DBRS Confirms NOVA Chemicals Corporation at BBB (low), Stable Trends

DBRS Limited (DBRS) has today confirmed both the Issuer Rating and the Unsecured Notes & Debentures rating of NOVA Chemicals Corporation (NOVA or the Company) at BBB (low) with Stable trends, based on the implied support provided by its parent, International Petroleum Investment Company (IPIC), which is wholly owned by the Government of the Emirate of Abu Dhabi. DBRS notes that certain of NOVA’s credit metrics have weakened modestly but remain above the current rating range. However, NOVA needs to maintain a stronger financial profile through a cycle to compensate for its relatively weak business profile before achieving the current ratings on a stand-alone basis.

NOVA’s operating performance in 2014 was mildly weaker compared to 2013, continuing the volatile pattern of revenues and earnings observed over the past few years. Revenues fell due to reduced co-product sales (expected as a result of the decreased reliance on crude feedstock at the Corunna Olefins segment (Corunna) in Ontario), offset somewhat by the cost benefits associated with substituting natural gas liquids (NGLs) for said feedstock. The completion of the cracker conversion at Corunna in 2014 allows the facility to utilize up to 100% of lower cost NGLs as feedstock, eliminating the need for heavier crude-based inputs. A drop in financing charges allowed for a solid improvement in earnings before taxes, although a higher tax expense caused a fall in reported earnings.

The Company paid out a special distribution in 2014 that was well above expectations. Along with elevated capital spending levels associated with its NOVA 2020 strategic growth plan, this led to a free cash flow deficit that was financed with cash reserves. However, the overall liquidity position remains strong as at December 31, 2014, with $764 million in cash on the balance sheet, undrawn credit facilities of over $600 million and minimal debt repayments due until 2023.

While NOVA’s cost advantage versus crude oil-based (naphtha) producers remains intact, the precipitous drop in global oil prices has made these competitors more cost competitive. As a result, DBRS expects some near-term earnings and cash flow weakening due to pricing pressures. As NOVA 2020 capital spending is expected to remain elevated and normalized dividends are to continue, DBRS anticipates free cash flow deficits. We expect the Company will use its substantial cash reserves and available credit facilities to finance them. DBRS does not anticipate another special dividend being paid in the near term.

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.

This rating is endorsed by DBRS Ratings Limited for use in the European Union.