As both oil and chemical prices hover near record highs, some oil companies are taking advantage of their chemical units’ high valuations to spin off divisions or otherwise restructure assets. Among the latest asset shuffles in the chemicals industry was the disclosure in March by BP PLC that it would spin out its olefins and chemical derivatives subsidiary, which will be called Innovene and based in the U.S. “Innovene combines the best in our BP heritage with the focus and discipline of being independent. Our new name speaks to our aspiration to challenge ourselves and the status quo in our sector,” said Ralph Alexander, CEO of the new concern. “Like BP, we are a global company, with major operations in Asia, North America, and Europe.” The new unit will be a separate entity in the BP group following an IPO later this year. It will be headquartered in Chicago and will have more than $9 billion in assets and $15 billion in third-party sales globally. It will be among the five largest petrochemicals companies in the world. “BP is taking advantage of an opportunity to restructure assets that they see as non-core,” says Gary Adams, President of Chemical Market Associates Inc. (CMAI). He notes that the spin-off includes only part of the BP chemicals portfolio, with the parent keeping its acetyl production facilities and other chemicals production units. One analyst notes that the move is as much financial engineering as industrial strategy. “BP doesn’t want to lose control of these assets. They will probably sell only 20% in the IPO and will keep the rest,” says John Parry, an analyst at John S. Herold Co., based in Norwalk, Conn. Parry says BP’s move is an attempt to segregate out the more volatile components of the company’s petrochemical holdings. A second industry deal is the auction for Basell NV, a joint venture of British-Dutch oil producer Royal Dutch/Shell Group and chemicals company BASF AG. Basell, the world’s largest producer of polypropylene and Europe’s largest producer of polyethylene, was formed in 2000 from the combination of the polyolefin businesses of the two parents. Iran’s National Petrochemical Co. is among the two top bidders to buy Basell. Also in the race to buy the polyolefins producer is a consortium of Indian investors composed of the chemicals firm Haldia Petrochemicals Ltd., Indian investor Purnendu Chatterjee, and some private equity funds. But one analyst, Bob Bauman, Vice President and director of polymers for Nexant, a Houston consulting firm, says that although Shell is exiting its polymers chemicals business, it is investing in two ethylene crackers in the Far East. “Shell feels like they do well in running crackers so they are concentrating their efforts in this area,” he says. Basell’s owners can expect to garner more than $1 billion each for the sale of Basell. Parry says that a secondary motivation for oil companies spinning off some of their chemicals assets is an expectation that natural gas prices will remain costly or even set new price levels. Expectations of high gas prices for U.S. olefin producers, along with a scheduled increase in capacity in olefin production in the Middle East, where gas prices are considerably lower, makes divesting or reorganizing U.S. olefin facilities a wise defensive move, he says. In another oil industry spin-off of a chemicals unit, Kerr-McGee Corp. says it would spin-off or sell its chemical business. The company is the nation’s sixth-largest oil and gas exploration company and it’s the third-largest producer of its primary chemical product, titanium dioxide. “We do not believe that the value of our chemical business is adequately reflected in our market valuation,” said Luke Corbett, Chairman and CEO. One oil company that is unlikely to spin off its chemical operations, according to Fadel Gheit, an oil analyst at Oppenheimer & Co., is ExxonMobil Corp. “They have the most tightly integrated petrochemicals structure in the industry. The chemicals business grew out of their refining business and the refining side of the operation benefits from its ties to the chemical operations.” ExxonMobil’s chemicals business generated an average 14% return on capital employed in the past decade versus an average of 8% for its competitors. At the moment, the company is enjoying an up cycle in both its olefins and aromatics chain products. Rather than being able to identify a single trend in recent moves to acquire or divest assets, Bauman says that chemicals companies are taking steps to ensure their profitability during what is expected to be the notoriously cyclical industry’s next trough. Adams says that CMAI is forecasting that the bottom will drop out of commodity chemical prices by 2008 at the latest. While some buyers may be waiting for what would presumably be lower prices, the owners of chemicals assets are taking steps to be in the best possible position to weather an expected downturn. Copyright 2005 Thomson Media Inc. All Rights Reserved. http://www.thomsonmedia.com http://www.majournal.com

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