DBRS Confirms NOVA Chemicals at BBB (low), Stable

DBRS has today confirmed the Issuer Rating and Unsecured Notes & Debentures rating of NOVA Chemicals Corporation (NOVA or the Company) at BBB (low) with a Stable trend. The confirmation of the ratings still relies on the implied support provided by NOVA’s parent, International Petroleum Investment Company (IPIC), which is wholly owned by the Government of the Emirate of Abu Dhabi. Despite deleveraging its balance sheet and achieving much stronger credit metrics, the Company still needs to demonstrate its ability to successfully manage the variability of the volatile commodity chemicals industry before its credit profile would be considered compatible with the current rating on a stand-alone basis, as highlighted in the last DBRS review.

NOVA’s operating results in 2012, although still respectable, were below DBRS expectations. A narrowing spread – a larger decline in product prices than feedstock costs – led to lower operating profit, even though volume sales were higher. Only the Corunna Olefins segment reported higher year-over-year profit, helped by much lower feedstock costs by utilizing an ethane/propane mix. Deleveraging efforts by NOVA have strengthened its balance sheet and all debt coverage ratios. In the near term, the North American market is expected to remain steady as economic growth supports a modest increase in domestic demand. Overall, DBRS expects NOVA’s performance in 2013 to be comparable with 2012. However, product prices and feedstock costs are expected to follow similar patterns as in 2012, constraining profitability. The return to operation of the rebuilt low-density polyethylene facility ahead of schedule should further add to earnings. Nevertheless, executing the “NOVA 2020” growth strategy to expand capacity should keep capital expenditures elevated in 2013. DBRS expects NOVA’s internal cash resources (cash flow and cash on hand) to be sufficient to meet funding needs and for the Company’s financial profile to remain little changed.

The Company’s NOVA 2020 growth strategy aims to capitalize on emerging feedstock opportunities and growing North American demand. NOVA plans to expand its polyethylene production footprint by building a world-scale gas phase reactor in Joffre, Alberta. Additionally, work on converting the Corunna facility to utilize up to 100% natural gas liquids feedstock has already started, and is expected to be completed by Q1 2014. There is also a plan to build a second world-scale Advanced SCLAIRTECH technology facility, and to expand the Corunna cracker. Funding these projects would stretch cash resources at NOVA. The Company has been diligent in restoring its balance sheet and DBRS expects NOVA to remain judicious in funding these expansion projects without unduly weakening its financial profile.

In the longer term, the advent of inexpensive shale gas is expected to increase the competitiveness of chemical producers in North America, and NOVA is well positioned to benefit from expected growth in the North American chemicals industry. NOVA is in the process of converting its Corunna site to use feedstock from the Marcellus Shale field. However, there is uncertainty regarding feedstock supply to the Joffre site. Lower gas flowing through the straddle plants as a result of recent depressed gas prices has led to less ethane being available under current contracts. The Company has had some success in securing supply from new sources, and will continue to work with suppliers, relevant government entities and pipeline companies to source additional supply. DBRS notes that a key risk to NOVA is a lack of adequate supply of competitively priced feedstock severely affecting the Joffre operations.

NOVA’s current ratings are still influenced by the implied support of IPIC. DBRS expects that IPIC would provide financial support to NOVA in the event of potential distress, even though a formal guarantee has not been provided to NOVA bondholders. DBRS notes that actions taken by IPIC since the acquisition support this view. Without this implied support, the Company would likely be rated in the upper range of the BB category, given the highly cyclical nature of the commodity chemicals industry, even though the Company’s financial profile has strengthened significantly in the last few years and is well within the range for the current rating. DBRS notes that NOVA needs to maintain its financial profile to stay within the current rating range through a cycle before its credit profile would be considered compatible with the current ratings on a stand-alone basis. DBRS expects the Company’s ratings to remain stable in the foreseeable future, especially now that the improved financial profile has provided more of a cushion with which to absorb unexpected weak results.

Notes:
All figures are in U.S. dollars unless otherwise noted.

The related regulatory disclosures pursuant to the National Instrument 25-101 Designated Rating Organizations are hereby incorporated by reference and can be found by clicking on the link to the right under Related Research or by contacting us at info@dbrs.com.

The applicable methodology is Rating Companies in the Industrial Products Industry, which can be found on our website under Methodologies.