Chevron Phillips’ $15B bid for Nova Chemicals may signal return of ‘big pockets’ to Alberta

Chevron Phillips Chemical Co.’s potential stake in Calgary-based Nova Chemicals could signal the return of oil majors in Alberta’s energy sector, according to analysts.

Reuters reported Thursday that a joint venture between Chevron Corp. and Phillips 66 Co. made a US$15 billion bid to acquire Nova Chemicals, quoting people familiar with the matter.

“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 oilsand side,” said Bill Rawlusyk, executive director of natural gas liquids at IHS Inc. “It means a multinational with big pockets coming back to Alberta, which would be a good thing in my opinion.”

Nova is run by the UAE state-owned Mubadala Investment Co., while Chevron Phillips is headquartered in Texas with 31 facilities in the U.S., Singapore, Belgium, Saudi Arabia and Qatar.

Chevron has offloaded some of its Canadian assets, including the 57,000-bpd Burnaby refinery in British Colombia, to Parkland Fuel Corp. in 2017. It maintains a 20 per cent interest in the Athabasca Oil Sands Project, operated by Canadian Natural Resources; a 60 per cent operating interest in its Ells River heavy oil leases; and is investing in its shale resources in the Duvernay in west-central Alberta, apart from other oil and gas interests.

Chevron did not immediately respond to request for comment.

If the deal proceeds, Chevron Phillips will become the third-largest producer of polyethylene in North America, behind ExxonMobil Corp. and Dow Chemical Co. It will also become the largest producer of high-density polyethylene (HDPE) on the continent, ahead of LyondellBasell Industries N.V.

Another buyer may yet emerge for Nova, and Mubadala could also decide to keep a stake in Nova in any deal that arises, Reuters reported.

HDPEs are used in plastic water bottles, corrosion-resistant piping and plastic lumber. The global market for HDPEs is expected to hit US$85.19 billion this year.

“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,” said Ashish Chitalia, Wood Mackenzie chemicals principal analyst. “Together, the companies would have ethylene volumes equivalent of a world-scale cracker size of 1.5 million tonnes.”

Certainly the attraction would be cheap ethane because natural gas prices are so low, and the market is pretty much balanced at the moment.

Bill Rawlusyk, executive director, natural gas liquids, IHS Inc.

Nova is proceeding with a $2 billion expansion plan for its Sarnia polyethylene plant in Ontario this year. It’s backed by $100 million through Ontario’s Jobs and Prosperity Fund and $35 million through Ottawa’s Strategic Investment Fund.

The potential acquisition comes as the country’s petrochemicals industry is in the midst of a rebound, boosted by dirt-cheap natural gas prices.

Capital spending on industrial chemical industry projects in Canada this year is expected to jump by 65 per cent to $1.9 billion, the highest since $2.2 billion spent in 2014, according to a year-end members’ survey by the Chemistry Industry Association of Canada, which represents producers that together contribute 75 per cent of the country’s chemical products by value.

Rawlusyk sees a unique advantage for companies to build petrochemical plants in Canada, especially given the incentives offered by the previous government in Alberta.

“Certainly the attraction would be cheap ethane because natural gas prices are so low, and the market is pretty much balanced at the moment. There’s been a lot of talk about another big ethane cracker being built in Alberta,” said Rawlusyk.

“The government has offered a bunch of money for that as well. These are multi-billion investments for new crackers, and they would need some way to get incremental ethane out of the natural gas so there would need to be some investment in extraction facilities as well.”

Headquartered in Calgary, Nova Chemicals was founded in 1954. Over the years, it has diversified its business beyond foam packaging and insulation to foam beverage cups and containers.

The deal with Nova Chemicals would allow Chevron and Phillips 66 to diversify further into this market while increasing competitiveness and market reach

Ashish Chitalia, Wood Mackenzie chemicals principal analyst

Nova Chemicals reported earnings before interest, taxes, depreciation and amortization of $271 million in the first three months of 2019, down from $418 million a year earlier, according to its website.

Abu Dhabi acquired Nova Chemicals for $500 million in 2009 using its stated-owned International Petroleum Investment Co. (IPIC), saving it from a financing restructuring due to its large debt. Since then, the company’s business has grown rapidly, taking advantage of the shale-driven natural resources boom in North America. Two years ago, Abu Dhabi merged IPIC with Mubadala, which manages over $225 billion in assets. The emirate has looked into consolidating its holdings and retrenching from some overseas businesses.

“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,” said Chitalia.

“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 potential acquisition comes after an Edmonton judge ordered Nova to pay Dow Chemicals $1.06 billion in damages in 2018 over a dispute around an ethylene plant in Joffre, Alberta.

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With files from Thomson Reuters

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