Methanex Corporation

Ladies and gentlemen, thank you for standing by. Welcome to the Methanex Corporation Q4 2020 earnings call. I would now like to turn the conference call over to Ms. Kim Campbell. Please go ahead, Ms. Campbell.

Thank you. Good morning, everyone. Welcome to our fourth quarter 2020 results conference call. Our 2020 fourth 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 benthamx.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 a forecast or projections which are included in the forward-looking information. Please refer to our fourth quarter 2020 MD&A and to our 2019 annual report for more information. I would also like to caution our listeners that any projections provided today regarding Mephinex'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, cash flow, or income made in today's remarks reflect our 63.1% economic interest in the Atlas facility and our 50% economic interest in the Egypt facility. In addition, we report our adjusted EBITDA and adjusted net income to exclude the mark-to-market impact on share-based compensation and the impact of certain items associated with specific identified events. We report these non-GAAP measures in this way to make them 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. John Florence, for his comments and a question and answer period.

Thanks, Kim. Good morning. We hope that everyone is continuing to stay safe and healthy. I'd like to take a moment to thank our team around the world who have shown incredible dedication, and flexibility in a year where we've had to change how we work to ensure that our team remains safe while continuing to deliver reliable supply to our customers. In the face of these challenges, we achieved stronger Q4 results demonstrating the resilience of our business. This morning, we'll comment on our Q4 and full year 2020 results, provide an overview of what we are seeing in the methanol markets, review our operational results, and share our near-term outlook, including how we will continue to manage our business, given that the economic recovery path remains uncertain. Now turning to our financial results. In the fourth quarter of 2020, we recorded adjusted EBITDA of $136 million and adjusted head income of $12 million, or 15 cents a share. We recorded higher fourth quarter results compared to the third quarter, primarily due to the realized prices, highlighting our significant leverage to methanol prices. Our results were partly offset by changes in the mix of produced and purchased methanol sold. For the full year of 2020, our financial results were lower compared to 2019, primarily due to lower realized methanol prices. We recorded adjusted EBITDA of $346 million and an adjusted net loss of $123 million, or $1.62 per share for 2020. Now, turning to the methanol market, in the fourth quarter, the continued improvement in the global methanol demand, combined with various planned and unplanned methanol industry outages and delayed startup of new industry capacity led to tighter market conditions and lower inventory levels, supporting higher methanol prices. Global methanol demand began to recover in the second half of 2020, after falling in the first half of the year due to the impact from the COVID-19 pandemic and a lower oil price environment. We estimate that global methanol demand increased by approximately 2% in the fourth quarter of 2020 compared to the third quarter. Overall, we estimate that the global methanol demand totaled approximately 82 million tons in 2020, which is a 3% decrease compared to 2019. Before COVID-19, we forecasted global methanol demand growth of approximately 3%. As a result, we estimate that 2020 global methanol demand is approximately 5% to 6% lower than pre-COVID expectations. The methanol industry ran at a lower operating rates in 2020 due to plant shutdowns to respond to lower methanol demand as well as various planned and unplanned outages. In the fourth quarter, There were a number of plant outages around the world, particularly in Iran and in China, where there was a diversion of natural gas to meet seasonal power demand instead of methanol production. The delayed startup of new industry capacity additions also contributed to tighter market conditions. We estimate that the industry cost curve, which continues to be set in China, is approximately $260 per ton. The cost curve is higher than the third quarter as a result of higher coal prices. Spot prices in China are above this range today. So far in the first quarter of 2021, market conditions remain tight, and we posted higher prices for January and February 2021. We recently posted our February North American price, which increased to $492 per ton, and our Asia Pacific price, which increased to $430 per ton. Our European contract price is set quarterly, And our first quarter posted prices 390 euros or $475 per ton. We mentioned on our Q3 quarterly call that we would provide update guidance to our discount rate to posted methanol prices. In 2021, we expect to see a higher discount rate of approximately 17% on average compared to our prior 15% guidance, as we saw more competitive environment given broader economic uncertainty. Recall that when prices increase quickly, our discount rate tends to decrease, and the reverse is true when prices decrease quickly. Now turning to our operational results. We'll speak to our fourth quarter production results and provide comments regarding our production outlook for 2021, including ongoing natural gas curtailments that are expected in New Zealand, Trinidad, and Chile. Our production levels were higher in the fourth quarter compared to the third quarter, due to higher gas availability in New Zealand and Chile and record production in our Geismar facilities. In New Zealand, our production levels were higher in the fourth quarter due to improved gas supply. In 2021, our outlook for New Zealand production is uncertain. Our gas suppliers have recently advised that a major offshore gas field, which supplies the New Zealand market and underpins a portion of our production, has experienced significant and unexpected production declines. which will result in lower gas deliveries. Given that gas deliveries are expected to be lower in 2021, we are consolidating production in our two large Maunganui plants, which have a combined operating capacity of 1.7 million tons, and temporarily idling our smaller Baicha Valley plant. We estimate production in New Zealand for 2021 of 1.5 to 1.6 million tons, compared to our 2020 production of 1.7 million tons. In Geismar, both plants ran at full operating rates during the fourth quarter. Our production benefited from the completion of our low-cost e-bottlenecking project at our Geismar 1 plant, and we have seen a 10% increase in our daily production capability of this plant. We expect to complete the e-bottlenecking work at our Geismar 2 plant in 2021. When the demodeling activities are complete, the Geismar facilities will have an operating capacity of 2.2 million tons on an annual basis. In Trinidad, our production levels in the fourth quarter were similar to the third quarter as planned turnaround activities at our Atlas facility impacted both quarters. Looking into 2021, we have been advised that upstream production declines and the delay of upstream maintenance work due to COVID-19 will result in lower gas deliveries. It is unclear how long these lower gas deliveries will persist. Based on our current gas deliveries, we estimate production in Trinidad for 2021 of 900,000 tons, reflecting Methanex interest compared with our 2020 production of one million tons. All 2021 production is expected to come from the Atlas facility, as we announced earlier this month that we expect that the Titan facility will remain idle indefinitely because we have not been able to reach an acceptable longer-term natural gas agreement. We continue to have discussions around opportunities for longer-term gas supply. In Chile, our production levels were higher in the fourth quarter as we received higher gas deliveries. However, due to lower gas deliveries later in the fourth quarter resulting from upstream production declines in Argentina, we are unable to run both plants in December. Our Chile floor plant remains idle today, and it's uncertain how long these lower gas deliveries will persist. We estimate production in Chile for 2021 of 900,000 to 1 million tons compared to our 2020 production of 800,000 tons. In Egypt, production in the fourth quarter was similar to the third quarter. In Medicine Hat, our plant ran at nearly full operating rates after the completion of a planned turnaround that concluded at the end of October. Our 2021 production is forecasted to be similar to 2020 production of 6.6 million tons, although actual production may vary by quarter based on gas availability, planned outages, extended unplanned outages, and unanticipated factors. Now turning to our balance sheet. We took a series of decisive actions in 2020 to further strengthen our business and our balance sheet. As a result, we ended the year with a strong liquidity position of over $800 million in cash, a $300 million undrawn revolving credit facility, and no debt maturities until the end of 2024. Our disciplined approach to capital allocation has not changed, and over the long term, we believe we are well positioned to meet our financial commitments, execute on attractive growth opportunities that exceed our hurdle rate, and deliver in our commitment to return. access cash to shareholders through dividends, and share repurchases. Regarding our Guides Mark III project, as we previously discussed, this is a high-quality project with substantial capital and operating cost advantages. In April 2020, we placed the project on temporary care and maintenance for up to 18 months, given the significant uncertainty regarding the global economy due to COVID-19. The project was in excellent shape and progress has been safe on time and on budget, and the project has been significantly de-risked. Construction on the DeGeismar 3 project remains on hold. We have a robust decision-making process for evaluating the project, and before deciding whether to restart construction, management and our board will need to carefully consider many factors, including the strength of the global economic recovery and the overall methanol industry outlook. We are encouraged by the early signs of economic recovery that began in the second half of 2020. However, given that the COVID-19 pandemic continues to limit our near-term visibility, it is difficult to predict how methanol demand, industry supply, and methanol prices will ultimately recover on a sustained basis. For now, we remain cautious, and we are prioritizing liquidity and financial flexibility. Now turning to our outlook for the first quarter. In the near term, based on our posted prices so far, we expect realized ethanol prices in the first quarter of 2021 will be higher than the fourth quarter of 2020. We expect that our production levels will be similar compared to the fourth quarter given the natural gas curtailments in New Zealand, Trinidad, and Chile that we mentioned earlier. Adjusted EBITDA is expected in the first quarter to be higher compared to the fourth quarter. In 2021, we will remain focused on operating our plants safely and reliably, delivering secure and reliable supply to our customers, and protecting our strong financial position and financial flexibility. We are well positioned to continue delivering significant value to shareholders over the medium to long term as market conditions improve. We would now be happy to answer any questions.