BASF Faces Harsh Reality as Crude Slump Sends 2015 Profit Lower

  • Oil and gas segment took impairment of EU600M in final quarter
  • BASF expects oil and gas prices to stay at low level in 2016

BASF SE executives are facing up to oil’s new reality. The steep drop in prices they didn’t see coming isn’t just a passing phenomenon.

When crude was trading at around $70 a barrel just over a year ago, Chief Executive Officer Kurt Bock said there were “fundamental reasons” why oil couldn’t stay that low.

Now, with prices hovering near $30 -- the steepest collapse in a generation -- the loss in value of BASF’s oil-and-gas division is dragging down profit and shares, which fell as much as 5 percent in Frankfurt trading on Wednesday when the company unveiled a surprise 600 million-euro ($654 million) writedown at explorer and producer Wintershall.

"Clearly the lower oil price has had a more challenging effect than expected,” Citigroup analyst Andrew Benson said in a note. "These are trough conditions."

For years, Wintershall has propped up earnings and cash flow at BASF, the world’s biggest chemicals maker, as other divisions making additives and building materials suffered slowdowns in markets such as construction. Bock has repeatedly defended BASF’s energy business, which generates nearly a quarter of profit, saying it provides a strategic hedge for chemical operations, some of which also suffer periodic dips in demand.

On Wednesday BASF said 2015 earnings before interest and tax fell a more-than-forecast 18 percent to 6.2 billion euros. The Ludwigshafen, Germany-based company had previously said ebit would be “slightly lower.”

The warning drove home BASF’s dependence on the industry and how the severity of the downturn has wrong-footed executives.

“I see the oil price rising sooner rather than later,” Mario Mehren, head of Wintershall, told reporters as recently as last week in Berlin. The executive said he expects the effects of investment cuts in the oil industry to be seen from 2017 while demand will rise at the same time, leading to higher, albeit volatile, prices.

On Wednesday, BASF painted a bleaker picture. “BASF anticipates that prices for oil and gas will remain at a low level in 2016,” the company said in the statement. “The assumptions for oil and gas prices have also been reduced for subsequent years.”

BASF’s writedown follows that of Austria’s oil and gas company OMV AG, a competitor and partner on projects, which revised down the value of its exploration and production assets by about 1 billion euros in October.

Under Bock, BASF’s Wintershall has shifted its focus further upstream to oil and gas production. An asset swap with Gazprom saw it gain stakes in Siberian gas fields in return for its half of a gas-trading joint venture in Europe.

While the asset swap rid BASF of a low-margin business, it also meant the loss of 12 billion euros in annual revenue. BASF also bought oil and gas assets from Norway’s Statoil ASA for $1.25 billion in 2014 to secure more European supplies.

BASF shares fell 3.5 percent at 59.94 euros as of 3:07 p.m. local time. The stock has dropped 15 percent this year, cutting the market value to 55 billion euros.

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