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Chemical giant Dow Chemical’s (DOW - Analyst Report) Argentine unit and Argentina’s state-run energy company YPF SA have penned a deal to invest $188 million to jointly develop shale gas at Argentina’s Vaca Muerta formation, according to sources. Dow will invest $120 million while the remainder will be provided by YPF.

Both Dow and YPF decided to team up in the area of El Orejano based in the southern Patagonia province of Neuquen, where Vaca Muerta is located, to develop unconventional gas resources. Per the deal, the companies will drill 16 wells to extract shale gas. The companies will also work together to identify new projects focused on expanding Argentina's petrochemical industry where both will have common interest.

The deal came into effect after YPF and Chevron Corporation (CVX - Analyst Report), the second-biggest U.S. oil company, formed a $1.24 billion shale partnership in the Vaca Muerta formation in July. Argentina ranks second (after China) in having potential recoverable shale-gas reserves and also ranks fourth in shale oil.

Last month, Dow decided on the locations where it intends to expand its four leading Performance Plastics brand franchises. The decision is part of an investment strategy on the U.S. Gulf Coast to integrate advantaged shale gas. The selected sites are based in Texas and Louisiana and construction will commence shortly.  

Dow’s collective, high-return investments are expected to boost revenues and generate roughly $2.5 billion in earnings before interest, taxes, depreciation, and amortization (EBITDA) when the plants are fully operational. Dow will also be able to better address the increasing customer and value chain demand in markets like food packaging, transportation and infrastructure, hygiene and medical, and electrical and telecommunications.

Dow currently holds a Zacks Rank #3 (Hold).

 Other companies in the chemical industry worth considering are The Eastman Chemical Company (EMN - Analyst Report) and E. I. du Pont de Nemours and Company (DD - Analyst Report). Both hold a Zacks Rank #2 (Buy).

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