BASF will take a 7.3 billion euro ($7.9 billion) writedown as its Wintershall Dea energy business pulls out of Russia, the German chemicals giant said, triggering a net loss for 2022 and sending its shares lower.
Wintershall Dea has deep ties to Russia, including stakes in the Nord Stream gas pipelines and joint ventures with Russia's Gazprom. Russian billionaire Mikhail Fridman's investment firm LetterOne owns a 27.3% stake in it.
"Wintershall Dea will end its Russian activities. Continuing to operate in Russia is not tenable," Wintershall Dea CEO Mario Mehren said.
"Russia's war of aggression in Ukraine is incompatible with our values and has destroyed cooperation between Russia and Europe," Mehren said in a statement late on Tuesday.
Shares in BASF were down 0.9% at 0830 GMT, having fallen as much as 2.2%.
An impairment charge was expected but "the magnitude is nevertheless breathtaking", said Markus Mayer, an analyst at brokerage Baader Helvea.
The energy company had previously said it was trying to legally separate its Russian business.
According to BASF's statement, 5.4 billion euros of the write-down for 2022 were new charges to be taken in the fourth quarter.A local trader said that investors may now fear a "harsh dividend cut".
BASF's dividend policy states that it aims to increase the payout per share each year.
Analysts on average had been expecting a dividend of 3.42 euros per share for 2022, compared with 3.40 euros for the previous year, according to a consensus shared by BASF.
Jefferies analysts wrote in a research note that a recent decline in European natural gas prices would temper market concerns over the Russia burden, offering a "significant potential earnings tailwind into 2023".
Mehren said limitations imposed by Russia on Western-owned assets had made it impossible to operate properly "and resulted in an economic expropriation of the joint ventures in Russia".
The company added that Russian presidential decrees had retroactively slashed the prices at which joint ventures can sell their oil and gas to Kremlin-controlled Gazprom.
Wintershall Dea said it had to write off Russian joint venture stakes and Russian-related activities, including its 15.5% holding in the damaged Gazprom-led Nord Stream pipeline and the WIGA Transport joint venture with Sefe, formerly known as Gazprom Germania.
As a result, BASF flagged a 1.38 billion euro net loss for 2022, according to preliminary results also published on Tuesday, after a 5.52 billion profit in 2021.
Analysts had on average expected net profit of 4.77 billion euros, according to a company-provided consensus.
Wintershall Dea's Russian activities include a 35% stake in the Yuzhno-Russkoye gas field alongside Gazprom with 40% and Austria's OMV with 25%.
Wintershall Dea also co-owns two Achimov natural gas production projects in Siberia, including a 50% stake in the Achimgaz joint venture with Gazprom and a 25% holding in the Achim Development venture.
BASF said last year that the oil and gas company's exposure in Russia was the reason for it to hold off on plans to take Wintershall Dea public.
LetterOne had earlier voiced opposition to the initial public offering, causing a public rift with its German partner a year ago.
BASF, in its 2022 preliminary results, said it expected a 15% fall in earnings before interest and tax (EBIT) to 6.55 billion euros, below the 6.84 billion expected by analysts, and an 11% rise in sales to 87.32 billion euros on higher prices and currency effects.
BASF is scheduled to publish its final 2022 results on Feb. 24.
($1 = 0.9270 euros)
(Reuters - Reporting by Victoria Waldersee, Christoph Steitz and Ludwig Burger; editing by Josie Kao and Jason Neely)