Chemical companies preserve cash and cut exposure amid uncertainty
Companies in Canada, Latin America, and the United States opted for risk-reduction decisions as the timeline for resolving the Covid-19 crisis appeared indefinite.
Petrochemical companies moved in March 2020 to strengthen liquidity, reduce financial exposure and in one case quickly reverse an asset sale decision amid new revenue opportunity.
One company now seeks a partner for a large-scale project in which it had previously gone on its own, while another pulled out of a long-term venture it had worked on for the past four years.
New conditions brought along by Covid-19 may impact the petrochemical business indefinitely and possibly as long as the entire decade, petrochemical experts warned.
Mexico’s Orbia taps into available credit
Polyvinyl chloride (PVC) producer Orbia, formerly Mexichem, said on March 27 it drew $1 billion from a revolving credit line due to Coronavirus-related economic uncertainty. The borrowing compares with 2019 total sales revenue of $9 billion.
The decision is “a prudential, precautionary measure to strengthen liquidity and financial flexibility,” said Orbia, based in Mexico City and with operations in 41 countries including North and Latin America , Europe, as well as Asia.
Securing funds is necessary “due to continued global economic uncertainty as well as potential effects on global financial and capital markets as a result of the Covid-19 outbreak,” said Orbia which produces PVC resins that go into applications like plastic tubes.
The funds will help meet a payment of $230 million due in 2020, with the next significant debt maturity a couple of years later.
The decision to tap into the revolving credit line amid the Covid-19 crisis came as payment of that credit line won’t come until June 2024. There is a possibility of repaying anytime before that date without penalty.
The company estimated on Feb. 28 a capital expenditure of $360 million for 2020. At the time it said that it was subject “to the absence of major disruptions in the global economy.”
Finding opportunity in a crisis
Canada-based Inter Pipeline said on March 30 it was “exploring partnership opportunities on the Heartland Petrochemical Complex” as well as slashing dividends.
The Heartland complex near Edmonton is under construction since early 2018 at a total projected cost of C$3.5 billion. It includes a propane dehydrogenation and polypropylene (PP) plant. Startup had been set for late 2021.
The project, expected to produce 525,000 tonnes of PP annually, is more than halfway completed.
A partner would help Inter Pipeline in “lowering our project concentration exposure,” CEO Christian Bayle said. He said the decision to seek a partner started in late 2019.
“We have interested parties, however the pace of progress will inevitably be slowed by the impacts of COVID-19,” he added.
Inter Pipeline is also slashing dividend payments by 72% and cutting payroll for top management anywhere from 10% to 20%.
Inter Pipeline also said it was suspending the sale process of its bulk liquid business in Europe despite being at an “advanced stage” in the process.
“The severe decline of energy related commodity prices and return of strong contango pricing has notably benefited Inter Pipeline’s European operations. Demand for product storage is very high,” the company said.
Inter Pipeline, based in Calgary, Alberta owns and operates energy infrastructure assets in Western Canada and Europe.
Shell pulls out of Lake Charles LNG project
Shell said on March 30 that due to Covid-19 market conditions it won’t proceed with a Lake Charles, Louisiana Liquified Natural Gas (LNG) equal venture project it had entered in 2016.
“Given current market conditions, Shell announces today it will not proceed with an equity interest” in the project. Accordingly, Energy Transfer will take over as the project developer,” it said.
Shell will continue to support Energy Transfer with the ongoing bidding process for the engineering, procurement, and construction and then plan a phased handover, it said.
The decision aims to “to preserve cash and reinforce the resilience of our business,” said Maarten Wetselaar, Shell director of integrated gas and new energies.
Shell is building in Monaca, Pennsylvania an ethane cracker and polyethylene plant at a cost some estimated at over $6 billion. It is more than halfway completed.
Covid-19 to have long-lasting impact
“Only one thing seems certain: the coming decade will be shaped by this crisis,” said Patrick Kirby, Wood Mackenzie Principal Analyst, and Matthew Chadwick, the organization’s vice president, global head of petrochemicals, in a report.
“The crisis will slow investment and shift focus towards cash reservation and capex discipline,” the report added.
“The industry must ask itself how to set up for success in a decade that looks very different to the last,” it said.
Lara Swett, vice president of technical programs at the American Fuel and Petrochemical Manufacturers association said on March 23 “Covid-19, poses a different, unprecedented level of challenge. The impact isn’t confined to one region, it’s global, and the timeline for resolving the crisis is indefinite.”
Over $200 billion in petrochemical projects had until recently been approved or considered.
By Renzo Pipoli