Cheap gasoline is a delight for commuters, but it’s been a pain for the shareholders in one of metro Chicago’s newest companies, Univar.
When Downers Grove-based Univar went public in June 2015 at $22 per share, it was solidly entrenched as the No. 2 chemical distributor in the world (behind Germany’s Brenntag) and coming off a decade in which its sales had increased 7 percent annually. Not long before, a $1.5 million grant from the state of Illinois helped induce Univar to relocate its headquarters from suburban Seattle.
Since then, though, the sharp downturn in oil and gas exploration and production, particularly in chemical-needy fracking, has sent Univar’s financial results plummeting. It also confronts new CEO Stephen Newlin with a twofold challenge: how to make up for what may be a permanently smaller market for its petroleum-sector services and lift the company’s stock value, which fell to as little as $10.65 in February.
In 2014, oil and gas accounted for $1.2 billion in sales at Univar, or 12 percent of total revenue of $10.37 billion. This year, Newlin estimates, the sector will generate less than $400 million in sales. Based on projections by Robert Koort, an analyst at Goldman Sachs in New York who foresees Univar’s revenue falling 7 percent this year to $8.32 billion, that would reduce the sector’s share to no more than 5 percent.
“Oil and gas may never get back to 12 percent of our sales again,” acknowledges Newlin, 63, who took the top job in May after predecessor Erik Fyrwald left to take over as CEO of agribusiness Syngenta of Switzerland. (Both men served long tours of duty earlier in their careers at Nalco of Naperville.) “We aren’t reliant on hope. We’re making decisions based on reality here.”
Among his reality-based moves are the closures of Univar supply depots in Texas and Wyoming near now-silent fracking fields that were once reliant on chemicals to stimulate drilling and strengthen cement footings, and cutting back staffing in the sector by 40 percent and more.
After a whirlwind tour of many of the company’s almost 800 branch facilities, Newlin also is pointing Univar toward less cyclical sectors such as pharmaceuticals, food and personal care while featuring better-margin specialty chemicals. He’s put the brakes on the company’s aggressive acquisition program for now, too. Univar closed a half-dozen deals in 2015 and two more in the first quarter. There have been none since then as Newlin works to pay down $3.09 billion in long-term debt.
Univar won’t be able to stay out of the merger and acquisition game for long, however. For one, its suppliers are bulking up, led by a prospective merger of Dow Chemical and DuPont. The supplier/producers themselves control 90 percent of all distribution in the $2.3 trillion chemical market globally. The other 10 percent is controlled by some 10,000 independents like Univar.
Another factor that makes sitting out hard is the competition. Brenntag has been on an acquisition tear recently. More ominously, the industry No. 3, Nexeo Solutions of suburban Houston, recently was acquired for $1.6 billion by billionaire New York investor Wilbur Ross and his WL Ross. Ross didn’t respond to a request for comment, but he has a track record of rollups in struggling industries like steel and coal and could use Nexeo as the start of another consolidation play.
If so, smaller companies such as Producers Chemical of Sugar Grove, which has 25 employees and $25 million in annual sales, probably would get offers. Roger Harris, CEO of the family-owned business founded in 1963, says that he’s gotten “calls of interest” from Univar and others in the past. “Competitors would love to have our employees and our customer base,” Harris says. “We get contacted all the time by the bigger distribution companies, but we’re not for sale.”
For now, Newlin is sharpening up operations and Univar’s sales force. Rivals say he’s also reduced pricing on key products to boost volume. In the end, though, he may have to reconcile shareholders to accepting less. “Newlin has said that he has a history of producing double-digit sales growth and has no plans of changing his target,” says Ryan Merkel, an analyst at William Blair in Chicago. “We appreciate the lofty goal, but given Univar’s recent sales history we see this as a stretch.”
Maybe so, but the chemical industry is also violently cyclical. All of the negatives that have hammered at Univar’s results recently—declining oil patch rig counts, a strong dollar that hurts business in Europe, sluggish demand from industrial customers in the U.S.—could disappear in a few years.
“If oil demand and prices turn up again, it’s a relatively small thing to take the cap off a fracking well and start drilling again,” says Andrew Taylor, a senior partner at Boston Consulting Group in Chicago. He predicts that the overall U.S. chemical market will grow at close to a 4 percent annual pace over the next five years. “Oil and gas could be painful for a while,” he says. “But the sector will come back.”
Investors are showing signs of hopefulness. Univar shares once again trade at more than $20.