Chemical M&A Outlook
Chem M&A, projects may dry up as recession deepens
Author: Al Greenwood
HOUSTON (ICIS)–The combined blows of low oil prices and the coronavirus (Covid-19) pandemic will cause chemical companies to rein in investments, causing declines in mergers and acquisitions (M&A) as well as new projects.
Even before the coronavirus, commodity chemical companies were contending with weaker demand as a result of destocking, said Arun Viswanathan, chemicals equity analyst at RBC Capital Markets. He was among the speakers in a webinar, part of a series hosted by ICIS.
At the same time, markets were trying to absorb the output of all the new plants that were recently built in the US and China.
The coronavirus has compounded these challenges, and economists are forecasting a sharp decline in GDP. For the US, some predict the economy could contract by double digits in the second quarter.
A case could be made for Q2 chemical earnings to fall by 20-30% or more year on year, Viswanathan said.
FINANCIAL STRESS TEST
Such a sharp decline will test balance sheets, said Joseph Chang, global editor for ICIS Chemical Business magazine.
Investors are worried about liquidity and solvency, even for investment-grade companies, Chang said.
So far, most of the chemical companies in the US and Europe have been conservative about leverage, which refers to a ratio of a company’s debt to its earnings before interest, tax, depreciation and amortisation (EBITDA).
ICIS recently conducted a review of 13 publicly traded US companies and found that about 82% of their long-term debt comes due in 2023 and beyond.
Major US chemical companies have generally done a good job of pushing debt maturities out, Chang said.
A new corporate-debt programme from the US Federal Reserve should provide more relief to chemical companies, although it is available only to companies with investment-grade ratings, Chang said.
To relieve pressure on earnings, companies could tap into revolving loans, Viswanathan said.
Another option is dividend reduction. Although some midstream companies have lowered them, chemical producers have made no indications that they could cut their dividends.
Companies could postpone or cancel chemical expansion plans, Viswanathan said.
Methanex is reviewing its earlier plans to build a new methanol plant in Geismar, Louisiana.
Chang said more such reviews could take place, especially if companies have yet to make final investment decisions (FIDs) on projects.
In the US, the basis for a lot of these projects was the region’s cost advantage.
US producers rely overwhelmingly on ethane and other natural gas liquids (NGLs) as feedstock, while much of the world relies on oil-based naphtha.
The advent of shale gas and shale oil increased supplies of NGLs in the US, lowering their costs versus producers that relied on naphtha.
The sharp decline in oil prices has reduced – if not eliminated – that cost advantage in the US.
Spot margins for high-density polyethylene (HDPE) in the US are below those in Europe and close to those in Asia, Chang said. “It’s going to be much harder to justify these kinds of billion-dollar investments.”
Many of the new proposed chemical plants are being pursued by oil producers, who want to rely less heavily on crude, Chang said.
Oil companies are under even more pressure to lower capital expenditures, so that could lead to more chemical project delays and cancellations.
Chevron is reducing its 2020 capital spending plan by $4bn-16bn. Those cuts include $800m in its downstream and chemical operations.
Similarly, any expectations that oil producers could acquire downstream chemical producers have dried up, said Daniel Fletcher-Manuel, head of financial markets development, ICIS.
Viswanathan added that chemical companies have already gone through a phase of deal-making. Dow and DuPont merged and then separated into three companies focuses on materials, agriculture and specialty chemicals. Sherwin-Williams acquired Valspar, and consolidation took place among producers of titanium dioxide (TiO2).
Still, there were some companies conducting strategic reviews. Viswanathan expects that any actions based on these reviews could be delayed by three to six months.
“I do think that M&A will take a little bit of a breather for a couple of quarters,” Viswanathan said.
Chang said the decline in stock prices for chemical companies could complicate any deals. Those drops could increase the gap between what buyers are willing to bid on a company and what sellers are willing to accept.
SOME CHEM SECTORS ARE LESS BAD
The outlook is still gloomy, but some parts of the chemical industry are in better positions than others.
Among specialty chemicals, companies that make herbicides, pesticides and other agrochemicals have a rosier outlook because they provide essential goods, said Viswanathan.
Plastics should also perform relatively well because of their essential role, he said.
For paints and coatings producers, the decline in oil prices should lower their feedstock costs, Viswanathan said. However, these companies will contend with lower demand from the construction and automobile sectors.
Chemical companies reliant on the automobile industry could suffer more because of the plant shutdowns in that sector, he said.
Industrial production was already weak, and it could fall further because of the coronavirus.
Companies that are focused on producing commodities could see Q2 earnings fall by 30-40% year on year, Viswanathan said. Special chemical producers and companies reliant on oil-based feedstock could see Q2 declines of 5-10%.
He expects more stock analysts will lower their earnings estimates in the days and weeks ahead.
CHEMICALS HAVE KEY ROLE TO PLAY
Chemical companies will play a critical role in preventing the spread of the coronavirus, said Dean Curtis, group managing director for ICIS.
In Europe, ICIS has noted rising demand for clear sheets made of polycarbonate (PC) and polymethyl methacrylate (PMMA), Curtis said. These are being used to make protective screens for cashiers in supermarkets and other retail stores.
The rise in demand for sanitsers and hygiene products is trickling down to ethanol and ispropanol (IPA), he said.
“As most of the world protects and isolates during Covid we are seeing changes to demand, some positive and some negative,” Curtis said.
“Economic stimulus will play its part, based on the link of chemical demand to spending power,” he said. “But the industry is resilient, it innovates and I have shared just a few examples of our ability to be agile and adjust – and more importantly to do the right things for society and the industry itself.”
Curtis added: “There are many examples where our industry, like humankind has come together and stepped up and pivoted to support our fight against Covid-19.” he.
The ICIS webinar series will continue at 1500 hours GMT on Wednesday with one focused on packaging.
Tuesday’s webinar recording is available here.
Visit the ICIS coronavirus topic page for analysis of the impact on chemical markets and links to latest news.
By Al Greenwood