the likely magnitude of the dividend payment in FY22E [estimates for full year 2022] at current gas pricing.”

The bank estimates that dividend in 2022 could be at around €1bn.