Oil price uncertainty Is BASF Turning Toxic?

On the eve of its 150th anniversary, things have taken a turn for the worse at the chemicals giant. Failed oil and gas deals, over-expansion and lack of a clear stategy are taking a toll.
A BASF plant in Germany.

They are unlikely ideological partners, yet the chemicals giant BASF, one of Germany’s most conservative companies, and the country’s left-wing Die Linke party have something in common these days.

Both are rallying against the sanctions the West is imposing on Russia.

BASF, the world’s largest producer of chemicals, makes hundreds of millions of euros from its oil and gas fields in Russia.

On top of that, the company co-operates with the Russian gas giant Gazprom. It was only last year that BASF’s chief executive Kurt Bock characterized the managers at Gazprom as trustworthy and reliable.

But that is not the case anymore. In December last year, Gazprom cancelled its South Stream gas pipeline, which was to carry huge amounts of gas from Russia under the Black Sea to south-eastern Europe. BASF owned a 15 percent stake in the project.

A few weeks later, Gazprom pulled out of another deal, this time on the orders of Russian President Vladimir Putin. BASF was supposed to get a share in Siberia’s gas fields in return for leaving its share of the gas distribution trade to Gazprom. Not anymore.

The decline in global oil prices has hit BASF’s revenues and profits hard.

The decision was put down to the escalation of the Ukraine conflict, which has caused a serious breakdown in relations between Russia and Germany.

The fact that the deal is off is not BASF’s only problem.

In the year that the company celebrates its 150th anniversary, BASF faces a host of other difficulties.

The decline in global oil prices has hit BASF’s revenues and profits hard. And on the environmental front, its rival Bayer Boden is doing much better in the pesticides business.

To make matters worse, many of the company’s chemicals businesses are suffering from overcapacity, which is pulling down margins.

So how did the usually stalwart BASF end up in this position, and what is Mr. Bock doing about it?

In 2013, the company, which is based in Ludwigshafen in southwest Germany, managed to increase its revenue by three percent to €74 billion, or $83 billion. Profits grew by four percent to €4.8 billion.

On Friday, Mr. Bock announced BASF's 2014 figures. Analysts had expected revenue and profits to have fallen by between one and two percent, but the results revealed that revenues were flat in 2014, and unadjusted profits rose slightly to €5.15 billion.

But Mr. Bock warned that the real test lay ahead. Profits in 2015 were not expected to increase on 2014 and the company's outlook for the coming year was subject to "significant uncertainty," he added.

Many observers feel that even if it escaped unscathed in 2014, 2015 will indeed be a tough year for BASF. They point to multiple problems, primarily in the company’s oil and gas segment, but also in its pesticides and some specialized chemicals sectors. Only its general chemicals and industrial products units are doing well.

Despite rallying in the past two months to around €85, BASF’s share price has been weak since the start of 2014 – not just in comparison with Germany’s DAX index but in comparison with its rival, Bayer.

But the company cannot only point to external factors such as falling oil prices to explain its coming difficulties. Mistakes have been made internally, too.

 

Quelle: dpa
Praying for a good year: Kurt Bock.
(Source: dpa)

 

Management’s first of six major errors was that it sold BASF’s entire pharmaceutics business.

It was bought by Abbvie ten years ago and ever since the U.S. firm has been making healthy profits from the rheumatism drug Humira, which BASF developed. Abbvie is currently raking in profits of $3 billion.

The second mistake involved heavy investment in some of BASF’s riskiest regional markets.

"BASF focused too much on Russia even amid the U.S. shale gas boom in the past years,” said Karl Martin Schellerer, a chemicals consultant in Munich. Some 53 percent of the company’s investment funds are spent on Russia.

In the pesticide business, BASF has lost way to Bayer. Lutz Grüten, Analyst, Commerzbank

BASF has also been investing too heavily in Libya and Argentina.

Libya’s civil war hit the company hard and it has only recently picked up its oil production again.

And in Argentina, BASF’s subsidiary Wintershall, the South American country’s fourth largest oil producer, has been limited in its ability to repatriate profits because of import restrictions and controls on capital movements.

But regardless of these pitfalls, BASF has decided it wants to strengthen its presence in Argentina’s rich gas fields.

The third mistake was the company’s expansion in the oil and gas sector, which made it more dependent on oil prices. These have fallen from $110 to $60 in the past year.

BASF’s fourth mistake was its lack of innovation in its pesticide business.

In the first nine months of 2014, the operational profit of BASF’s agriculture business dropped by 12 percent to €1.1 billion, or $1.2 billion.

“In the pesticide business, BASF has fallen behind Bayer,” said Lutz Grüten, an analyst at Commerzbank. “Bayer did a lot of things right in the pesticide business. Lots of good products, and it developed its leadership,” he added.

BASF, on the contrary, has not been very innovative, insiders said.

 

Video: Kurt Bock on BASF's 2014 results.

 

The fifth error was BASF making too many bad purchases in the specialist chemicals business.

Overall, BASF has been doing well in the sector, which includes markets such as cosmetics, dyes and paper-making, but uncoordinated growth has let it down.

Paper chemicals have been a particular problem area. The business evolved primarily on the back of BASF’s purchase of the Swiss chemicals company Ciba for €3.8 billion in 2008. But the company now views the acquisition as a bad move.

Its vitamin business is also under severe pressure from Asian rivals.

Finally, BASF does not seem to have a clear strategy. Mr. Bock is not known for his big picture approach. He is too interested in details and lacks decisiveness, insiders say.

But, according to employees, Mr. Bock is now beginning to take more of an interest in acquisitions.

“The company could strengthen its oil and gas units as well as its specialist chemicals business,” an analyst at Warburg Research said.

“In the pesticides business it will be difficult for takeovers as there are few big competitors.”

Financing such a project should not be a problem for BASF, the analyst at Warburg Research said.

“Interest rates are low; BASF has an excellent rating and could easily put up capital of ten billion euros.”

 

This article originally appeared in the business magazine WirtschaftsWoche. To contact the authors: [email protected], [email protected]