Frankfurt, Dusseldorf With a massive write-down totaling 7.3 billion euros, the BASF Group eliminated the Russian commitment of its subsidiary Wintershall Dea from its balance sheet at the end of the year. With the value correction published on Tuesday evening, the chemical giant officially admits that the activities in the country are unlikely to generate any income for Wintershall in the foreseeable future, nor will they be exploitable through a sale.
Investors have been assuming such a development for months, which contributed to the weak performance of BASF shares last year. However, the now announced exit from Russia raises hopes that the long-planned separation from Wintershall Dea is getting closer. BASF shares rose slightly on Wednesday morning.
Wintershall CEO Mario Mehren was also optimistic. “Of course, the activities in Russia have recently been a burden. The withdrawal now helps us to become more marketable,” he told Handelsblatt on Wednesday.
With the withdrawal from Russia, Wintershall will lose half of its production and reserves and around 30 to 40 percent of its cash flow. However, the company is still big enough and has a clear strategy to grow in exploration and production outside of Russia.
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Mehren points out that significantly smaller companies have recently gone public successfully. However, he did not want to comment on the specific timing of the IPO: “That is up to the shareholders.”
Analysts doubt that the balance sheet adjustment will lead to a quick Wintershall IPO. Chemical expert Markus Mayer from Baader Bank assumes that such a step will not be possible before 2024 at the earliest. The environment is too uncertain for both a sale and an IPO in the foreseeable future.
The assessments of financial experts sound similar. With the withdrawal from Russia and the write-off, some imponderables with regard to the commitment in Siberia have been eliminated. But that won’t happen quickly with an IPO, said a banker who was already considering a possible Wintershall IPO.
Because the deal is not that easy because of its size. For an IPO like that of Wintershall, you need a good market in which a number of placements with stable performance have already been successful. Wintershall Dea was formed in 2019 from the merger of the BASF subsidiary Wintershall and Dea. BASF currently holds 72.7 percent of Germany’s largest oil and gas producer. The rest is held by the Letter One investment group, which is backed by Russian oligarch Mikhail Fridman.
The abandonment of the Russian business has drastically reduced the possible proceeds from a sale of the Wintershall stake. Analyst Mayer estimates that BASF’s stake in the oil and gas producer before the Ukraine war was still worth 15 to 18 billion euros. He currently only sees it at six to eight billion euros.
Wintershall: gap in BASF’s financial strategy due to withdrawal from Russia
The operating profit of the BASF Group is not affected by this. However, the loss of value at Wintershall and the delay in the IPO have left a painful gap in the chemical company’s financial strategy.
The group wanted to use the proceeds from a sale for its ambitious expansion plans, for example in China, and for the conversion to climate-neutral production processes. “BASF will now have to finance these expenses more from cash flow,” Mayer expects.
The group is investing up to ten billion euros in the plant near the southern Chinese city of Zhanjiang.
(Photo: IMAGO/Xinhua)
As far as the development of operating earnings is concerned, Wintershall has played practically no role for BASF for several years. Since the merger with Dea, the investment has only been accounted for with its equity share. The proportionate Wintershall result is therefore no longer included in the operating profit of the BASF Group, which analysts and investors pay close attention to, but only in the investment result.
When the accounting was changed in 2019, BASF had written up the Wintershall share significantly in the course of a revaluation to a good 14 billion euros. At the time, this led to special income of more than five billion euros, which was recognized on the balance sheet but did not affect cash. After the Russia write-offs, the stake should only be around five billion euros in the books.
BASF can claim a certain amount of compensation thanks to the very high cash flow that Wintershall Dea is currently generating outside of Russia. The company also produces oil and gas in North Africa, Norway and Germany. For the first three quarters of 2022, the Kassel-based company had already reported free cash flow of around 3.6 billion euros, which is available for distributions to shareholders.
BASF’s chemical earnings under pressure
At the same time, BASF’s chemicals business is likely to have generated a high cash flow last year, in particular due to the reduction in inventories. In operational terms, on the other hand, the situation for the Group has clearly deteriorated.
The operating profit (adjusted EBIT) of the BASF Group, which was published in advance on Tuesday evening, was 6.88 billion euros in 2022, eleven percent below the previous year’s figure and also slightly below analysts’ estimates.
According to BASF, regular operating profit fell by around 15 percent to 6.5 billion euros, also due to a write-down on a chemical plant. This is likely to be the ammonia plant in Ludwigshafen, which the group shut down due to high gas prices.
In the current year, business for the chemical giant is likely to become even more difficult due to high energy prices and a weakening economy. Against this background, the group had already announced a cost reduction program with a volume of 500 million euros in October.
Chemical expert Mayer warns that Wintershall is ultimately just a BASF construction site. “Many investors are looking at the group’s growing dependence on China and the associated economic and political risks.”
Business with basic products from BASF under pressure
Operationally, business with basic products (Chemicals division) and plastics (Materials) in particular is likely to come under operational pressure in the current year. Experts assume that operating income in these segments will roughly halve. Against this background, Mayer does not rule out the possibility that further write-downs may become necessary in view of the currently weak demand.
It will therefore be all the more important for BASF to stabilize or improve earnings in the extensive business with higher-value chemical products such as crop protection products, paints and specialty chemicals.
The apparently disappointing development in the Nutrition & Care segment, in which BASF has bundled its business with products for the cosmetics and food industries, shows that this will not be easy. According to the advance report, the adjusted result was below the analysts’ estimates.
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