Interesting Investing Opportunity in These Chemical Companies
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The global chemical industry, which is valued at nearly $3 trillion, has grown at a steady pace in the last decade. Global chemical production rose 2.6% in 2012 whereas it increased 3.8% in 2011. The reason for this slowdown was the European debt crisis and the subsequent weak demand for chemical products in the global market. However, this industry is in recovery mode, with the after-effects of the European debt crisis easing off.
The global chemical industry output is expected to grow by 4.3% in 2013 and by 4.7% in 2014. Here are three leading U.S.-based chemical companies in terms of market cap. Here's an analysis of whether these companies can further consolidate their respective positions.
A chemical company going strong
K-Dow Petrochemicals was supposed to be a $17.4 billion joint venture between Dow Chemical (NYSE: DOW) and Petrochemical Industries Company, or PIC. The joint venture was signed in July 2008. However, PIC called off the deal in December 2008. Dow sued PIC and was subsequently awarded $2.2 billion as arbitration charges by an international court in May 2012. Dow received a direct cash payment of $2.2 billion from PIC in May 2013.
A part of this cash will be used by the company to pay off its debt. It plans to reduce its debt by $2 billion in 2013. This will help Dow reduce its annual interest expense by $100 million this year. It will also decrease its debt to equity ratio to below 0.67 in 2013. This would be a decrease of 31.5% from 2012.
Sadara Chemical is a 50-50 joint venture between Dow and Saudi Arabian Oil. Sadara Chemical secured about $10.5 billion of project financing in June 2013. These funds, along with $2 billion raised in April 2013, will be deployed for the construction of a chemical complex in Saudi Arabia. This complex has an estimated production capacity of 3 million metric tons of plastics and specialty chemicals. Production will commence in the second half of 2015. This project is expected to generate average annual earnings of $500 million for first 10 years after its start-up.
Banking on agricultural revenue
E. I. du Pont de Nemours (NYSE: DD) launched a new $40 million corn and sunflower seed production facility in Stasi, Ukraine in June 2013. Ukraine is renowned for its mineral-rich black soil, which enhances agricultural yield. It is among the top countries in the world in terms of percentage of total land suitable for agriculture, or arable land; of Ukraine's total land area, about 55% is arable. The U.S. Department of Agriculture has predicted that Ukraine will become one of the top three world exporters of corn and coarse grains in the next two years.
DuPont is a market leader in corn seeds and the second-largest producer of sunflower seeds in Ukraine. The new plant is one of the biggest seed production plants in Ukraine. It has the capacity to supply 5,000 tons of corn seed and 2,000 tons of sunflower seed annually to Ukraine and other countries. This increased capacity will help it improve its market share in the Ukrainian seed market.
Cyazypyr is an insecticide which is used to control chewing and sucking pests. This insecticide was launched by DuPont in Argentina in 2012 and in Canada and China in 2013. Rynaxypyr is another insecticide used for chewing pest control. Rynaxypyr had a significant impact on the company’s agricultural segment, which grew 14% quarter-over-quarter to $4.7 billion in the first quarter of 2013. Rynaxypyr had sales of $750 million in 2012. Rynaxypyr and Cyazypyr have a combined annual sales potential of more than $1 billion in the next two years.
Adding fizz with acquisition
Praxair (NYSE: PX) has two major hydrogen production projects this year. In June 2013, it started a hydrogen plant in Port Arthur, Texas. The capacity of this plant is 150 million standard cubic feet per day, or scfd. Praxair has another hydrogen plant in St. Charles, Louisiana, which will be operational in July this year. This plant has a capacity of 120 million scfd.
These two plants thus have a combined capacity of 270 million scfd of hydrogen. This will increase Praxair’s hydrogen production capacity in the U.S. by 25%. This increased capacity will increase the revenue of the company. The expected revenue for Praxair is $3 billion in the third-quarter of 2013, a growth of 8.2% quarter-over-quarter.
NuCO2 is a leading provider of beverage carbonation services to the U.S. restaurant industry. Praxair acquired NuCO2 from Aurora Capital Group in the first quarter of 2013 for $1.1 billion. The beverage carbonation solution provided by NuCO2 is popular with restaurants and convenience stores which offer fountain beverages. 85% of NuCO2’s business is in the top 100 restaurant chains. This acquisition will help Praxair provide nitrogen generation and blending control systems to companies selling draught and craft beers. These products improve beer’s consistency and reduce wastage. It is expected that NuCO2 will generate EBITDA of around $115 million and revenue of $250 million in 2013.
Dow has received cash for arbitration charges, which it will use to pay off part of its debt. Its joint venture, Sadara Chemical, should be a revenue driver in the long-term.
DuPont’s new production facility will help the company increase seed production in Ukraine. Rynaxypyr and Cyazypyr will have huge sales potential in the long-term.
Praxair’s two hydrogen production plants will increase its hydrogen production capacity in the U.S. by 25%. The NuCO2 acquisition will help Praxair enter into the nitrogen generation and blending control systems market.
All three of these stocks are a buy.
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