Methanex Corp
TSX:MX
Earnings Call Analysis
Q3-2023 Analysis
Methanex Corp
In the third quarter, the company reported an average realized methanol price of $303 per tonne and produced approximately 1.5 million tonnes. These resulted in an adjusted EBITDA of $105 million and an adjusted net income of $0.02 per share. The adjusted EBITDA for this quarter was a decrease from the prior quarter due to a decline in the average realized methanol price.
The company acknowledged improving market conditions, especially stronger demand in China for methanol, thanks to applications like MTBE and methanol-to-olefins, combined with moderation in global operating rates due to various supply outages. This has led to higher pricing throughout the third quarter continuing into the fourth quarter. Given the November posted prices in key regions, the company estimates a global average realized price of approximately $310 to $320 per metric tonne for October and November.
Production in the third quarter was lower due to scheduled maintenance and seasonal gas constraints. Nonetheless, with increasing gas supplies from Argentina and expected full operational rates through the Southern Hemisphere summer months, the company has increased its Chile production guidance for 2023 to a range of 900,000 to 1 million tonnes. Moreover, a new two-year natural gas agreement in Trinidad and Tobago has been signed to restart the fully owned Titan plant while idling the Atlas plant by September 2024.
The company starts the fourth quarter with a strong financial position, comprising around $500 million in cash and $300 million in undrawn liquidity. They prioritize the completion of the Geismar 3 project and plan to use excess cash to repay the $300 million bond due at the end of 2024 rather than refinancing it. They forecast the remainder of cash expenditures for the Geismar 3 project to be between $140 million to $190 million.
Looking towards the fourth quarter of 2023, the company anticipates an increase in adjusted EBITDA owing to a higher realized methanol price and elevated produced sales. With the completion of the Geismar 3 project, the company expects to improve its cash flow generation capabilities even amid economic uncertainties.
The company plans to formally update its guidance for the production profile in 2024 towards the year-end. They also expect G3 to ramp up in the first quarter of 2024 and are considering various variables such as the transition from Atlas to Titan, as well as potential improvements in gas supply in Chile to estimate future production increments.
The company expressed continued commitment to Trinidad, despite short-term challenges with the gas supply and is not currently considering relocating assets. Instead, they are exploring opportunities such as converting underutilized assets into e-methanol plants.
With G3's start-up, the company expects a working capital build and CapEx to edge down to around $150 million. Regarding cash flow management, they prioritize paying down a $300 million bond; however, a significantly stronger methanol market could allow for excess cash to lead to buybacks.
The company views the marginal producer's cost in China, particularly coal producers' costs, as a significant factor for methanol pricing. They also monitor affordability within the olefins industry closely. Current Chinese spot pricing is around $280 to $300, influenced by producer costs and olefins affordability, which is lower than it would typically be in a mid-cycle market environment.
The company is working on both demand and supply sides, focusing on the burgeoning marine fuel market. Over 200 ships operating on methanol are anticipated by '27/'28, which may generate 7 million tonnes of demand. Their strategy includes MoUs with shipping companies for various types of methanol, particularly green methanol driven mainly by the European market due to regulatory momentum in the emissions sector.
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Good morning. My name is Julie Ann and I will be your conference operator today. At this time, I would like to welcome everyone to the Methanex Corporation 2023 Third Quarter Results Conference Call.[Operator Instructions] I would now like to turn the conference call over to the Director of Investor Relations at Methanex, Ms. Sarah Herriot. Please go ahead, Ms. Herriott.
Thank you. Good morning, everyone. Welcome to our third quarter 2023 results conference call. Our 2023 third quarter news release, management's discussion and analysis, and financial statements can be accessed from the Reports tab of the Investor Relations page on our website at methanex.com.I would like to remind our listeners that our comments and answers to your questions today may contain forward-looking information. This information, by its nature, is subject to risks and uncertainties that may cause the stated outcome to differ materially from the actual outcome. Certain material factors or assumptions were applied in drawing the conclusions or making the forecast or projections, which are included in the forward-looking information. Please refer to our third quarter 2023 MD&A and our 2022 Annual Report for more information.I would also like to caution our listeners that any projections provided today regarding Methanex's future financial performance are effective as of today's date. It is our policy not to comment on or update this guidance between quarters. For clarification, any references to revenue, EBITDA, adjusted EBITDA, cash flow, adjusted income or adjusted earnings per share made in today's remarks reflect our 63.1% economic interest in the Atlas facility, our 50% economic interest in the Egypt facility, and our 60% interest in Waterfront Shipping.In addition, we report our adjusted EBITDA and adjusted net income to exclude the mark-to-market impact on our share-based compensation and the impact of certain items associated with specific identified events. These items are non-GAAP measures and ratios that do not have any standardized meaning prescribed by GAAP and, therefore, unlikely to be comparable to similar measures presented by other companies.We report these non-GAAP measures in this way because we believe that they are a better measure of underlying operating performance, and we encourage analysts covering the company to report their estimates in this manner.I would now like to turn the call over to Methanex's President and CEO, Mr. Rich Sumner, for his comments and a question-and-answer period.
Thank you, Sarah, and good morning, everyone. We appreciate you joining us today as we discuss our third quarter 2023 results. For the third quarter, our average realized price of $303 per tonne and produced sales of approximately 1.5 million tonnes, generated adjusted EBITDA of $105 million and adjusted net income of $0.02 per share. Adjusted EBITDA was lower compared to the second quarter due to a lower average realized price and lower produced sales.Through the third quarter, we saw improving market conditions with stronger demand from certain sectors as well as moderation in global operating rates, mainly from various supply outages in North America, Middle East and Southeast Asia.Methanol demand improvements were primarily driven by stronger demand in China, with increased demand for MTBE and other fuel applications as well as improved demand for methanol-to-olefins, with a number of MTO plants restarting operations in the third quarter. We are currently seeing very high operating rates across the MTO sector, which we believe is driven by the completion of planned downstream expansions as well as some improvements in affordability from a higher energy and olefins pricing during the quarter.However, we believe economic pressure remains on this sector under current market conditions, we continue to carefully monitor the global macroeconomic environment, and during the third quarter, we saw relatively flat demand outside of China for methanol into traditional chemical applications compared with the second quarter.Coal pricing in China increased during the third quarter from around RMB per tonne to above RMB 1,000 per tonne currently, which we believe was primarily driven by various industry supply disruptions. We currently estimate the global cost curve to be over $300 per tonne based on current coal pricing in China. Overall, continued high energy pricing and improved supply- demand fundamentals has led to slightly higher pricing throughout the third quarter and into the fourth quarter.Our November posted prices in North America, Asia Pacific and China were posted at $549, $370 and $360 per metric tonne, respectively. And our fourth quarter European price was posted at EUR 375 per metric tonne. Based on our October and November posted prices, we estimate our global average realized price to be approximately $310 to $320 per metric tonne for these 2 months.In the third quarter, we had lower production due to scheduled turnarounds in New Zealand and Chile and seasonal gas restrictions in Chile. We are encouraged by the pace of gas developments in Argentina and the continued supply rates from ENAP in Chile. Increasing gas supply from Argentina allowed us to restart our second Chilean plant in September, earlier than previous years.We expect both plants to run at full rates from the end of September through April 2024, the Southern Hemisphere summer months, and are increasing our Chile production guidance for 2023 from a range of 800,000 to 900,000 tonnes to a range of 900,000 to 1 million tonnes based on an improved gas availability from Argentina.Earlier in October, we also announced that we signed a 2-year natural gas agreement with the National Gas Company of Trinidad and Tobago to restart our fully owned Titan plant, and simultaneously idle the Atlas plant in September 2024. I want to thank our team for their hard work to ensure that we maintained operations in Trinidad, which is a strategic part of our global portfolio. The gas situation in Trinidad in the near-term is challenging, which is reflected in the short-term of the new gas contract. We remain committed to working with the NGC and the government to secure long-term economic gas supply.We entered the third quarter in a strong financial position, with approximately $500 million of cash and $300 million of undrawn backup liquidity. Our capital priorities are to complete the Geismar 3 project and allocate any excess cash to repay rather than refinance the $300 million bond due at the end of 2024.Construction of our G3 project is progressing safely to plan. Construction is nearly complete and the team is in the final handover, testing and commissioning phases. We expect to achieve commercial production around the end of the year and within our budget range of $1.25 billion to $1.3 billion. The remaining $140 million to $190 million of cash expenditures, including approximately $50 million in accounts payable is fully funded with cash on hand.Looking ahead to the fourth quarter of 2023, we're expecting higher adjusted EBITDA with a higher realized methanol price and higher produced sales. We remain focused on delivering strong operational results from our existing assets and completing the G3 project. We are well positioned during this period of economic uncertainty with growing cash flow generation capability from G3 and a portfolio of assets that can generate cash flow across a wide range of methanol prices.We would now be happy to answer questions.
[Operator Instructions] Our first question comes from Ben Isaacson from Scotiabank.
Rich, a question on Trinidad. You said that the gas situation has been challenging, which was the reason for the short-term deal. Does that mean that you don't have confidence that it'll get better? Is that why -- I mean, if it's challenging, presumably it's challenging in the short-term.And then as part of that same question, what was the rationale to idle a plant that was running and then bring on -- and then spend CapEx to restart Titan? Is that because there was going to be a major turnaround for Atlas that you wanted to avoid? Just trying to understand the whole Trinidad story.And then just maybe as my follow-up, can you just talk about any risk to EMethanex due to the shutdown of the Tamar platform off of Israel?
Thanks, Ben. On Trinidad, I'll talk about the kind of the near-term, and the reason we call it challenging is, I think, well, previously that the gas market is tight in Trinidad, and in the near term, what we see today is, there's about -- when you look across LNG, ammonia and methanol, that's about 4.5 Bcf of demand per day. Current production is in the range of 2.5 to 3.0 Bcf.And the government -- no, we haven't given up on the fact that that situation is going to get better because there's a lot of things happening in Trinidad, and we believe there's a lot of incentives today to restart capacity that is there across the estate, and these are long assets that have run really reliably over time in Trinidad.So, certainly not -- we are working to understand all of the initiatives that are being taken, and we remain really committed to working with NGC as they and the government of Trinidad as they work with the upstream on improving that situation. The reason we started up -- the decision around Titan versus Atlas is because of the near-term situation. They were offering a fairly short- term contract, and when you look at the economics under that contract in the short term, it made sense to run Titan.And as you said, we don't have a turnaround in front of us like we do in Atlas. That plant had gone through a major maintenance just before we'd idled it. I think that was back in 2019. So, it made sense from an economic perspective and also, I would call it an organization perspective, we want to keep our team in place.Our global manufacturing team is part of our -- huge part of our organization, and we're really pleased that we've got the -- we'll have the Titan asset running at the end of next year, and we will shift and create a Titan restart team now that will be focused on getting that plant up and running safely and reliably.You asked about Egypt, I'll answer that. I think as of right now, what we've seen is, there has been a shutdown of the -- so Israel is an exporter of gas to both Jordan and Egypt. Israel has shut in the Tamar field, which has impacted the flow of gas into Egypt. That is not affecting the available of gas to the industrial producers there. We do understand there may be impact to LNG producers. So as of right now, that's not impacting our operations or other industrial producers in Egypt.
Our next question comes from Joel Jackson from BMO Capital Markets.
A couple of questions short term and then I'll do a long term. I'll do short term first. Just looking at some of your guidance for Q4, can you say if you expect Q4 EBITDA to be higher? You said everything will be higher, will be higher than Q4 of '22. And when you gave your price guidance of $310 million to $320 million, looks like you're using a higher discount rate than Q3? And then, would you be having some inventory builds in Q4, like you normally do?
Okay. So, for Q4, I haven't done that comparison. Our reference was in comparison to Q3, Joel, for higher pricing and higher produced sales. As it relates to the discount rate, we don't expect a big difference in the discount rate, so maybe we can take that one offline.And then inventory build, yes, we do. We have seen a number of quarters here with inventory build on our produced sales. So we're probably accounting for accounting, but we would expect that at some point we'll also be seeing a benefit of pulling through produced sales as well. So, hopefully, that adds just a bit of context to the quarter for you. Is that helpful?
Okay. And then my longer-term question -- yes, I just want to ask for '24, but that's clearly longer term now.
Yes. Yes.
If you look at the production profile for '24, can we talk about, like off a base of little more than 6.5%, can we talk about what you expect for '24? So, I would imagine you expect G3 could ramp across Q1. You have almost near production there next year. I would imagine you switch over from Atlas to Titan, but there might be a hiccup there, like would you lose some tonnes?Would you be running both plants overlapping for a month? Or would we lose some tonnes on a ramp down and a ramp up? Any other changes in New Zealand or anywhere else, maybe better gas in Chile? Like, should we expect 2 million tonnes more in production next year or 1.5 million tonnes? Like, can you just give us some ideas?
Yes. We will update our guidance formally towards the end of this year, but I will -- maybe I'll give you kind of some preliminary thoughts there. We are -- we will, for Chile, like I said, we'll be operating 2 plants at full rates until -- at least until April of next year. So, already, we've got those gas contracts in place today and we'll be working on the similar contracts for next year.This is the first time in a very long time that we've operated 2 plants at full rate. So, we're really excited about that. And we'll be working on replicating that out in the -- for the summer month period for next year. So I would expect when we were at $800 million to $900 million this year that that number will be higher for Chile.For Trinidad, we will -- we are going to be working as the gas contracts are working simultaneously. So we will be trying to -- I don't expect a lot of overlap there, but we will try -- it will be kind of an idling and then a startup of Titan. So you can kind of do the numbers on how that change happens. And then I think the big one will be also G3. Intention here is obviously to start up around the end of the year, but it will take time before G3 actually works through our inventory flow. So you probably got a 45 to 70 day inventory build before G3 starts kind of coming through the earnings.Egypt, we would expect similar results. We've been operating at higher rates. And New Zealand, we'll update our guidance today. It's at 1.3 million to 1.4 million tonnes. And we'll be -- that's probably a similar level we would be at. But we'll update it more formally and we also have to factor in scheduled turnarounds as well. So, more to come there.
Our next question comes from Steve Hansen from Raymond James.
Rich, can you go back to the Chilean gas situation, just in a little bit more detail? It sounds like on the back of some recent success, there's an opportunity to secure some more gas going forward? Just trying to understand what that means for the production profile next year, I guess, through the summer months, in particular, down there? And how we should think about maybe even the medium and longer-term profile for the production at complex?
Yes. Thanks, Steve. So, bit of a background on what's happening in Chile, and a lot of this is what's happening in Argentina. Argentina is developing the Vaca Muerta field in the Neuquen Basin, and this is quite a prolific field. What they're trying to do is they're investing in pipeline infrastructure. So gas development, there is a lot of success around gas development. And what they have done is they are working on connecting that field into the major grid in Argentina. Argentina consumes about 120 million cubic meters day in gas.What they did is, they commissioned a pipeline that is now delivering -- in the third quarter that's now delivering 10 million cubic meters into the grid. They're working on adding compression to that pipeline, which would add another 10 million cubic meters per day into the grid as well. And that will happen sometime in the first half of 2024.And then what they are also working on is another pipeline connection, which would double that capacity that would come on in the 2025 time frame. In addition to that, there's a development that's happening in the Austral basin by Total and Wintershall and a consortium there called the [ Fenix ] Project, and that's located really close to our plants.So all of these developments are significantly improving the domestic gas balances in Argentina. And as well, that supports export markets, which we are very well positioned there with our assets. So, we're really pleased to say that we're going to be operating 2 plants at full rates during this sort of 8-month month period. And like I said, the first time in a very long time, we've been doing that. And we're going to work on longer-term gas. We think that focusing on the non-winter months is the right thing now. And over time, we'd also be hoping to improve our gas position during the winter months. But these are things we'll continue to update on as we progress through.
Very good. And just one follow-up on the G3 in terms of the commissioning and the inventory build that you described. I know it's early, but can you give us a sense for whether the 45 to 60 or 70 window you describe will all take place in Q1 from your standpoint today? Or will that start to build through the later part of Q4?
Yes. I think right now the way to do it is starting in Q1. That would be probably the right way to think of it around -- starting in around beginning of the first quarter.
Our next question comes from Hassan Ahmed from Alembic Global.
You guys saw a nice uptake across all your regions, obviously. Europe; pricing-wise, Europe is obviously, for the quarter, so no reflection there as yet. I'm just trying to understand the delta between sort of North American pricing and China/ Asian pricing. I mean, even if I were to discount North American pricing, there is still call it as much as a $70, $80 a tonne delta between those pricing levels in the regions. So just trying to get a better sense of why that exists? I mean, it seems to me above and beyond shipping.
Yes. Hassan, thanks for the question. I think, hopefully, I'll answer your question the right way here for you to make sense of it. I think if you were to look at discount levels across the regions rather than our global discount because you can't really apply the average discount to all the prices. It's really that each region does have its own kind of market discount levels, which do vary quite widely, depending on which region you're looking at.So our ARPs, if you were to look at our ARPs by region, that would probably make more sense and probably more reflective of kind of reasonable pricing differentials between those. So it's hard to look at the global discount and apply that and try to make sense of those prices relative to, say, spot or other markers.
Understood. And just coming back to a sort of broader question. I know it's all sort of recent occurrences and the like in the Middle East. But, I mean, are you guys seeing any meaningful shifts as a result of that in trade flows? I mean, I guess more specifically, what are you guys hearing in terms of Iranian product?
Yes. So as of right now, we're not hearing any disruptions as of today. First, we're monitoring this situation very closely and really hoping for a peaceful and sustainable resolution here for everyone. But we haven't seen any disruption. Israel doesn't have any meaningful, really, methanol demand, nor is there any supply. And in the area there, there's no methanol trade routes that are impacted.Now, if this were to escalate in the region, a lot of things could be impacted, including methanol. But we haven't seen any of those disruptions yet, but that could impact crude, it could impact LNG trade flows, methanol trade flows. And so, those could have really meaningful impacts on the industry. But we haven't seen any of that yet, but we're really closely monitoring to see, obviously, what's going to -- how this is going to unfold.
Our next question comes from Matthew Blair from Tudor, Pickering, Holt.
Could you talk about any opportunities you're looking at for your underutilized assets? Is there a chance that you could take apart Atlas, move it to the U.S., like you did with some of your Chile plants a long time ago? Or is there an opportunity for converting those assets into an e-methanol plant?
Yes. So, we -- in terms of relocation in Trinidad at this point, we remain committed to Trinidad. And we are -- we think there's a lot of incentives today to get assets, underutilized assets operating in place where they are today, and that assets operated really well for us in Trinidad. So, we are focused there.Now, we have -- we do have experience relocating plants. We moved Chile II and III to Geismar. Our experience on plant relocation is that the capital cost savings are really not that meaningful. It's really about speed. The construction time frame can probably be -- we could probably save a year on -- in terms of the construction time frames versus building new. So it has advantages there.We're not considering that today for Atlas as we want to work on getting longer-term sustainable gas in Trinidad. But that is something that we've done before. We have a lot of experience with, and there is that speed advantage in the event that you wanted to move quickly on a project.
Sounds good. And then could you talk little bit about the moving parts on cash flows in 2024? Should we think of your CapEx moving down to the, I don't know, $150 million to $200 million range? I think you mentioned the debt pay down of about $300 million next year. There's also the dividend of $50 million, plus potentially a working capital build as you ramp up G3. Would the remainder -- any remaining cash flow go to buybacks in that scenario?
Yes. So. I think the right number to use on the CapEx is at the lower of your range, around $150 million. And I think you've got all the numbers in terms of the other cash outlays. So yes, we're focused on the $300 million bond, and I think as of today's pricing, we're probably -- that's the main focus. We generate a little over $200 million in free cash flow with G3 -- at $300 methanol price. Above that, then you're probably getting above the bond, if it get closer to $350.We still see that the market environment today is supportive of what we need to repay the bond, but we're really focused on that. If we were to have a really stronger methanol market, then you start looking at free cash flow beyond the debt repayment. We don't have any major capital ahead of us. And so, we'd be looking at returning excess cash and likely some balanced approach between looking at the balance sheet further on delevering. But we're really focused on the $300 million bond today.
Our next question comes from Josh Spector from UBS.
I guess first, I actually wanted to ask a follow-up on the cash flow side. So, when you think about the working capital build next year with the G3 start-up, I mean you're already purchasing and reselling some tonnes. So, is there a way to size kind of the net impact as you would expect [ that to be ] in terms of cash used to build that inventory?
Yes. We're not really concerned with the working capital build up here. I don't think that there's any strategies we're having in terms of managing that down. You will see we are buying a lot of product today, which we will significantly reduce with G3 coming online, because we're not going to be growing our sales by 1.8 million tonnes next year. We've already grown our sales. So you'll see a lot of purchase product being displaced by produced product, which would be supportive of lower inventory values anyways.
Yes. So, I appreciate that. I guess that's where I was kind of going, because the 2 kind of net offset each other, so it's not really a major cash use. Is that kind of what you're saying? Or should we be thinking about it as a somewhat of a cash use?
Yes. Yes.
Okay. And then the other question I have is just more on cost curve and just methanol price support. I mean, if heard your comment correctly, you talked about $300 a tonne methanol price support. Your posted pricing in China is higher., I guess, what do you view as the pricing driver here? Is it the fuel value? Is it coal and how does that evolve into next year, in your view?
Our posted price is higher, but after discount, we're probably in or kind of closer to those levels. What's driving the price today is -- really, it's going to be the marginal producer cost, which is a coal producer cost in China. And then the other factor that we look very closely at is the affordability of methanol into -- primarily into the olefins industry.And I think right now, we would say that both of those factors are kind of pointing to the levels where we are today in China at around $200 -- spot pricings at around $280 to $300. We have seen some improvement in the olefins market, and I would say that that sector relative to oil pricing today is pricing well under where it would be on a kind of mid-cycle basis. So we've seen tonnes of pressure on that sector that we would in a normal -- in a kind of mid-cycle energy pricing at $90 oil, we would expect much, much higher pricing.And especially when MTO is operating at the highest rates, I think we've ever seen today, as an example, that sector is operating at 90% operating rates over a very high base because we've added MTO plants last year. So, if we had a better market there, I would expect that would be driving methanol prices higher than where we are today.
[Operator Instructions] Our next question comes from Laurence Alexander from Jefferies.
This is actually Kevin Estok on for Laurence Alexander. So it looks like most of my questions have been asked. But I guess, I was wondering if you could give maybe any updates since the last calls around your strategy on a green and blue methanol. And I guess maybe how current interest rates might impact future investments, I guess to kind of get a sense of your rate sensitivities too, as it relates to your strategy.
Yes, thanks. Maybe when you think about the low carbon space, the strategy is really looking at both sides, both the demand and the supply side. I didn't mention it in the opening comments, but there continues to be a lot of momentum in marine fuels. Right now, over 200 ships plan to be in the water in the '27, '28 time frame. It represents around 7 million tonnes of demand if those ships were to run on a methanol 100% of the time.So, we are working with major international shipping companies. This is a container shipping segments leading the way, but there's interest in dry bulk, tankers and cruise ships. So we're working with that actually. We've got a number of MoUs signed working closely with the shipping industry on their desire for green, blue, conventional methanol, say, green, it looks like -- for green methanol, t's mainly being driven by the European market for in shipping, and that a lot is on the back of what's happening on the emissions trading scheme as well as EU maritime regulations around carbon emissions.We're having a lot of other discussions around blue and conventional methanol as well. And then on the supply side, we're working on a number of projects. I would say, first and foremost, we've been certified to be able to purchase our renewable natural gas in North America and produce green methanol. And our Geismar plants and our marketing regions are certified to be able to sell that product through to customers -- certified product through to customers.And then we're looking at the feasibility of projects at our sites, and that would be using renewable hydrogen and CO2 to sort of green the assets, and we're looking at multiple feasibility within our existing sites. We're also in discussions with other projects that are out there that would like to work with us on offtakes, and -- so we're trying to understand how we can open up as many economically efficient supply alternatives for the marine industry around green methanol. And there's a lot of discussions happening and we'll hope to be able to report more as we progress in this area.
There are no further questions at this time. I will now turn the call back over to Mr. Rich Sumner
All right. Well, thank you for your questions and interest in our company. We hope you will join us in February when we update you on our fourth quarter results.
This concludes today's conference call. You may now disconnect.