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US ethane lifts outlook of Canada’s Nova Chemicals

05.27.2014  | 

Nova is in the final stages of securing low-cost ethane, an NGL, piped from US shale formations to facilities in Ontario and Alberta -- just south of Canada’s oil sands production region.



Nova Chemicals Corp. debt is trading as if Canada’s largest chemical maker is rated investment grade for the first time in a decade, with projects set to tap cheap US shale gas seen cutting costs and swings in earnings.

Credit-default swaps show the cost to insure debt of Nova against default over five years has dropped 50% since June 2013 to 125 basis points, in line with borrowers rated at the lowest investment-grade of Baa3, according to Moody’s Analytics. Calgary-based Nova is rated Ba1 by Moody’s Investors Service and BB+ by Standard & Poor’s, the highest junk-bond grades for each company.

Nova is in the final stages of securing low-cost ethane, a natural-gas liquid, piped from US shale formations to facilities in Ontario and Alberta -- just south of Canada’s oil sands production region. The projects should stabilize fluctuating earnings and cash flow and eventually boost profit, said David Fisher, a Toronto-based analyst at S&P.

“We expect the conditions for a possible upgrade to be met sometime in 2014,” Fisher said by phone on May 23. “What we need to see is the company is well on its way to having the projects fully operational and that there are not going to be any major execution challenges as they ramp up.”

Nova, which has C$924 million ($850 million) of debt, hasn’t been rated investment grade by S&P since 2002. S&P raised the company’s outlook to positive on Feb. 14.

Yield Spreads

For Nova, being freed from a junk rating would translate into 10-year borrowing costs about 80 basis points, or 0.80 percentage point, lower. The company’s 5.25% notes due in August 2023 yield 4.2%, about 224 basis points more than government benchmarks, according to Bank of America Merrill Lynch index data.

US dollar-denominated bonds of investment-grade rated peers including Dow Chemical and Airgas yield an average 3.36% for similar-maturity debt, according to the Bank of America Merrill Lynch US Corporate Chemical Index. By comparison, the average yield for speculative-grade chemical companies is 5.13%, according to another index.

Nova has secured supplies of ethane for its only two production sites, both in Canada, as competitors such as Dow and Westlake Chemical also expand production because of the cost advantage provided by shale gas.

Nova, owned by the Abu Dhabi government’s International Petroleum Investment Co., turns hydrocarbons such as ethane into ethylene, the most-used petrochemical, and then into pellets of polyethylene. The plastic pellets are sold to makers of shopping bags, food packaging and auto parts, among other end markets.

Bakken Region

In Joffre, Alberta, located halfway between Calgary and Edmonton, Nova hasn’t been able to run its three ethylene plants at full capacity because of a shortage of ethane in the province, said Pace Markowitz, a company spokesman. Nova has now secured an agreement to buy Hess Corp. ethane produced in the Bakken shale region of North Dakota and piped through Saskatchewan to Alberta, he said.

The pipeline will deliver ethane to the Joffre site in the next several weeks, Markowitz said.

Another part of Nova’s feedstock diversification plan for Joffre is securing off-gas extracted by Williams Partners from oil sands in northern Alberta. The Bakken and oil-sands feedstocks will allow Joffre to run at capacity, boosting production by 1 billion lb/year of ethylene, and the company plans to spend $1 billion to expand polyethylene production by a similar amount in the first half of 2016, Markowitz said.

Cracker Capacity

In Corunna, Ontario, about 90 miles north of Detroit, Nova is investing about $250 million to allow the ethylene plant, known a cracker, to run entirely on ethane feedstock, up from a maximum of 70% ethane and 30% naphtha, Markowitz said. Sunoco's Mariner West pipeline in December started bringing Nova ethane from the Marcellus shale region of western Pennsylvania, he said.

Nova is receiving about 60% of its contracted ethane from the Marcellus, a level that will rise through the next few months, Markowitz said. The company plans to spend about $300 million to boost the cracker’s capacity by 20% and expand production of polyethylene, he said.

Reducing exposure to oil derivatives and increasing use of low-cost North American gas is set to improve Nova’s financial results, said John Rogers, a New York-based chemicals analyst at Moody’s, which hasn’t rated Nova investment grade since 2002.

“Once they get their pipelines in place and they can show a couple quarters of improved performance, we would upgrade them,” Rogers said May 22. “Sometime in the next few months, we will take a look at that.”

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