Braskem’s management explores whether value higher if company sold in pieces

Odebrecht, renamed Novonor in December, and state oil Petrobras, both owners of Latin America’s biggest petrochemical producer Braskem, would realize different company values depending on whether the company is sold as a single asset or in parts, a Braskem official said.

Braskem completed this polypropylene plant in Texas in September 2020. Image courtesy of Braskem

“If the sale is done in parts, there could be tax implications,” said Braskem’s CFO Pedro van Langendonck during the first quarter 2021 earnings discussion. Another key consideration before any decision to split the company in parts is that some assets may lose synergies.

Any sale timing during the year would coincide with improved results and a positive outlook for resins demand compared with uncertainty a year ago.

Braskem’s assets include five polypropylene (PP) plants in the U.S., one of them just inaugurated in September. Another North American property is a majority stake in Braskem Idesa, an ethylene/polyethylene complex in Mexico built five years ago with a $5.2-billion investment.

Losing synergies?

“I think everybody has said of this idea of breaking Braskem up. So we've been putting some thought around that to see if there are any opportunities or ideas that could increase the value” for shareholders, van Langendonck said, according to a transcript of the May 6 call by Motley Fool.

Splitting up some assets without losing synergies would be difficult and particularly so in Brazil.

Brazil represents “an integrated production planning, integrated inventory planning, integrated commercial planning, integrated as feedstock procurement planning. It's a single overhead,” he added. The rest of South America as well as European commercial operations depend on Brazilian production.

However, the U.S. operations are not as integrated with Brazil or with Europe, van Langendonck said. There is substantial commercial synergy between Brazil and Europe because “after South America, the largest export hub for us is Europe,” he added.

Then “there could be a substantial tax burden or not, depending a lot on the structure of how such a deal could be done,” he said.

“But as far as we understand the sale of Braskem is an integrated sale of the whole company, that's how we understand it at this point,” he said.

When could a Braskem sale occur?

Odebrecht (or Novonor) holds 50.1% of Braskem’s voting capital while Petrobras has 47%. There are other minority shareholders.

Petrobras has said that “their equity in Braskem is not a core asset for them," van Langendonck said

So a sale "would be part of their divestment plan. But they also said last Friday that they don't have any definition or decision about the sale model. So we don't have any other information about this,” he added.

Odebrecht said in a filing to investors in mid-2020 that it had started plans toward a sale of all or part of its stake in Braskem. The sale was intended to meet obligations to creditors, it added.

Profit and outlook improved

“Regarding the PP propylene spread in the U.S., spreads grew 49% compared to 2020 average,” said investor relations director Rosana Avolio also during the call. Spreads and profitability improved across the company’s main operation areas from last year.

In the first quarter of 2021, the company's recurring operating result was $1.3 billion, 52% higher than in the preceding quarter mainly due to the better spread for polyethylene (PE), polypropylene (PP) and main chemicals in Brazil.

PP in the U.S. and Europe and PE in Mexico also saw better spreads. Europe saw higher PP sales, Avolio said.

Mexican challenges

“In Mexico, the average capacity utilization rate of our PE plants increased in relation to the fourth quarter due to the production based on (an) experimental business model implemented in January and February,” Avolio said.

The restart followed the interruption of natural gas service in Dec. 2020 amid disagreements with Mexican officials over a long-term ethane contract.

During January-March “fee sales in Mexico decreased by 27% when compared to fourth quarter 2020 due to the lower availability of products in inventory,” she said. Mexico's recurring operating results was $94 million, 49% less than in the fourth quarter 2020.

Braskem won bidding more than a decade ago to secure ethane supplies at a set price. Based on that contract, it invested in a plant to transform the ethane into ethylene and polymerize into polyethylene in partnership with local private group Idesa.

Braskem complained early in 2020 over missed contractual fine payments it claimed. Those were related to missed ethane deliveries on the part of Mexico, which continued to fail to meet contractual deliveries. Mexican Presidente Andres Manuel Lopez Obrador said in August that the contract was unfair because it created a need for Mexico to buy ethane and sell to Braskem Idesa at a lower price.

Together with losses related to fines, the contract created a cost to Mexicans of some $683-million, Lopez Obrador said. 

In December Mexican officials interrupted the flow of natural gas to Braskem Idesa forcing a plant shutdown.

The complex operations in Nanchital, Veracruz restarted earlier this year.

“I will be very brief. Negotiations are still ongoing. I think everybody knows the underlying issue is the life of ethane in the country. We've been putting a lot of effort in increasing the supply of imported ethane,” von Langendonck said.

“So our capacity to import right now is at about 20,000 barrels per day of ethane, and we are expanding that capacity to 26,000 barrels per day in the coming, I would say, month or so,” he said.

Mexico “is currently supplying anywhere from 30,000 to 35,000 barrels of ethane per day. So if you look at those numbers, the potential maximum capacity right now would be or in the near future, would be at about 55,000 to 60,000 barrels per day,” he said.

That should bring capacity utilization to over 80%, he said.

Odebrecht changed its name to Novonor in December. Odebrecht and Braskem pleaded guilty in the U.S. and agreed in 2016 to pay a $3.5-billion settlement over corruption charges. That year, former CEO Marcelo Odebrecht was sentenced to 19 years in prison in Brazil. He later got an early release after spending two and a half years in jail.

On April 15 Jose Carlos Grubisich, another former CEO of Braskem, pleaded guilty to bribery charges involving $250 million in diverted funds.

By Renzo Pipoli