Dow Chemical Battles Economy, Preps for LNG Skirmish


It's tough to judge -- or at least to quantify -- managerial competence. Yet, I've long described myself as a "management freak," in that I attempt to mix metrics with a difficult-to-define visceral feeling about the strength of the team at the controls of a company.

I won't attempt to define that mixture further. However, I will note that, as last week came to an end, Dow Chemical joined its rival DuPont among the companies that have traditionally demonstrated capable managements, but are being forced to do battle with global economic headwinds. As a result, Dow, like DuPont earlier, presented results for the final quarter of 2012 that were less than stellar.

Big items
For the quarter, Dow posted a loss of $716 million, or $0.61 per share, a far worse result than the loss of $20 million, or $0.02 a share, for the final quarter of 2011. However, if you back out items for both periods, the big Michigan company earned $0.33 per share in the most recent quarter, compared with $0.25 per share a year earlier. Analysts who follow the company had anticipated $0.34 on the per-share line for the final quarter of 2012. Quarterly revenues reached $13.92 billion, down 1% year over year, but comfortably higher than the consensus $13.67 billion expectation.

The big difference between the company's reported and adjusted earnings resulted primarily from charges related to a restructuring program announced in October. Under the terms of that program, the company is cutting about 2,400 jobs and mothballing about 20 plants. This restructuring is expected to result in, among other things, annual savings of approximately $500 million annually by the end of next year. In the meantime, however, it resulted in a sizable charge of $990 million for the quarter.

As CEO Andrew Liveris said in assessing Dow's recent results: "The second half of 2012 saw significant deterioration in the markets we serve, particularly in China. In response, Dow identified and took aggressive action to mitigate the effects of a slow-to-no-growth global environment -- by deploying cost and cash flow levers and by continuing to prudently manage our portfolio and prioritize growth investments."

Results were mixed on a geographic basis. For instance a 5% growth rate was recorded in Asia Pacific, offset by a decline of precisely the same magnitude in Western Europe. Simultaneously, the two Americas each expanded by precisely 1%.

Prepping for an LNG war
But while the global economy is anything but strong, Dow and a host of other basic industrials companies are benefiting from historically low prices for natural gas, their primary feedstock. At the same time, they're clearly gearing up for a fight with those in a movement to turn the U.S. into a significant processor and exporter of liquefied natural gas, or LNG. Their obvious belief is that a sizable U.S. LNG push would drive the nation's gas prices higher and remove the advantages they are currently receiving.

For instance, as The Wall Street Journal noted on Friday, steelmaker Nucor is reacting to the lower gas prices by constructing a Louisiana plant on the precise site where it dismantled another one nine years ago. The reason for the company's new building project? Obviously, it's the plummeting of U.S. gas prices. Just five years ago they were above $12 per million BTUs, or nearly quadruple today's level.

But there are contending interests baring down on one another there. Dow, which is moving forward with, among other facilities, a new ethylene production plant at its operation in Freeport, Texas, is concerned about the negative changes that LNG would mean for its own economics.

As you likely know, Cheniere Energyhas gained permission to build an LNG-processing plant on the Gulf Coast that is expected to become operational within a couple of years. At the same time, plans to participate in an LNG ramp-up were recently announced by a Kinder Morgan and partnership.

Flawed, misleading, and outdated
As Liveris said, however, in response to an end-of-year Department of Energy report on LNG:

The report...on LNG exports is flawed, misleading and based on outdated, inaccurate, and incomplete economic data....The report also fails to consider the tremendous competitive advantage that affordable, abundant domestic natural gas offers to the nation. Instead, the report offers the baffling conclusion that the U.S. would be better off using its domestic natural gas advantage to fuel growth and jobs in other regions versus strengthening the U.S. economy through manufacturing and benefiting consumers with lower energy costs.

So the "gas battle" that I recently projected for the U.S. clearly is imminent. It appears that that Dow Chemical will be in the thick of it. And given the contretemps' potential effects on our nation's economy, I urge Fools to watch the progress carefully.

The Foolish bottom line
Similarly, given the tussle being waged with global economic softness by Dow and other chemical companies, Fools would be well advised to simply monitor the company until its skies begin to brighten. That assessment likely fits with the 62% of the analysts following the company who rate it a hold.

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Fool contributor David Lee Smith has no position in any stocks mentioned. The Motley Fool recommends Kinder Morgan and Nucor. The Motley Fool owns shares of Kinder Morgan. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.

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