Methanex Corporation

Welcome to the Methanex Corporation Q3 2021 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 third quarter 2021 results conference call. Our 2021 third quarter news release, management 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 forecasts or projections which are included in the forward-looking information. Please refer to our third quarter 2021 MD&A and to our 2020 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, 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. These items are non-GAAP measures that do not have any standardized meaning prescribed by GAAP and are therefore unlikely to be comparable to similar measures presented by other companies. 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, and good morning, everyone. This morning, a few members of our executive leadership team are joining me, including Ian Cameron, our SVP, finance, and CFO, Vanessa James, who previously led our marketing and logistics organization, and now leads our corporate development function, including the execution of our Geismar 3 project, as well as our sustainability function. And Rich Sumner, who was recently appointed to lead our marketing and logistics organization after working for many years with the company in various finance and marketing roles around the world. Mike Herz, who led our corporate development function and our Geismar 3 project, recently retired from the company after 26 years of exceptional and dedicated service. Today we will review our strong third quarter 2021 financial results, discuss our latest views on the methanol market, talk about our operational results and share our robust outlook as we enter the fourth quarter. Then we will open up the call for your questions. Turning to our financial results, we recorded adjusted EBITDA results of $264 million in the third quarter and adjusted net income of $99 million or $1.29 per share. Our adjusted EBITDA results reflect a continuing strong methanol price environment, partially offset by lower sales of Methanex-produced methanol. In the third quarter, we increased our average realized price to $390 per ton, a $14 increase compared to the second quarter. Our results illustrate the significant leverage that our earnings have to methanol prices. In addition, amid a rapidly rising energy price environment, Our results highlight our low-cost structure and the value of our natural gas arrangements, as approximately 65% of our near-term North American feedstock requirements are managed through fixed-price contracts, and the majority of our natural gas agreements across the rest of the world are linked to methanol prices. Now, turning to the methanol market, in the third quarter, methanol market conditions remain tight with ongoing industry supply challenges. Traditional methanol demand was flat as various factors, including supply chain disruptions, extreme weather events, and global energy shortages impacted industrial production levels and constrained demand growth. Demand for methanol to oilfins or MTO producers was lower in the third quarter due to planned maintenance activities and China's government-mandated industrial operating rate restrictions intended to limit energy consumption and energy intensity. Demand from other energy-related applications was steady. Methanol industry supply continues to be impacted by various factors. In North America, Hurricane Ida and technical issues affected methanol industry production. In Europe, sharply rising natural gas prices and planned and unplanned outages constrained methanol industry production. In China, limited coal supply and government-mandated industrial operating rates restrictions, as noted earlier, to manage total energy consumption and energy intensity curtailed methanol production. Over recent weeks, global energy shortages and increasing coal, oil, and natural gas prices are impacting methanol supply and methanol demand, leading to a sharp increase in methanol prices and a significant steepening of the industry cost curve. We estimate a sharp rise in the industry cost curve with an average range over the past several weeks of approximately $450 to $500 per ton. We have seen significant volatility in coal markets, and more recently we've seen downward pressure in the coal futures market as a result of announced government intervention in the coal market in China, giving historically high pricing levels. We recently posted our November prices, which increased by $83 to $692 per ton in North America, and increased by $90 to $600 per ton for Asia Pacific. We set our European contract price quarterly, and our fourth quarter posted price is €490, or approximately $575 per ton. Starting in January 2022, we are introducing a new posted price for the China market. We will continue to post the Asia-Pacific price for customers in the region, excluding China. We are making this change to better reflect the different market fundamentals in China compared with other countries in the region. Our outlook for the methanol industry is positive, and we believe that new industry supply will be needed to meet growing methanol demand over the next five years. Now turning to our operational results. Our third quarter 2021 production of 1.5 million tons was slightly lower than the second quarter. Our production in New Zealand was lower in the third quarter compared to the second quarter, primarily due to the short-term commercial arrangement to make natural gas available to support a tight New Zealand electricity market from early June to late August. Since then, we have operated both of our Montanui plants. We estimate production in New Zealand for 2021 of 1.3 million tons. The upstream gas sector is completing several field development projects that could improve gas availability over the coming years. In Geismar, during the third quarter, we shut down our Geismar 1 and 2 plants as a precautionary measure to ensure that the safety of our team members during Hurricane Ida. Fortunately, the hurricane only caused very minor damage and we restarted production after approximately two weeks. The production impact of this outage was approximately 100,000 tons. which offset higher production resulting from the completion of our Geismar 2 debottlenecking project earlier this year. In Chile, our production in the third quarter was similar to the second quarter. We typically experience lower gas deliveries in the southern hemisphere winter months, impacting our second and third quarters. We recently restarted production at our Chile 4 plant, which was idle for the last 18 months. and expect to operate both plants during the southern hemisphere summer months to the end of April 2022. We estimate production in Chile for 2021 of 800,000 tons. Our Atlas plant in Trinidad as well as our Egypt and Medicine Hat plants operated well during the quarter. Now turning to our balance sheet. We ended the third quarter in a strong financial position with over $900 million in cash and $900 million of undrawn backup liquidity. We previously announced a strategic shipping partnership with Mitsui OSK Limited, or MOL, with the proceeds of $145 million. We recently finalized definitive agreements for this partnership, and closing is expected in the coming months, subject to regulatory approval and after all the customary conditions are met. Turning to our capital allocation priorities, we generate meaningful cash flow across a wide range of methanol prices. Our capital allocation priorities remain the same. We use the cash we generate to maintain our business, pursue value accretive growth opportunities, and continue our strong track record of returning excess cash to shareholders. We recently restarted construction of our Geismar 3 project, a unique project with significant capital and operating cost advantages that will strengthen our asset portfolio and substantially improve our future cash generation capability. Our capital cost estimate for the project is $1.25 to $1.35 billion. We have committed approximately $455 million to the project as at the end of Q3 2021, and we expect approximately $800 to $900 million of remaining capital costs to be capitalized before capitalized interest, or approximately $100 million per quarter from October 2021 onward. We are confident in our ability to complete this project on time and on budget, and we have substantially reduced the project execution risk profile. Our remaining budget includes allowances and contingencies for both cost escalation and the remaining risks of the project. We are targeting commercial operations at the end of 2023 or early 2024. With our strong liquidity position and cash flow generation, we are well positioned to fund the Geismar III project from cash and build on our long-term track record of returning excess cash to shareholders. We recently announced that we reset our quarterly dividend to $0.125 per share and commenced the 5% share repurchase program. At this time, Geismar 3 is the only significant growth capital in our plans over the next few years. We expect that G3 will substantially increase our cash generation capability and support a significant increase in our future shareholder distribution potential. Now turning to our outlook for the fourth quarter, global energy shortages and escalating coal, oil, and natural gas prices are leading to a sharp increase in methanol prices. We expect realized methanol prices in the fourth quarter of 2021 will be significantly higher than the third quarter based on our current posted prices. We forecast that our higher than the third quarter as we restarted our Chile 4 plant in early October. We restarted our Mount Nui plant in New Zealand in late August, and we expect to run our Geismar plants at full rates without an unplanned two-week shutdown due to Hurricane Ida, as well as realizing the benefits of the completion of the de-bottlenecking project. As a result, we anticipate our adjusted EBITDA results in the fourth quarter to be considerably higher than the third quarter. We would now be happy to answer any questions.