BASF Considers U.S. Investment of $1.4 Billion on Shale

BASF SE (BAS) may undertake its single biggest plant investment to date, spending more than 1 billion euros ($1.4 billion) to target cheaper U.S. shale gas with a facility to convert methane to propylene used in coatings.

Plans for the new facility are being evaluated, the Ludwigshafen, Germany-based company today said in a statement. Until now, the largest single-factory investment is BASF’s 1 billion-euro plant in Ludwigshafen for toluene diisocyanate, or TDI, a component used in seating cushions and mattresses.

BASF competitors have ramped up U.S. expansion plans on the growth of shale gas. Dow Chemical (DOW) Co. is adding plastics capacity in the U.S., using the low-cost natural gas. Axiall Corp., North America’s largest producer of vinyl building products, is considering a $3 billion ethylene plant in Louisiana. The U.S. market produced BASF’s fastest sales growth in euro terms, with revenue rising 5 percent in the first quarter, it said today.

“The production of propylene would allow us to take advantage of low gas prices due to shale gas production, considerably improve our cost position and improve our backward integration in the U.S.,” Chief Executive Officer Kurt Bock said in today’s statement.

The chemical maker will reduce the portion of investments allocated to Germany to about a quarter from a third within the next five years because of rising energy costs in its home country, Bock said earlier this year.

Auto Boost

First-quarter earnings before interest, tax and one-time items fell 3.3 percent to 2.14 billion euros, beating a 2.12 billion-euro analyst estimate in a Bloomberg survey. The company saw more demand from the automobile and agricultural industries, it said.

The shares climbed 0.5 percent to 83.81 euros at 12:27 p.m. in Frankfurt. The stock has gained 8.2 percent this year, giving it a market value of 77 billion euros.

“We had a good start to the year in our chemicals business and in the agricultural solutions segment,” Bock said.

Sales fell 1.1 percent to 19.5 billion euros in the quarter, compared with a 19.3 billion-euro analyst estimate. Net income gained 2.1 percent to 1.48 billion euros.

BASF today reiterated a target for annual earnings to rise even though it’s divesting a gas trading unit mid-year. Revenue for the full year will probably decline “slightly.” While the planned exit of gas trading and storage in the middle of the year will reduce sales “considerably,” some of that loss will be mitigated by growth in fungicides, herbicides and chemicals.

Job Cuts

BASF is transferring its gas trading unit to OAO Gazprom (OGZD) in an asset swap and in return will receive stakes in two Siberian oil fields.

BASF plans 2,000 job cuts at its performance products unit, which makes vitamins, ingredients for cosmetics and hygiene products, Chief Financial Officer Hans-Ulrich Engel said on a conference call today. Restructuring will save the unit 450 million euros to 500 million euros by 2016, Engel said.

The revamp affects all divisions within performance products, including paper chemicals, pigments and nutrition units, and will cost as much as 300 million euros, Engel said. Savings are to help BASF reach an operating profit target of 22 billion euros by the end of the decade.

Growth Strategy

The company is still concentrating on organic growth rather than acquisitions, Engel said today.

“If you look at what we’ve done over the last two years and compare that to what we did in 2006 to 2010 and you look at our stronger focus on organic growth, that gives you an idea of the current mindset we are in,” Engel said.

Under Bock, who has held the top job for three years, BASF’s largest acquisition was the $1.02 billion acquisition of seed-treatment supplier Becker Underwood Inc. in 2012. That contrasts with BASF’s purchases of catalytic converter maker Engelhard Corp. for about $5 billion in 2006, Swiss additive and dye maker Ciba for $5 billion in 2009 and cosmetic-ingredient maker Cognis for $3.8 billion a year later.

BASF’s supervisory board is proposing former CEO Juergen Hambrecht as chairman at the annual shareholder meeting today. The board is also suggesting British citizen Alison Carnwath, an adviser to Evercore Partners, for the chemical maker’s board for the first time. Current chairman Eggert Voscherau, 70, and Max Dietrich Kley, 74, are not available for re-election.

The shareholder meeting is in Mannheim, across the Rhine River from BASF’s Ludwigshafen headquarters.

To contact the reporter on this story: Sheenagh Matthews in Frankfurt at smatthews6@bloomberg.net

To contact the editors responsible for this story: Simon Thiel at sthiel1@bloomberg.net Robert Valpuesta, David Risser

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