One of BASF’s big profit generators, its oil and gas exploration unit Wintershall, turned into a drag on earnings Wednesday.
BASF, the world’s largest chemicals firm based in Ludwigshafen, said in a statement that the strong decline in global oil and gas prices over the past few months led to a non-cash writedown of €600 million, or $652 million, of its oil and gas operations in the fourth quarter.
As a result of the writedown, the company was forced to issue a profit warning. It expects an 18-percent drop in its 2015 operating profit before interest and taxes to €6.2 billion from €7.6 billion the year before. Wintershall in 2013 and 2014 contributed 34 percent and 22 percent, respectively, to BASF’s operating profit.
The profit warning makes BASF the latest casualty of plunging global oil prices. While some companies have benefited, others are seeing profits evaporate as oil prices have continued to spiral downwards over the last few months amid a glut of global supply.
BASF shares dropped as much as 4.6 percent to €59.20 in Frankfurt when markets opened Wednesday. By 11:18 local time, the stock was down 3.4 percent at €60.00.
We expect a significant share price dive today and reiterate our view that BASF is one of the least preferred chemical stocks. Markus Mayer, Analyst, Baader Bank
Markus Mayer, a Munich-based analyst at Baader Bank, said in a note he expected analysts to downgrade their 2016 profit per share forecasts. “We expect a significant share price dive today and reiterate our view that BASF is one of the least preferred chemical stocks,” Mr. Mayer said.
A day before BASF gave its profit warning, Mr. Mayer had reduced BASF’s stock price target by €11 to €52, citing lower oil prices and lower growth forecasts in BASF’s specialty chemicals division. The bank already had a "sell" rating on BASF's stock.
The profit warning could spell trouble for other chemicals firms in Germany, such as Lanxess and Covestro, the former Bayer plastics division.
Mr. Mayer has also downgraded rival chemicals firm Fuchs Petrolub, a lubricant maker listed in Frankfurt, to "sell." The bank expects BASF, Fuchs and German fertilizer and salt producer K+S to disappoint with fourth quarter earnings and their 2016 outlook.
Shares of chemical firms Fuchs, Covestro and Lanxess were all down around 1.6 percent, while K+S shares fell 1.9 percent in Frankfurt.
The profit warning by BASF, which also makes solvents, plastics, coatings, vitamins and fungicides, comes on the heels of similar statements by rival oil producers, such as Shell, which have been hit by record low oil prices. Brent oil fell to a 12-year low last week, below $28 a barrel, down from $113 in June 2014.
“BASF anticipates that prices for oil and gas will remain at a low level in 2016. The assumptions for oil and gas prices have also been reduced for subsequent years,” BASF said in a statement.
The company, which will release its full annual results on February 26, said it expects its full-year sales to be 5 percent lower at €70.4 billion, mainly due to the divestment of BASF’s natural gas trading and storage activities to Russian gas firm Gazprom. BASF’s Wintershall cooperates with Gazprom in Siberia.
Lower margins in BASF’s petrochemicals operations also contributed to a decline of the group’s operating profit, BASF said.
One might expect the chemical sector to be among the main winners of lower oil prices because oil is the most important raw material for making petrochemical products and plastics. But intense competition is forcing chemical firms to pass on all the savings to their customers, according to the German chemical industry association, VCI.
That’s evident in the high price declines the sector has been complaining about for months. Chemicals prices fell 2.5 percent last year, which led to German chemicals revenues stagnating at €190 billion. Many contracts stipulate that declines in raw materials must be passed on to customers.
That’s a major factor for Cologne-based chemicals group Lanxess. “We’re hardly benefiting from the cheap oil,” a spokesman told Handelsblatt earlier this month.
Gilbert Kreijger writes about companies and markets for Handelsblatt Global Edition. Ulf Sommer, an editor with Handelsblatt, contributed to this article. To contact the author: [email protected]