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  • 08-Sep-2022 | 22:17 GMT+08:00

Nutrien Ltd. Outlook Revised To Positive From Stable On Improving Financial Performance; 'BBB' Ratings Affirmed

    • We believe market fundamentals will remain strong in the near term for potash and nitrogen primarily led by supply constraints from eastern Europe.
    • We project Nutrien Ltd. will generate significantly improved cash flows and leverage metrics over our forecast period, with adjusted funds from operations (FFO) to debt averaging about 70% and adjusted debt to EBITDA of less than 1.5x.
    • As a result, S&P Global Ratings revised the outlook on Nutrien to positive from stable and affirmed its 'BBB' long-term issuer credit rating (ICR) on the company.
    • We also affirmed our 'BBB' issue-level rating on the company's unsecured debt and our short-term 'A-2' global scale and global scale commercial paper (CP) ratings on Nutrien.
    • The positive outlook reflects the potential for an upgrade within the next one-to-two years if Nutrien continues to sustain strong metrics, while adhering to financial policies that would support strong cash flow and leverage metrics through the industry cycle.

    TORONTO (S&P Global Ratings) Sept. 8, 2022--S&P Global Ratings today took the rating actions listed above. We project robust cash flow generation and credit measures, supported by record high fertilizer prices. We forecast adjusted FFO to debt of just over 100% and adjusted debt to EBITDA of below 1x in 2022, primarily driven by our estimate of record-high adjusted EBITDA of US$13.5 billion in 2022 amid extremely high potash and nitrogen prices. We believe Nutrien is well positioned to benefit from the structural shifts in industry supply, stemming from the Russia-Ukraine conflict, given its solid market position in potash and nitrogen. Although we do not expect prices for both potash and nitrogen will remain at the current elevated levels, we believe supply demand fundamentals should remain positive in the near term and support relatively healthy prices. At the same time, corn and soybean prices are at historical highs, enabling growers to earn strong cash margins despite the high fertilizer prices. Accordingly, we project adjusted FFO to debt to average 70% and adjusted debt to EBITDA to average below 1.5x over our five-year period (2020-2024). Strong projected credit metrics and our assumption that Nutrien's financial policies will ensure the company maintains strong credit ratios through the industry cycle are the key factors underpinning our positive outlook.

    We believe market conditions will remain favorable for potash and nitrogen even beyond 2022. Potash prices rallied in 2021, with Nutrien's weighted-average selling price increasing by 75% above 2020 levels. Prices further accelerated in 2022, with current potash prices at historical highs, more than 2x 2021 levels. This is largely fueled by the Russia-Ukraine conflict, which resulted in export restrictions from Russia and sanctions on Belarus, creating a structural shortfall in supply; Russia and Belarus together produce about 40% of global potash volumes. Although Nutrien is the only producer with the ability to meaningfully increase production (announced accelerating the ramp-up of its annual potash production capability to 18 million metric tons by 2025), this will not be sufficient to offset the supply gap (estimated at about 8 to 14 million metric tons). Hence, while we believe potash prices will moderate from current levels, they will likely remain above 2021 levels through at least 2024.

    Nitrogen prices have also been on an upward trajectory, with Nutrien's net average price per metric ton (/mt) in the first six months at US$688/mt relative to US$290/mt in 2021. Financial constraints and logistical issues have created challenges to export products from Russia, the world's largest exporter of nitrogen products. We also expect there will be delays in bringing new projects online from that region. At the same time, with significantly higher natural gas prices and reduced supply from Russia, we expect production curtailments in Europe, resulting in further tightness. We believe these factors, coupled with Chinese restrictions on urea exports, will continue to support the strength in nitrogen prices.

    Management would need to demonstrate a financial policy supportive of a higher rating. Based on our forecasts, we expect solid operating cash flow generation of US$5 billion-US$10 billion annually, although we expect a majority of the cash flows will be used toward investing capital, shareholder returns, and acquisitions. We expect the company to spend US$2.5 billion-US$3.0 billion annually on capital spending, which includes brownfield expansions, investing in digital technology and advancing initiatives related to ESG. The company also expects to distribute about US$6 billion to shareholders in 2022 from the solid free cash flow generation projected. While we view this as aggressive, we assume Nutrien will take a measured approach to shareholder returns during weak industry periods as demonstrated in 2020, when it engaged in modest share buyback activity (about US$160 million).

    In addition, management repaid about US$2.1 billion of debt in 2021 and we assume the upcoming bond maturity of US$500 million in October will also be repaid with cash. We believe the gross debt reduction should enable Nutrien to maintain leverage well below its public target of 3x across a commodity cycle, supporting our improved financial risk profile assessment. However, management has not committed to making any further debt reduction and given the inherent cyclicality in the industry, we believe management would have to demonstrate a clearly articulated financial policy committed to maintaining a higher rating.

    The company's integrated strategy, with strong market positions in potash and nitrogen, and exposure to the relatively stable retail segment, supports our rating. Nutrien is the world's largest potash producer and has a strong market position in nitrogen. The company's operations are also low cost, with the potash Rocanville mine being one of the lowest-cost mines globally, and S&P Global Ratings expects continued focus on cost efficiencies will further lower cash costs in the potash segment. The nitrogen segment also benefits from favorable costs due to good geographic positioning and access to low North American natural gas feedstock cost, which has further strengthened the company's competitive advantage given the record high natural gas prices in Europe.

    The company's business risk profile is also supported by Nutrien's presence in the retail segment. Nutrien is one of the largest crop-input distributors in the world through its retail segment (US$2.1 billion in adjusted EBITDA expected in 2022). Our forecast estimates the retail business will continue to expand through organic growth and acquisitions, primarily in Brazil as demonstrated by the recent acquisitions. We believe the company's digital retail platform and newly established captive finance subsidiary--Nutrien Financial--further support the company's medium- and long-term retail growth strategy. In our view, the relative stability of the retail segment tempers the wholesale segment's inherent volatility and reduces consolidated earnings volatility, strengthening the overall credit profile relative to that of peers.

    The positive outlook reflects our view that the company will continue to benefit from strong market fundamentals, resulting in our expectation for robust credit measures. Specifically, we project adjusted FFO to debt to average 70% and adjusted debt to EBITDA to average below 1.5x over our five-year period. Our outlook also factors in our expectation that management is committed to maintaining an improving credit profile and will limit discretionary spending within cash flow generation, such that it maintains its balance-sheet strength.

    We could revise the outlook to stable over the next one-to-two years if:

    • The company's credit metrics weakened substantially, such that weighted-average adjusted FFO to debt declined and remained below 60% without near-term recovery prospects. We believe this could occur if product prices fell sharply due to ease in supply constraints or meaningful new capacity additions coming onstream relative to our expectations; and
    • Management pursued aggressive financial policies such that it weakens the company's credit quality and increases balance-sheet debt;
    • We could also consider a negative rating action if the captive finance entity's loss ratio increases above 3% at the same time debt to equity exceeds 8x, and we believed losses and leverage would remain at these levels.

    We could raise the rating over the next one to two years if:

    • The company maintained its fully adjusted five-year, weighted-average FFO-to-debt ratio at or above 60% at the midcycle fertilizer price; and
    • Nutrien's financial policies remained supportive of a higher rating.

    Although less likely to occur during our 2022-2024 outlook horizon, we could also consider an upgrade if Nutrien achieved a meaningful expansion of its retail segment, such that it lowered the overall volatility of its cash flow generation and materially strengthened its return on capital.

    We also believe it is highly unlikely that the captive finance entity could strengthen to a level that provides an uplift to Nutrien's overall credit profile (and the rating) in the near-to-medium term. We believe the subsidiary could enhance Nutrien's credit profile in the long term, if the loss ratio decreases below 1% and consistently remains below this level.

    ESG credit indicators: E-3, S-2, G-2

    Environmental factors are a moderately negative credit consideration in our rating analysis of Nutrien, a fertilizer producer and distributor. While the potash, nitrogen, and retail segments each accounts for about one-third of the company's cash flows, the nitrogen segment accounts for 75% of the total company emissions. We see nitrogen-based fertilizers as having higher environmental exposure than the broader industry and facing long-term scrutiny and regulations related to carbon dioxide emissions. However, we believe the transition to greener ammonia will take time and fertilizers will remain critical to the growing global food needs. Nutrien recently announced intent to build a 1.2-million-metric-ton clean ammonia facility in Geismar to support its 2030 emission targets, which is to reduce greenhouse gas intensity by 30% by 2030 compared with its 2018 baseline of 0.68 metric tons of CO2 per metric ton of product. We also note that Nutrien has initiated a carbon program for growers to adopt sustainable agricultural practices.

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