FRANKFURT (Reuters) - BASF said it was in talks to combine its oil and gas unit Wintershall [WINT.UL] with DEA [RWEDE.UL], the energy group owned by Russian billionaire Mikhail Fridman, as the German group expands its core plastics and chemicals operations.
“BASF would hold the majority of the shares in the joint enterprise. An initial public offering (IPO) of the joint enterprise would be an option in the medium term,” BASF said in a statement.
Fridman’s LetterOne Group outbid BASF in 2014 to acquire DEA from German utility RWE, in a move to diversify his energy interests outside Russia.
DEA later put out a statement confirming the talks between LetterOne and BASF regarding a potential merger of their respective oil and gas activities. Both sides said there was no assurance that a deal would be signed.
In May, Kurt Bock, BASF chief executive, said profit contributions from its oil and gas unit were diminishing further amid weak oil prices. As a result, the group would focus on boosting profitability at its chemicals and crop protection businesses.
The oil and gas division, also known as Wintershall, accounts for about 8 percent of group operating profit so far this year and in 2016, down from more than 20 percent in 2015.
That reflected a slump in the oil price and turmoil in Libya, one of Wintershall’s key sources of oil, following the fall of former leader Muammar Gaddafi. Other important exploration and production sites are in Norway and Russia.
Patrick Lambert at brokerage Raymond James, who values Wintershall at about 10-12 billion euros ($11.9-$14.3 billion), said the talks were a move in the right direction for BASF.
“BASF’s exposure to oil and gas has failed to deliver the expected hedge for its chemicals portfolio, and has led to increased volatility in terms of its cash flow generation,” he said.
Adjusted operating earnings at the Wintershall oil and gas business was 533 million euros in the first nine months of the year.
BASF, whose products include catalytic converters, vitamins and foam chemicals, has been on an acquisition spree during the past two years.
It paid 5.9 billion euros in October to buy seed and herbicide businesses from Bayer. It also bought Solvay’s nylon business for 1.6 billion euros. In 2016, it bought Albemarle Corp’s surface-treatment unit Chemetall for $3.2 billion.
Shares in BASF closed 2.9 percent higher, while the STOXX Europe 600 Chemicals index ended up 0.3 percent. DEA became a growth platform for Fridman and his partners after they and partners BP sold Russian oil venture TNK-BP for $55 billion in 2013 to state-controlled oil major Rosneft .
DEA’s expansion in Britain and the United States has been hampered by Western sanctions on Russia in the row over Ukraine although Fridman and his partners are not on the sanctions list.
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Additional reporting by Dmitry Zhdannikov in London; Editing by Edmund Blair and Jane Merriman