Dow Chemical's New Plans in the Sand

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This week has offered more evidence that nowhere is globalization a more pressing reality than with the energy industry and its offshoots. That reality came home to roost again with this week's announcement that Dow Chemical (NYSE: DOW) and Saudi Aramco, the oil company controlled by the Saudi government, will team up to build a massive new chemical production complex in Saudi Arabia.

If that weren't enough, it also appears that Dow may be progressing toward an agreement to join a Chinese company in building a new coal chemical plant in that nation. While the Saudi agreement clearly is farther along, Fools shouldn't be surprised by an announcement down the road by the company that the Chinese pact has been cemented.

The Saudi complex won't be cheap. Indeed, chemical industry experts currently peg its likely cost as high as $22 billion. It apparently will involve the integration of an existing refinery at Ras Tanura on Saudi Arabia's Persian Gulf coast and the nearby Juaymah gas-processing plant with the new petrochemical complex. The Saudis will continue to own the first two facilities, which will provide feedstock to the new petrochemical complex. That facility, which also apparently will include the establishment of a new industrial city, will produce ethylene and ethylene derivatives used in the manufacture of plastics.

The reasons for Dow's widening forays are not materially dissimilar to the rationale for Halliburton's (NYSE: HAL) recent announcement that it will establish a new corporate headquarters in Bahrain in the United Arab Emirates. Indeed, with North American energy production slowing appreciably, it has become incumbent upon producers, oilfield service companies, and petrochemical companies alike to operate closer to the world's energy reserves. Larger integrated companies like ExxonMobil (NYSE: XOM) and Royal Dutch Shell (NYSE: RDS-A) (NYSE: RDS-B) are finding it necessary to essentially cover the world in the pursuit of both upstream and downstream profits.

But while Dow's Saudi complex probably won't begin production until about 2012, I would urge Fools to carefully examine the company in the near term. While its shares are up about 12% in the past year, it nevertheless still trades at a forward P/E of less than 12, and its five-year PEG ratio (P/E divided by expected growth) is an attractive 1.3. Further, the company starts investors off with an enticing dividend yield of 3.3%. For these reasons, I think it's a name that should be prominent on Fools' watch lists.

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Fool contributor David Lee Smith does not own shares in any of the companies mentioned. He welcomes your questions or comments. The Motley Fool has a disclosure policy.