Scenario is one of crisis in the sector, uncertainty over the sale of Novonor’s stake
07/05/2024
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Braskem’s polypropylene production plant in West Virginia, U.S.: Petrochemical company has lost nearly R$20bn in market cap since resumption of sale process — Foto: Divulgação
Braskem, amid a stalled sale and industry-wide slump, has seen its assets deteriorate. The petrochemical company has a market capitalization of R$14.7 billion, less than half of the R$34 billion it was worth when Novonor (formerly Odebrecht) resumed the formal process of selling its stake in 2021. This value is also below the nearly R$15 billion in debts owed by the parent company to banks that hold the company’s shares as collateral. This year, Braskem’s shares have accumulated a loss of 16.6% on the B3 stock exchange.
The situation reflects the combination of the worst downturn in the global petrochemical industry with the multi-billion expenses following the ground subsidence in Maceió, the capital of Alagoas state, where the company was extracting rock salt, and uncertainties regarding the company’s future, which also counts Petrobras as a significant shareholder. Looking ahead, doubts prevail.
On the sale front, the recent withdrawal of the Abu Dhabi National Oil Company (ADNOC) and the change in Petrobras’s command brought no relief. Valor has learned that after the new management team took over the state-owned oil company, the indication to Novonor was that it continued to support the ongoing process. However, the change in leadership reignited fears of a potential nationalization of Braskem.
According to sources close to the discussions, the Petrochemical Industries Company (PIC), a Kuwaiti state-owned company interested in the Brazilian petrochemical firm, is still conducting due diligence. The expectation is that this phase will be completed in August. If PIC decides to proceed with an offer for Novonor’s stake—38.3% of the total capital and 50.1% of the voting capital—and Novonor accepts the proposal, Petrobras may decide whether to join the sale or exercise its right of first refusal on its share.
When contacted, Petrobras said about two weeks ago that it was still conducting due diligence on Braskem for a possible exercise of the tag along or right of first refusal. “So far, there has been no decision from Petrobras’s board of directors on the matter,” it said. Novonor declined to comment on the matter.
The devaluation of Braskem has also raised questions about the sale of the shares held by Novonor. At current market prices, Novonor would raise just over a third of the amount owed to banks and would not settle this commitment.
Internally, to mitigate the damage from an unusual combination of pressure factors, which resulted in the loss of its investment-grade credit rating—making access to new funds more expensive—Braskem has adopted stringent measures. Cost reduction and productivity improvement, the sale of non-strategic assets, investment cuts, and workforce downsizing are on the list of actions.
In its most recent move, the petrochemical company signed an investment agreement with Solví to form a joint venture in industrial waste management. In practice, the transaction represents the sale of Cetrel, responsible for waste treatment, environmental monitoring, and water supply in the Camaçari Industrial Complex in Bahia. Under the agreement, Braskem will contribute Cetrel to the joint venture and receive R$284 million, while Solví will include GRI and Emergencial in the partnership and hold 50.1% of the new company—the remaining 49.9% will be owned by Braskem.
When contacted, Braskem replied that it continues to seek to reduce fixed and variable costs and increase productivity, as well as monetize adjacent assets. In 2023, according to the company, the adoption of these initiatives had a positive impact of $390 million on operating results (EBITDA) and $525 million on cash generation. At the beginning of the year, additional initiatives were identified and they, by the end of March, added $58 million to EBITDA.
“It is important to highlight that our continuous objective, today and for the coming years, is resilience and discipline in capital allocation, seeking new financial preservation initiatives while advancing in the implementation of our growth strategy,” it said.
The expectation for the next petrochemical cycle is for improvement in the coming years as the excess supply of basic petrochemicals and resins, particularly polypropylene (PP) and polyethylene (PE), is absorbed by demand, according to forecasts from international consultancies such as ICIS, Platts, and Argus. However, it’s unclear at what pace this will happen, which should keep sector margins (spreads) and the company’s financial leverage (which in March exceeded 8 times) under pressure for some time.
According to Argus Media Brasil, even with the slight improvement in Braskem’s spreads during the first quarter, “an imbalance between supply and demand for petrochemical products persists, given capacity additions in Asia and lower global demand.” “Because of this, there is an expectation that petrochemical spreads will remain below mid-cycle conditions, causing the company’s leverage to remain high for longer than anticipated,” said Frederico Fernandes, a petrochemical specialist at the consultancy.
*Por Stella Fontes — São Paulo
Source: Valor International