NOVA Chemicals’ 1Q19 earnings tumble on weak prices, as China exposure fuels anxiety

NOVA Chemicals bonds sank after the ethylene and polyethylene producer reported a 39% year-over-year drop in adjusted EBITDA for 1Q19 to USD 237m versus USD 388m on weak pricing for its products, according to four sources familiar with the company.

Revenue for the quarter fell 17% YoY to USD 943m from USD 1.134bn in 1Q18, the sources said.

Also weighing on the Mubadala-owned company is its exposure to China and the impact on earnings as trade negotiations falter, said the sources.

Nova’s USD 1.05bn 5.25% senior unsecured bonds due 2027 declined nearly three points to 94.5 to yield 6.124% on 7 May post-earnings from trades at 97.25 on 6 May. The bonds last traded at 94.25 to yield 6.167% yesterday (13 May), according to MarketAxess.

The company’s USD 500m 5% senior unsecured notes due 2025 dropped to 95.73 to yield 5.857% on 8 May from trades at 97.5 on 6 May. The bonds last traded today at 95.5 to yield 5.906%.

During Nova’s quarterly earnings call, management guided to annual capex of USD 1.1bn for 2019 and 2020, said the sources. The figure includes USD 500m for the cracker expansion and new polyethylene facility in Corunna, Ontario, USD 200m for maintenance capex, and USD 100m for planned maintenance of its E2 ethylene and AST1 polyethylene plants. Another USD 300m is earmarked for its Baystar joint venture between Total Petrochemicals & Refining and Novealis Holdings, a JV between NOVA and Borealis.

Executives also relayed to investors that negotiations with Dow Chemicals over a USD 1.05bn adverse judgment are ongoing, said the sources.

The Alberta Court of Queen’s Bench ruled in June 2018 that NOVA owes Dow USD 1.05bn for damages incurred in a joint venture between the two companies in the 2001–2012 timeframe, as well as an additional USD 501m in payments related to patent litigation. The court has yet to rule on an additional USD 250m–USD 350m of damages that were allegedly incurred in the 2012–2015 period.

NOVA has appealed the decision, with an outcome not expected until 2020 or early 2021, according to NOVA CEO Todd Karran during last week’s earnings call.

During 4Q18, the company generated USD 68m of free cash flow based on USD 237m of adjusted EBITDA, USD 134m of capex and USD 35m of interest expense, said two of the sources.

Looking forward, investors expect NOVA to burn USD 160m in 2019, based on USD 1.09bn of EBITDA, USD 1.1bn of capex and USD 150m of interest expense, said the sources. However, upcoming dividend payments totaling USD 500m could bring annual cash burn to USD 650m.

NOVA specifically deferred 4Q18’s USD 250m parent distribution by a year to 4Q19 from the original payment timeframe of 2Q19, said the sources. The company is expected to make a similar USD 250m dividend payment for the 4Q19 quarter.

For the period ended 31 March, NOVA’s gross leverage totaled 2.5x with USD 1.23bn in EBITDA and USD 3.1bn of total debt. Factoring in USD 858m of cash, net leverage comes to 1.8x.

As of 31 March, the company had USD 2.813bn of liquidity split between USD 858m of cash, USD 1.455bn of revolver availability and a USD 500m delayed draw term loan.

2019 Debtwire

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