Methanex Corporation (NASDAQ:MEOH) Q3 2023 Earnings Call Transcript

Methanex Corporation (NASDAQ:MEOH) Q3 2023 Earnings Call Transcript October 26, 2023

Operator: Good morning. My name is Julie Ann and I’ll be your conference operator today. At this time, I would like to welcome everyone to the Methanex Corporation 2023 Third Quarter Results Conference Call. All lines have been placed on mute to prevent any background noise. After the speakers’ remarks, there will be a question-and-answer session. [Operator Instructions] I would now like to turn the conference call over to the director of Investor Relations at Methanex, Ms. Sarah Herriott. Please go ahead, Ms. Herriott.

Sarah 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.

Rich Sumner: 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 can 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 RMB80O per tonne to above RMB1,000 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 €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 two 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 development 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 tonnes to 900,000 tonnes to a range of 900,000 tonnes to 1 million tonnes based on improved gas availability from Argentina. Earlier in October, we also announced that we signed a two-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 are 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.

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Q&A Session

Operator: Thank you. [Operator Instructions] Our next — our first question comes from Ben Isaacson from Scotiabank. Please go ahead, your line is open.

Ben Isaacson: Thank you, very much, and good morning, everyone. 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 as part of that same question, what was the rationale to idle a plant that was running and then bring on 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 talk about any risk at E-Methanex due to the shutdown of the Tamara platform off of Israel? Thank you.

Rich Sumner: Okay. Thanks, Ben. On Trinidad, I’ll talk about the kind of the near-term and the reason we call it challenging is, I think, we talked about previously that the gas market is tight in Trinidad. And then in the near-term what we see today, there’s about — when you look across L&G, ammonia and methanol, that’s about 4.5 Bcf of demand per day. Current production is in the range of 2.5 to 3 Bcf. And the government — no, we haven’t given up on the one. 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 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 — 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?

Ben Isaacson: Yes.

Rich Sumner: 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 Tamara 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 L&G producers. So, as of right now, that’s not impacting our operations or other industrial producers in Egypt.

Ben Isaacson: Appreciated, Rich. Thanks so much.

Rich Sumner:

Operator: Our next question comes from Joel Jackson from BMO Capital Markets. Please go ahead, your line is open.