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Repeating record results at BASF will be a tall order

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BASF's performance in 2012 was good, but not that good. The world's largest chemical company reported its highest revenue and profit in its 147-year history on Feb. 26. Given the European debt crisis and the shaky global economy in 2012, the figures are pretty impressive.

Investors may be pleased. Peers such as Dow Chemicals, DuPont and Akzo Nobel may be watching with envy. It would be wrong, however, to get carried away. Up to a point, BASF was just lucky. Across all segments, for instance, sales were boosted by positive exchange-rate movements. In all, currencies were responsible for more than half of the growth in sales.

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BASF also benefited from the easing of political tensions in North Africa. BASF is the largest German producer of oil and gas, thanks in good measure to its production facilities in Libya. In 2011, oil output ground to a halt for nine months. After the toppling of Moammar Gadhafi, BASF got its wells up and running again and in 2012 its total oil and gas production jumped 27 per cent. Earnings before interest and taxes in the oil and gas segment skyrocketed by 85 per cent. While the company deserves praise for sorting out the problems in Libya quickly, the potential for further positive contributions is limited. Production volumes are already back at 80 per cent of the pre-2011 level.

These benevolent developments helped offset less pleasant trends elsewhere. Leaving oil and gas aside, four of BASF's five other core segments suffered decreasing profitability. Earnings before interest and tax in the chemicals unit, which produces ethylene, ammonia and propylene, among other things, fell 30 per cent due to weak demand and higher input prices. Profitability of the plastics unit, which makes materials for the automotive and electrical industry as well for household appliances and sports products, took a similar hit.

BASF shares trade on a forward P/E multiple of 12, in line with peers. The company's management offered no more than a cautious outlook for 2013, but still expects to add another record year in terms of sales and earnings. Given the quantities of good fortune it encountered in 2012, that is an ambitious target.

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