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Ed Lin, 08.18.05, 10:59 AM ET

Merrill Lynch said that without a post-Labor Day decline in hydrocarbon costs, there is "downside risk to second-half estimates for the capacity-sensitive [chemical] companies."

Merrill noted that for the third-quarter alone, additional margin erosion in polyethylene of 2 cents to 3 cents per pound would cause lower Nova Chemicals' (nyse: NCX - news - people ) estimated earnings by 15 cents per share, cut Lyondell Chemical's (nyse: LYO - news - people ) estimated earnings by 9 cents per share, and hurt Dow Chemical's (nyse: DOW - news - people ) estimated earnings by 8 cents per share.

The research firm currently expects Nova to lose 35 cents per share in the third quarter. It expects Lyondell to earn 55 cents per share and Dow Chemical to earn 95 cents per share in the quarter.

Fourth-quarter earnings estimates could also be at risk if hydrocarbon costs have not abated, Merrill noted.

Nova is the company "most leveraged to a recovery in the ethylene cycle," but the firm has a "neutral" rating on the company despite its positive stance on the industry. "With the 19% rally from mid May lows, the stock is already priced for a $5.00 to $6.00 of peak EPS in 2006, to which we see little upside given our negative outlook for the styrenics chain."

Merrill said Lyondell shares "continue to present an attractive buying opportunity," and rates the company at "buy." "Given Lyondell's high earnings leverage to bellwether chemical commodities, Lyondell would be one of the biggest beneficiaries of a recovery in the ethylene cycle," the firm said.

The firm also has a "buy" rating on Dow Chemical. Merrill said "there is room for the shares to move higher as the recovery in the ethylene cycle continues to unfold."