Oil companies to Petchem, Integrated Oil Cos into Big Petchem

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Big Oil is moving aggressively into petrochemicals, unleashing huge amounts of capital for new projects worldwide. A natural extension would be the acquisition of standalone petrochemical/commodity chemical companies, underscored by Chevron Phillips Chemical’s rumoured $15bn bid for NOVA Chemicals.

And if indeed major oil companies are willing to pay up for petrochemical mergers and acquisitions (M&A), this also highlights a big disconnect between potential deal valuations and publicly traded multiples.

Take the rumoured $15bn bid, including debt, by Chevron Phillips Chemical (CP Chem) for Canada-based NOVA Chemicals cited in the Reuters story last week. That represents an enterprise value/earnings before interest, tax, depreciation and amortisation (EV/EBITDA) multiple of 10.9x NOVA’s 2018 EBITDA of $1.38bn, and 11.7x the average EBITDA for the past three years.

That is miles away from the EV/EBITDA multiples of major US-based commodity chemicals which are in the 5-7x range for 2018 figures.

“Conceptually, this bid is not surprising – the oil majors are all going into petrochemicals in a big way, and with assets trading below replacement value, buy should be favoured over build,” said Jonas Oxgaard, analyst with Bernstein.

“The first big takeaway for petrochemicals is fairly obvious – industry players value petchem assets higher than the Street, which should support share prices of the companies,” he added.

VALUATION ANALYSIS

The Bernstein analyst estimates CP Chem’s rumoured $15bn bid for NOVA at around 10x EBITDA, taking into account the $1.1bn legal liability NOVA owes Dow from an ethane allocation dispute ruling last year in Canada.

That would be a 50% premium over Dow’s EV/EBITDA multiple of about 6.7x 2018 numbers. LyondellBasell trades at around 6.2x 2018 EBITDA and Westlake at 5.4x, the analyst pointed out.

Yet the stock prices of US-based petrochemical companies have hardly budged on the deal talk. Usually you would expect some pin action for related companies, even on a rumoured deal.

For comparable ethylene and derivative names, Dow has a market capitalisation of around $37bn, while LyondellBasell is at $32bn and Westlake Chemical at $8.6bn. As with most M&A, a significant premium over the market cap would have to be offered to make a deal attractive to the seller.

To give a sense of scale, the US oil supermajors ExxonMobil and Chevron have market caps of $326bn and $238bn, respectively. Occidental Petroleum, a mid-size player with chemical operations, has a market cap of $37bn, but is in the process of acquiring oil and gas producer Anadarko Petroleum for $38bn.

Among European oil majors, UK-based Shell weighs in at a market cap of around $290bn, UK-based BP at $146bn and France-based Total at $145bn.

Plus, Middle East sovereign oil companies – led by Saudi Aramco ($100bn over 10 years and ADNOC ($45bn through 2025) - are investing massive amounts of capital into petrochemicals as they see demand shifting away from transportation fuels - a conclusion just about every oil company is coming to grips with.

THE FUTURE OF STANDALONE PETCHEMS

“The second big takeaway [from the CP Chem/NOVA talk] is that this cements the existential threat that the oil majors form towards the standalone petrochemical industry,” said Oxgaard.

“The oil majors have all seemingly come to the same conclusion – petrochemicals are the future of oil demand,” he added.

Along with Saudi Aramco’s ambitions, the analyst points to Shell’s plans to spend $3bn-4bn/year on petrochemicals – 2-3 times what Dow and LyondellBasell are spending – and ExxonMobil spending $5bn each on two new crackers and considering additional investments.

Oxgaard asks a fundamental question: “What is the role of even a large pure-play petrochemical player in a world where the oil majors can outspend them 10 to 1? Do the petchem majors need to turn downstream and become specialty plastics producers? This is not a transformation that is easily pulled off.”

Between oil and commodity chemical companies, there are two macro forces converging to make deals more likely. The oil companies are clearly ramping up investment in petrochemicals and perhaps racing to acquire these assets ahead of a levelling off or even decline in transportation fuels demand as the EV (electric vehicle) slowly but surely makes inroads.

They’ve determined the future of the oil barrel is in chemicals - not in gasoline and diesel.

At the same time, owners of commodity chemical companies may be wise to exit ahead of the next chemical cycle downturn and/or economic recession. This could apply to more commodity or cyclical assets within chemical companies or the entire company itself.

Already more commodity or cyclical chemical assets are coming to market with private equity firms snapping up a number of them up.

On the commodity side, private equity firm Advent International is buying Evonik’s methyl methacrylate (MMA) business for €3bn, while European vinyls businesses Vynova and KEM ONE are on the selling block, according to sources in the financial community.

And on the cyclical front, BASF is seeking a buyer for its construction chemicals business.

NOVA Chemicals owner Abu Dhabi-based sovereign investment fund Mubadala, which merged with initial NOVA buyer IPIC - another Abu Dhabi sovereign investment fund - could be seeking a timely exit for a large cyclical commodity business at a robust valuation.

IPIC bought NOVA for around $500m (equity valuation) at the height of the financial crisis in 2009 after the latter unsuccessfully sought a bailout from the Canadian government. Including the assumption of about $1.5bn in net debt, the price tag was just over $2bn.

An exit at $15bn including the buyer’s assumption of about $3.3bn in debt, yields around $11.7bn in equity value - a return of well over 20x over the past decade.

Having bought NOVA at the perfect time in the cycle, Abu Dhabi’s investment fund could well exit not quite at the top, but close enough.