Borealis – Credit Update

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SWOT Analysis 8 June 2012 Credit Research Credit Flash - Borealis AG Strengths/Opportunities ■ Strong market position as Europe's second biggest producer of polyethylene and polypropylene ■ Good backward integration through its steam crackers and Base Chemical business and access to feedstock through its shareholders ■ Positive earnings contributions of its Borouge Joint Venture with Abu Dhabi National Oil Company (60%), which benefits from cheap feedstock supply ■ Growth opportunities in the Far East and China, in particular through Borouge ■ Strong shareholder background with long-term strong strategic interest of IPIC (Aa3/AA) and OMV (A3/A-) ■ Conservative capital structure with gearing target of 40-60% (FYE 2011: 35%) ■ Prudent financial policy, with Borealis never engaging in excessive debt-financed acquisitions, thereby reducing event risk ■ Strong innovation focus, with Borealis developing leading proprietary technologies (i.e. Borstar) and investing in innovation centers (i.e. research center in Austria; innovation center in Abu Dhabi for its Borouge JV) ■ Diversification in the Base Chemicals sector (further strengthened by the further expansion of the fertilizer activities through the acquisition of PEC-Rhin in 2011) Weaknesses/Threats ■ Pronounced earnings volatility in the cyclical petrochemical industry ■ Low geographic diversification with 81% of FY11 sales coming from Europe; however, shareholding in Borouge JV provides exposure to robustly growing Asian market ■ Significant capacity is expected to come on stream in the Middle East, which might put additional pressure on pricing and hence margins ■ Relatively low EBITDA margins, which nevertheless are in line with those of other players in the petrochemicals industry ■ Earnings contributions from its JV not fully cash accretive to Borealis ■ Significant capex requirements for the expansion of its Borouge JV in Abu Dhabi, though most of it is expected to be covered by the JV's earnings contribution ■ No detailed cash flow data available (changes in working capital are not disclosed); lack of interim quarterly financial information ■ Potential combination of Borealis with NOVA Chemicals (owned by Borealis' shareholder IPIC) although there is currently no fixed timetable. In the past, it was contemplated that Borealis might acquire up to 24.9% of the share capital in NOVA Chemicals, however, to date there has been no news concerning this. UniCredit Research page 2 See last pages for disclaimer.
Key Credit Points 8 June 2012 Credit Research Credit Flash - Borealis AG Company overview Borealis AG, headquartered in Vienna, Austria, was formed as recently as 1994 through the merger of Neste's and Statoil's petrochemical and polyolefins operations. However, the group looks back on more than 50 years of experience in the production of polyolefins under the aegis of various predecessor companies. Borealis has customers in around 120 countries with production sites located close to its key markets in Europe, the US and Latin America. Through the production capacity provided by its Borouge Joint Venture, established 1998 in Abu Dhabi, United Arab Emirates, Borealis serves the emerging markets of Asia and China in particular. Borealis has around 5,100 employees worldwide. While the Polyolefins segment represents the majority of sales, we note that in FY11 the majority of operating profit was generated by the Base Chemicals segment. SALES BY SEGMENT (FY11) SALES BY REGION Base Chemicals 31.3% Integrated petrochemical company Subject to feedstock cost volatility Non Allocated 1.4% Polyolefins 67.4% 4000 3500 3000 2500 2000 1500 1000 500 0 EU Europe excl. EU 2009 2010 2011 USA Middle East and Asia Others Source: Company data, UniCredit Research Borealis is a fully integrated petrochemical company with a historic focus on polyolefins production. However, as an integrated company owning and operating two naphtha-based steam crackers (in Finland and Sweden) and one ethane-based cracker at its Borouge JV (see below), Borealis produces the full range of hydrocarbon feedstock, such as olefins (ethylene, propylene), butadiene as well as aromatics. While the olefins are used as feedstock in Borealis' own polyolefins production, the available butadiene and aromatics (such as benzene and xylene) are mainly sold on to various manufacturing industries through its Base Chemicals segment (around 32% of FY11 sales). Given that the company does not operate crackers at its production sites (in Schwechat and Burghausen), it procures the required ethylene and propylene for its polyolefins plants from its main shareholder (OMV) or joint venture partners. Borealis is subject to the volatility in crude oil prices. Given that the majority of crude oil is used in the fuel industry, the price for naphtha is closely linked to that of gasoline. As a result, chemical producers such as Borealis, which operates two naphtha-based crackers, are subject to strong volatility in the price of their main feedstock. In Europe, naphtha-based crackers are common, while in North America and the Middle East natural gas is the dominant feedstock. In the energy-intensive cracking process, naphtha (or natural gas) is split (cracked) into smaller carbon chains (C2 = ethylene, C3= propylene, C4= butadiene) and rings (called aromatics such as benzene). The price for these cracker products is determined and fixed once a quarter (cracker margin), which makes cracker operators vulnerable to short-term fluctuations in the underlying feedstock, i.e. crude oil (more precisely naphtha) or natural gas, UniCredit Research page 3 See last pages for disclaimer.
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