Wednesday, May 16, 2007

Dow Chemical (DOW): Liveras Keeps Delivering

In early March I wrote "I expect Dow (DOW) to make a major announcement by the end of April and, no, it will not be a sale of the company." OK, so I was off by 10 days. When Dow and the Saudi Arabian Oil Co. announced their joint venture this past weekend, it marked a major coup for both the company and it's chief Andrew Liveras.

Currently in the chemical world the most talked and fretted about variable in input (energy) prices. Sales for Dow are increasing quarterly and annually and the only thing holding there stock back is the fact that energy prices are increasing along with them pressuring margins and profits. Last year on CNBC Liveras gave an interview that foretold the events of the past few months and what stands to happen in the future. He said in the interview that US energy policy was going to drive his company and others out of the US to places where they were able to get input for the products they make cheaper. Before anyone gets all riled up and decides to make a political pronouncement on this, I need put out the fire. Liveras was explicit in his blame for both parties here. Neither has done anything meaningful in regards to implementing a national energy policy that would sustain us. Both parties in the last 20 years have controlled Congress and the White House and neither has done anything about it. The argument could be made that Bush has done the most with his push for alternative energy but even here he is only dipping his toes in the water.

The US, Liveras said has access to ample oil and natural gas reserves but will not allow them to be drilled. This causes an artificial reliance on imports and increases their prices. Whether you agree or not on the drilling policy is irrelevant, the facts are what they are when it comes to pricing and it's effect on business. Liveras has pulled off a master stroke for his shareholders. In a "if you cannot get cheap milk in the store, go to the farmer to get it" move, he is building the largest petrochemical complex in the history of Dow in with the worlds largest oil producer in Saudi Arabia. He has now guaranteed shareholders the cheapest input prices in the industry for the products it will produce. How cheap? Most analysts estimate the natural gas Dow will be using at the facility to be 1/8 to 1/10 the cost of gas it uses in the US. It will be a staggering savings for DOW at a mammoth facility.

How big will this be? Currently DOW has 100 plants around the world that took 100 years to built. The Saudi complex by itself will house 30 additional plants.

The next announcement will be in China with it's China Shenhua Energy Co to turn it's massive western coal supplies into energy. China is desperate to develop its western provinces to take some of the strain off the infrastructure on it's eastern seaboard. China recognizes that it's oil dependency is growing annually and its looking for ways to offset it before it significantly strains the country's growth.

We now have DOW building the largest petrochemical plant in a country with lowest input price costs and near completing a deal in the world most populated country to help supply it with desperately needed alternatives to oil. When you add in the doubling of the capacity at their Kuwait project, Dow is becoming the largest and lowest cost producer of it's products to the fastest growing area of the world. Sounds like recipe for success.

These will be joint ventures are in keeping with Liveras's stated strategy and will mitigate the costs by Dow. The fact that they are essentially going into business with the government's of those countries assures the success of the projects for Dow and it's shareholders.

On another note. Isn't it nice to be a shareholder of a company that has a CEO who, when he states the goals and a direction of our company, actually delivers on them immediately? Dow is a long term play and by long term I am talking about decades, not months or years. The long term value of Dow is multiples of any price people were talking about in the recent buyout speculation frenzy in February and March. Liveras resisted taking the easy buck and shareholders will be the eventual winners. I own shares and are enrolled in the companies DRIP plan (read more about DRIP plans here) so every one of the juicy dividends Dow pays just deliver me more free shares of the company.

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