BASF shares decline after oil & gas joint venture agreement with LetterOne

LONDON (ICIS)–Shares in German chemicals major BASF fell on Friday morning in the wake of the company’s announcement that it had signed an agreement with LetterOne to merge their oil-and-gas businesses to create a joint venture called Wintershall DEA.

– Shares down on previous close

– New deal close date to appease investor doubts

– €200m synergies, in line with analyst expectations

Shares in BASF were trading at €76.42at 10:07 UK time, 2.48% below the previous day’s close.

The deal is expected to close in the first half of 2019, which is slightly behind the original guidance for the second half of 2018.m However, according to analysts at UBS, this will likely be seen as a positive “as there was some investor concern about the lack of progress since December”.

Also appeasing investors was the news that BASF’s equity stake in the joint venture will ultimately be as high as 72.7%, having previously announced its stake would be 67%.

“The additional bump on conversion of pref shares from the original ‘two thirds’ commentary [is] due to an agreement over the value of the pipeline assets,” said UBS.

According to a note from research analysts Bernstein, the shares will “convert no later than 36 months post-closing but in all cases, pre-IPO [initial public offering]”.

An IPO is planned for the second half of 2020, however, according to Bernstein “there are opportunities to accelerate this timeline to take advantage of the healthy oil price environment, but realistically this is likely to be no more than six months, given the integration work required”.

Pre-tax synergies form the deal are expected to be €200m, which UBS said is broadly in line with expectations.

“The bulk [of the synergies] will come from their ability to integrate procurement, exploration and R&D activities, corporate functions and operating companies in shared regions (Germany and Norway),” said Bernstein.

“BASF’s share of the post-tax synergies (at 72.7% share) is €105mn, at current P/E is equivalent to €1.3bn or ~1.8% of current market cap.”

BASF also issued a new guidance for 2018 in the wake of the deal, in which it said it expects 2018 earnings before interest and tax (EBIT) to decline slightly before exceptional items.

UBS has maintained a neutral rating for BASF in the wake of the deal, but says it remains cautions on earnings momentum for two reasons.

“We still see a risk in Ag Solutions due to likely high inventories in fungicides, around half of crop protection sales.”

UBS also said the “ongoing contraction of unit margins in polyurethanes and ethylene leaves some vulnerability to our chemicals estimates”.

Picture source: BASF

Focus article by Niall Swan