Chevron Phillips Bids $15bln to acquire Nova Chemicals

Chevron Phillips Bids $15bln to acquire Nova Chemicals
June 24, 2019

 

Chevron Phillips Chemical Co., a petrochemical industry jointly owned by Chevron Corporation (NYSE: CVX) and Phillips 66 (NYSE: PSX) has evinced interest to take over Calgary, Canada-based Nova Chemicals for over $15 billion, including debt. The potential takeover signals a return of oil majors to Alberta at a time when the country’s petrochemicals sector is showing firm signs of a rebound, aided by extremely low natural gas prices. Following the news, Chevron closed at $124.93, up $0.65 or 0.52% from earlier close, while Phillips 66 ended Friday’s trading session at $90.58, down $0.25 or -0.28% from the prior close.

If the acquisition of Nova Chemicals goes through, it will enable Chevron Phillips Chemical, one of the top ten petrochemical manufacturers, to broaden its global footprint.

Established in 2000, Chevron Phillips Chemical has 31 manufacturing facilities located in Qatar, Saudi Arabia, USA, Belgium, and Singapore. The company generated $12 billion in revenues in fiscal 2018.

Nova Chemicals was set up in 1954. In the past six decades of operation, the company has diversified from insulation and foam packaging to foam-based containers and beverage cups. The company’s resins and polystyrene are used by a range of industries, from packaging to construction.

HDPEs are used in a wide range of industries, from plastic water bottles to plastic lumber and corrosion-resistant piping. The global market for HDPEs is anticipated to reach $85.19 billion in 2019.

The Abu Dhabi state-owned International Petroleum Investment Co (IPIC) took over Nova Chemicals by paying $500 million in 2009 and saved it from undergoing financial restructuring due to a pile of debt. The company rebounded strongly as shale-based energy business started thriving in North America.

In 2017, under the direction of Abu Dhabi, IPIC was merged with Mubadala Investment Co., Abu Dhabi’s sovereign wealth fund, which manages assets worth $225 billion. The fund has been exploring the sale of Nova since the beginning of 2019. However, there is no guarantee that the UAE based fund will accept Chevron Phillips Chemical’s bid.

In the first-quarter of 2019, Nova Chemicals posted EBITDA (earnings before interest, taxes, depreciation, and amortization) of $271 million, a decline from $418 million in the similar period last year.

Ironically, Chevron had decreased its presence in Canada in recent years. The company sold the 57,000-bpd British Colombia-based Burnaby refinery to Parkland Fuel Corp. in 2017. The company still owns a 20% stake in the Athabasca Oil Sands Project, managed by Canadian Natural Resources and a 60% management control over Ells River heavy oil leases. In Duvernay (west-central Alberta), the company is investing in its shale resources.

Ashish Chitalia, Wood Mackenzie chemicals principal analyst, has explained the need for consolidation in the petrochemicals industry. He said: “The petrochemical market is consolidating, with the main players – ExxonMobil, Saudi Aramco, LyondellBasell, Dow — expanding organically or through M&A. Since 2018, many petrochemical companies are under pressure owing to the slow economic growth outlook, the credit crunch in India/China, U.S.-China trade war, and the plastic backlash.”

Bill Rawlusyk, executive director of natural gas liquids at IHS Inc., believes that the acquisition would be a good development for the Alberta region. Rawlusyk said: “Nova’s been spending a lot of money lately, but none of it in Canada other than the Sarnia plant so it might mean we’ve seen the multinationals exit Alberta on the oil sand side,” said. “It means a multinational with big pockets coming back to Alberta, which would be a good thing, in my opinion.”

Nova is actively working on a $2 billion expansion program for its Ontario based Sarnia polyethylene plant. The project is backed with $100 million from Ontario’s Jobs and Prosperity Fund and $35 million from Ottawa’s Strategic Investment Fund.

Chitalia elaborated on how the acquisition will make Chevron Phillips a world leader in ethylene production. “The Nova acquisition would increase ethylene merchant exposure for Chevron Phillips. After the recent ethylene capacity increase at Cedar Bayou, Tex., Chevron Phillips was exposed to 500 thousand tonnes of ethylene to the merchant market, while Nova, post its acquisition of Williams Geismar (a Lousiana cracker) is exposed to approximately one million tonnes of ethylene. Together, the companies would have ethylene volumes equivalent of a world-scale cracker size of 1.5 million tonnes.”

If the deal goes through, Chevron Phillips will become the third largest manufacturer of polyethylene in North America, behind Dow Chemical Co and ExxonMobil Corp. Chevron Phillips will also turn out to be the continent’s largest manufacturer of high-density polyethylene (HDPE), pushing behind LyondellBasell Industries N.V.

Notably, last year, an Edmonton judge passed a judgment asking Nova to compensate Dow Chemicals to the tune of $1.06 billion in damages with regards to a dispute over an ethylene manufacturing facility at Joffre, Alberta.

Chitalia also explained why the region is ideal for acquisition. “The deal with Nova Chemicals would allow Chevron and Phillips 66 to diversify further into this market while increasing competitiveness and market reach. North American ethane feedstock advantage makes the region an ideal location for acquisitions or expansions in the ethylene-polyethylene sector.”

The market is anticipated to react positively to the bid made by Chevron Phillips to acquire Nova.

Technically, the stock of Chevron is trading above its 50-day moving average. Furthermore, the MACD indicator is making new highs. As a result, we can expect the stock to remain bullish in the short-term. The stock is having solid support at 121 levels.

chv - technical analysis - 24th June 2019

Disclaimer: Any financial trading analysis offered here is our opinion and is not intended as advice or direction for investors. We cannot guarantee the success of any trades made as a consequence of this article, and we encourage traders to incorporate a strong money management strategy to limit losses when they enter the markets. Please use this article as part of your own research before formulating strategies prior to trading.

Richard W

Richard W

Richard is the guy who know everything there is about the financial industry, working in a top firm for over 15 years, he will give the lowdown on some of the biggest companies in the world


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