Italy’s Versalis 2018-21 earnings outlook muted on US, Asia capacities

LONDON (ICIS)–Versalis’ has adopted a ‘conservative’ outlook on its earnings over the next few years despite a banner 2017 as a result of new low-cost capacity coming onstream in the US and growing Asian independence for some chemicals, the CEO of the Italy-based producer said on Friday.

Parent company Eni reported a 51% increase in operating profit for its chemicals operations year on year in 2017 to €460m, the strongest result for Versalis in many years, on the back of a shift to a higher-margin product slate and a better-optimised production plant set-up.

Eni CEO Claudio Descalzi projected a more bearish outlook for Versalis over the next few years, with forecast earnings before interest and taxes (EBIT) of around €300m in 2018, shifting up to around €400m by 2021, the end of its current strategic period.

“We have to consider a more conservative scenario,” Descalzi said In a capital markets day in London, UK, on Friday.

In a presentation, he attributed around €200m of the full-year chemicals result to a ‘2017 scenario effect’. The latter half of the year was characterised by top-of-cycle volumes and pricing for many petrochemicals products.

According to Versalis chief Daniele Ferrari, the lower earnings expectations despite prevailing strong global economic growth are driven by the expected glut of new basic polymers supply expected from the US, and increasing domestic supply in Asia.

“There is a wave of US wave of crackers coming onstream 2018-19, about 10m tonnes of new polyethylene capacity that will be put onto the market… [and] Asia is becoming [more] independent in terms of crackers,” Ferrari said.

“Adding these two elements in, we needed to be more conservative [in outlook],” he added, noting that underlying growth conditions are expected to be favourable across most of its product lines.

European producers have been eyeing the potential impact of the volumes of new large-scale olefins and polymers production capacity coming onstream in the US Gulf Coast as producers scrambled to capitalise on the growth of the country’s shale-derived oil and gas industry.

With the US largely supplied with basic polymers, the bulk of the new capacity is expected to ripple out to other markets, potentially diluting margins if large quantities of new volumes lead to supply growth temporarily outstripping demand growth.

Versalis is one of the first large European producers to explicitly factor in the potential impact of US polymers on its earnings projections for the next few years.

Parent company Eni on Thursday confirmed its preliminary 2017 financial results statement issued in February, with full-year group net profit swinging to €2.41bn compared to a €340m loss in 2016 as the company reaped the benefits of reduced operating expenses amid firm oil prices, and strong chemicals earnings.

Due to restructuring efforts following the 2014 price crash, the company can cover its upstream capital expenditure at an oil price of $40/bbl, and new upstream project economics that allow for a $30/bbl break-even point.

The company has also embarked on a programme of digitalisation between 2018 and 2021, Descalzi said, with 150 digital programmes covering the whole value chain and a virtual twin of each physical asset.

Eni projects a drop in non-productive time to 5% for its operations through the utilisation of advanced machine learning algorithms, and a 7% drop in production costs.

Picture source: Eni