Nova – Flexing Its (Financial) Muscles – Changing The Shape Of US Ethylene

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Graham Copley / Nick Lipinski

203.901.1629/203.989.0412

gcopley@/nlipinski@ssrllc.com

April 17th, 2017

Nova – Flexing Its (Financial) Muscles – Changing The Shape Of US Ethylene

  • Nova has now made the news twice in only a few weeks, with Monday’s announcement of the acquisition of Williams’ ethylene facility, ethylene infrastructure and a significant adjacent plot of land in Louisiana overshadowing its possible participation in an ethylene project together with Total and Borealis – for 2020 start-up.
    • The Williams’ facility has been on the market for a while and there have been several rumored bidders, including Westlake and Dailim (which made a public statement of an offer).
    • We see this as good deal for Nova – the price is high but probably fair and the IRR of the deal is dramatically improved by the immediate cash flow, versus a new project.
  • Our expectation is that Nova will quickly announce the construction of polyethylene capacity at Geismar – alongside the ethylene unit, either alone or with Borealis (Nova and Borealis share common ownership through Mubadala Investment Co. in Abu Dhabi – Nova is 100% owned and Borealis 64% owned by Mubadala – formerly IPIC).
    • Williams is currently the only 100% merchant ethylene player in the US – the minority interest in the facility (11.54%) is owned by SABIC, which has demand for its share of ethylene.
    • The merchant ethylene market is shrinking in the US as major buyers, such as DOW, WLK (through Axiall), ShinEtsu, Oxy and Formosa add new ethylene capacity.
  • Both Nova and Borealis have proprietary polyethylene technology and while Nova operates facilities in Canada and has a major sales presence in the US, Borealis currently only manufactures in Europe and the Middle East, and is not significant in the US market.
    • Nova started a new world scale polyethylene facility in Canada in the Fall of 2016 and has another facility on the books for Sarnia (Canada) to coincide with a significant expansion of the ethylene unit there – based on Utica and Marcellus shale base ethane.
    • We believe that the company will either move the Sarnia project to Geismar – or build two units concurrently (which would make more sense if Borealis was also involved).
  • Both Nova and Borealis have been good investments for their owners – generating billions of dollars of cash over the last four to five years because of the high margins in integrated polyethylene.
    • The owners have allowed both companies to keep investing – Nova in Canada and Borealis most recently in Abu Dhabi.
    • Now they clearly have their sights on expansion in North America.
  • Short-term, Nova will likely continue to sell ethylene in the US or export through Enterprise, but it is understood that Williams does not have much ethylene contracted for the longer-term.
    • Hence our view that Nova will need to build to consume the ethylene in the US.
  • Nova and Borealis will likely bring more competition to the US polyethylene market and when you also add the potential of Shell re-entering (with its Marcellus plan), there are too many players – which feeds into our “consolidation” thesis.
    • Nova and Borealis themselves are obvious merger candidates
    • We have written recently about LYB’s recent comments, highlighting WLK as a straightforward target – CPChem as less straightforward.
    • We are intrigued by DOW/DD comments that the first company to spin out will be materials and wonder whether the urgency there is because of a possible subsequent consolidation – LYB possible, Aramco more likely.
    • Shell could buy someone – like LYB or CPChem as a way back in to the business.

Exhibit 1

Source: IHS, Wood Mackenzie, Company Reports, and SSR Analysis

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