Talks Underway

BASF planning oil and gas merger with DEA

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BASF turned negotiations on. Source: Wintershall Holding GmbH

At first glance, BASF’s plan looks like another expansion move. But the potential deal is actually likely to initiate a process of withdrawal. The German chemical giant is in talks to merge DEA Group into its oil and gas division. Although BASF would hold a majority of the combined company, it’s still an indirect sign that it’s willing to fully divest from its energy business.

Talks are underway for a possible merger of BASF’s oil and gas business with DEA, an oil and gas business owned by the LetterOne Group, the company announced late last week. The two companies are then considering an initial public offer of the joint venture in the medium term, but BASF stressed that the talks are still open.

LetterOne is controlled by Russian billionaire Mikhail Fridman and the deal would represent a repatriation of sorts. In 2015, the investor acquired DEA from RWE for around €5.1 billion ($6.1 billion). BASF, which bundled its oil and gas business into its Kassel-based subsidiary Wintershall, was also interested in DEA three years ago.

The planned merger of Wintershall and DEA would result in a new oil and gas group with production of around 210 million barrels of oil equivalent (BOE) and sales of €4.3 billion, based on 2016 figures. BASF is likely to hold at least two-thirds of the new company’s capital, but would probably reduce its stake in the event of an IPO.

Investors and analysts interpreted the plans as a way for the company to begin exiting the oil business. “The merger of DEA and Wintershall could be an opportunity for BASF to withdraw from the upstream oil and gas business, which has few overlaps with the chemical company’s other activities,” said John Feddersen, head of British analysis firm Aurora Energy Research. As a result of the announcement, BASF shares rose by just under 3 percent, a stronger increase than all other stocks on the DAX.

Outside experts have speculated for years that the Ludwigshafen-based chemical giant could and should withdraw from the oil and gas business. But there were no signs from BASF until now.

However, there has been a noticeable increase in the company’s acquisition activity as of late, most recently with the takeover of Solvay’s polyamide business and the planned acquisition of parts of Bayer’s crop protection business. In addition, BASF’s “We Create Chemistry” campaign is clearly aimed at advancing the business with more highly refined and innovative chemical products. The oil and gas production business, which is strongly dependent on oil prices and therefore volatile, no longer coincides with this strategy.

Nonetheless, a withdrawal from the energy business would mark a turning point for BASF, which looks back on more than 100 years of experience in the production of fossil fuels. It began in 1907 with the takeover of the Auguste Victoria coal mine and continued into the late 1960s when BASF acquired Wintershall.

At first, BASF’s main objective was to secure the supply of raw materials. However, in the past two decades, the oil and gas division proved to be important in stabilizing the company’s profitability. Wintershall regularly delivered more than one-fifth of the BASF Group’s consolidated profit, before earnings fell sharply in 2015. In the first nine months of 2017, the oil and gas division still achieved sales of €2.4 billion, generating an operating profit of just over €600 million. But this was only around 8 percent of the consolidated operating profit.

In this sense, a withdrawal from the business seems easier today than it would have been years ago. However, the division’s valuation is also likely to be lower than it was in times of booming oil prices. Markus Mayer, a chemical expert at Baaderbank, estimates the current value of the division at around €10.5 billion and that of a Wintershall/DEA joint enterprise at more than €14 billion. A merger and IPO could increase the overall valuation of BASF’s oil and gas assets.

“Now is a good time for mergers and asset deals because oil prices are likely to rise.”

Cornelia Meyer, Economist

The transaction would also fit into the consolidation trend in the oil industry, which already led to a number of takeovers. Cornelia Meyer, an economist and independent energy expert, sees the possible deal as an elegant solution to heighten the appeal of the business for other interested parties: “Now is a good time for mergers and asset deals because oil prices are likely to rise. Wintershall alone would probably be too small.” Ms. Meyer estimates that, for example, companies like Austria’s OMV might be interested in the new company in the medium term, not least because Wintershall and DEA have a large natural gas portfolio. Gas accounts for 44 percent of total production at DEA and around 70 percent at Wintershall.

Siegfried Hofmann writes about companies and markets, and Franz Hubik covers renewable energy for Handelsblatt in Düsseldorf. To contact the authors: hubik@handelsblatt.com, hofmann@handelsblatt.com

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