BASF earnings miss estimates as European gas woes bite

Deteriorating economic conditions in Europe, Germany in particular, will adversely impact BASF third-quarter results and are prompting the world’s largest chemical company to execute a nearly $500 million cost-cutting program.

Russia’s invasion of Ukraine has roiled European energy markets. As Western Europe’s support for Ukraine in the conflict has grown, Russia has tightened the spigot of natural gas that Europe depends on. Supplies are down 50% so far this year and could go even lower.

Natural gas prices in Europe are nearly double what they were at the beginning of the year. Some chemical plants, which depend on the gas as energy and raw material, are running at 40-50% of capacity, according to the consulting firm Wood Mackenzie.

BASF released preliminary figures showing that its third-quarter sales held up in this environment, increasing 12% over the same quarter in 2021. The increase was due to higher selling prices for its products and a strong US dollar, which inflated its results in euros. Sales volumes declined.

In contrast, earnings for the quarter will be down 27% to about $900 million. The results, which are below analyst estimates for the company, include a $700 million charge to reflect a decline in the value of BASF’s shareholding in Wintershall Dea, an energy firm with extensive operations in Russia. Earnings before taxes and special items also declined, by about 28%.

The company suffered a loss in Germany, which depends heavily on Russian gas. Due to the results and “the deteriorating framework conditions in the region,” BASF says it is implementing a nearly $500 million cost-reduction program over the next two years.

The program will focus on Europe, particularly Germany. More than half of the targeted savings will come from BASF’s flagship site in Ludwigshafen. The firm says that cuts will come from “non-production areas” including “operating, service and research & development divisions.”

Chris Counihan, a stock analyst at the investment firm Jefferies, reacted to the planned cuts in a note to clients. “On the positive side, BASF are proactive in addressing their German cost position,” he wrote. “However, its ability to fully mitigate the unfavorable European position on the cost curve (feedstock, power prices, etc.) appears challenging.”