Methanex Corporation

This conference is being recorded. Cette conférence est enregistrée.

Ladies and gentlemen, thank you for standing by. Welcome to the Methanex Corporation Q1 2022 earnings call. I would now like to turn the conference call over to Ms. Sarah Herriot. Please go ahead.

Good morning, everyone. Welcome to our first quarter 2022 results conference call. Our 2022 first 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 methanx.com. I'd 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 first quarter 2022 MD&A and our 2021 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, average realized price, 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 Egypt facility, and our 60% economic interest in waterfront shipping. 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 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 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. John Florin, for his comments and a question and answer period.

Good morning. I hope that everyone is continuing to stay safe and healthy. Today, we will review our strong first quarter 2022 financial results, provide an overview of the methanol markets, discuss our operational results, and share our near-term outlook. Then we will open up the call for questions. Turning to our financial results, methanol posted prices were supported in the first quarter of 2022 by favorable supply-demand fundamentals. Our average realized price of $425 per ton and higher produced product sales volume drove adjusted EBITDA of $337 million and adjusted net income of $159 million, or $2.16 per share. Now, turning to the methanol market, Global methanol demand in the first quarter of 2022 increased slightly compared to the fourth quarter of 2021. This increase was driven by an increase in operating rates for methanol to olefins or MTO plants after the impact from the dual control policy in China and turnarounds in the fourth quarter. MTO operating rates increased by approximately 20% from 65% during the fourth quarter of 2021 to 85% in the first quarter of 2022. Demand from traditional chemical applications was lower in the first quarter compared to the fourth quarter due to the seasonal slowdown of manufacturing activity during the Lunar New Year in China, combined with some downstream turnarounds in the United States. Traditional demand has recovered from the seasonal lows in February. Industry operating rates remain challenged during the first quarter due to ongoing operating rate constraints related to winter conditions in the Middle East and feedstock availability and cost in Europe. Methanol prices in the first quarter were supported by tight industry conditions and the impact of continued high global energy prices on producer costs. Increased production from Iran is expected in the second quarter, and we expect tight market conditions to continue as plants in Trinidad, Europe, and Asia have planned turnarounds. We estimate the industry cost curve, which is set in China, is $380 to $400 per ton based on coal price range of 1,000 to 1,100 RMB per ton. Our May posted prices were slightly lower in all regions. North American prices decreased by $21 per ton to $638 per ton. Asia Pacific and China prices decreased by $20 and $30 per ton to $520 and $470 per ton, respectively. Our European contract price is set quarterly, and we increased our second quarter 2022 price by €65 per tonne to €570 per tonne. Our first quarter discount rate was in line with our guidance of 2022 at 20%. The methanol market fundamentals remain solid. To date, we have not seen significant evidence of demand destruction because of sustained elevated methanol prices, COVID-related lockdowns in China, the conflict between Russia and Ukraine, or inflationary pressures. Industry operating rates remain challenged, and high energy prices and geopolitical events could further constrain production. High global energy prices enhance methanol's cost competitiveness against alternative fuels, and we continue to see firm demand from traditional chemical applications. Turning to our operation results, Our production levels were lower in the first quarter compared to the fourth quarter due to lower gas availability in New Zealand, minor unplanned outages in Geismar and Trinidad, and a 20-day planned outage in Egypt. In Chile, production levels in the first quarter were comparable to the fourth quarter as our Chile 4 plant ran continuously in both quarters. We expect to continue operating both Chile plants through the end of April 2022. In Medicine Hat, Production in the first quarter was slightly higher compared to the fourth quarter, and the plant ran at nearly full operating rates. We continue to forecast our 2022 production to be approximately 7 million equity tons, although actual production may vary quarter by quarter based on gas availability, plant maintenance, extended plant outages, or unanticipated events. Now, turning to our balance sheet and capital allocations. In February, we closed the previous announced strategic partnership with Mitsui OSK Limited, or MOL, involving waterfront shipping and received proceeds of approximately $145 million. We ended the first quarter in a strong financial position with approximately $1.1 billion in cash and $600 million of undrawn backup liquidity, which meets our goal of having cash on hand to fund the remaining G3 capital cost spend. as well as having $300 million for operational flexibility. Our disciplined approach to capital allocation has not changed, and our priorities remain the same. We use the cash we generate to maintain our business, pursue accretive growth opportunities, and continue our consistent track record of returning excess cash to shareholders. Construction on our Advantage Jeep Geismar 3 project is progressing well. and is on schedule, on budget, and is expected to reach commercial production by late 2023 or early 2024. At a time, we believe the industry will need new supply to meet growing demand. GE3 will enhance our current asset portfolio and significantly increase our cash flow generation capability. At a $400 metric ton average realized price, GE3 generates approximately $325 million of adjusted EBITDA per year. It is a world-class CO2 emissions intensity profile. It will help us meet our recently published commitment to reduce our greenhouse gas emissions intensity. Our capital cost estimate for the G3 project is $1.25 to $1.35 billion, and we've spent approximately $620 million to the end of the first quarter. We expect approximately $625 to $725 million of remaining capital costs before capitalized interest. We continue to anticipate spending approximately $100 million per quarter, although the timing of expenditures may fluctuate period to period. Our consistent track record and commitment of returning cash to shareholders is highlighted in the Board's decision to approve both a 16% increase in the quarterly dividend to 14.5 cents per share, as well as an increase to our share buyback program 0.810464 shares to 6,094,171,000 shares, representing 10% of the public float, the maximum allowed in a 12-month period under Canadian regulations. This buyback program will expire in September of 2022. I would also like to highlight that earlier this month, we released our 2021 Sustainability Report, where we outlined achievable and solution-focused environmental, social, and governance commitments. We continue to deepen our understanding of the opportunities and the risks from the transition to a low-carbon economy, and I believe that we're well-positioned to continue to deliver long-term shareholder value as the world transitions. Now, turning to the outlook for the second quarter. Based on our current posted prices for April and May, we expect Q2 to be another excellent quarter for EBITDA generation and earnings. Looking forward, the methadone market fundamentals are solid. Our cash generation is strong, our G3 project is fully funded, and we're well positioned to continue with our commitment to return excess cash to our shareholders. We remain focused on progressing our Advantage G3 project safely and on budget, operating our plants safely and reliably, securing long-term economic gas for our idle plants in Trinidad and New Zealand, and delivering secure and reliable supply to our customers and delivering on our capital allocation priorities. We would now be happy to answer any questions.

Thank you. As a reminder, you may press star one if you have a question. The first question is from Ben Isaacson from Scotiabank. Please go ahead.

Thank you very much and good morning and congratulations on the good numbers. John, two questions for you. Number one, with respect to China and the lockdowns that we're seeing from COVID-19, Are you seeing any pivots in methanol demand and in methanol production there? Can you just frame what you're seeing in China right now?

Yeah, as of today, we're not seeing any impact on demand. We're obviously a headwind and we're watching. Certainly the lockdowns aren't as severe as they were in the spring of 2020, but it's something we're watching. On the supply side, again, most of the plants are outside the lockdown areas, so we're not seeing our customers or even our competitors having to shut down at this time. Having said that, if you look at pricing in China, today is around $3.65 equivalent U.S. dollars per ton. That's below the cost curve that we see in China based on coal and natural gas. So if they were to shut down, it's probably more as a result of cost curve than COVID at this point, Ben.

Thank you for that. And then just my follow up. If we leave the price for the moment, can you talk about the value of methanol? We're seeing a lot of swings in commodities, oil at 100. We're also hearing about recession fears. So what is the most secure right now in terms of downstream value for methanol and what's at risk?

Well, I think the one that we always watch is the MTO. And, you know, that's the one that's, you know, on the affordability curve, as we call it, that was the one that gets impacted first. Most of the chemical derivatives, you know, methanol is not a very large component of the cost of their product. But MTO is the one we watch. You know, we're fortunate in a high energy environment like we're seeing today. That's also very good for olefins pricing because the naphtha crackers obviously are paying a lot more for NAFTA today than they would have been this time last year. So that's lifted the cost curve quite nicely. So the MTO producers are running, like I said, at 95% today. So, you know, unless you saw a huge correction in oil offense prices, then that would mean energy prices falling quite a lot from where they are today. I think we're going to be fine on the demand side. Thanks. Thanks, Ben.

Thank you. The next question is from Joel Jackson from BMO Capital Markets. Please go ahead.

Hi, good morning, John. Hey, Joel. John, I missed a bit of the last question. I hope I don't have the same question. What do you think is setting the methanol price right now? Is it the cost curve? Is it affordability? It seems like it's more the cost curve. And then what are you sort of seeing into April here in terms of the market, maybe a little more supply coming out? from some of the different regions, maybe a little bit of demand restrictions, lockdown, things like that in China, GDP concerns. What do you think is going on on the ground kind of in April right now?

Yeah, I think there's a lot of negative sentiment out there, Joel, and I think that's driving some of what we're seeing in the short term. When we look at our supply-demand balances, demand is holding up. It's bounced back to traditional demand for Chinese New Year. MTO is running well. High energy makes the other energy applications very, very attractive for methanol. So we expect demand to continue to grow, and we're watching it very closely. Obviously, we have visibility throughout the globe through our network of supply chain and marketing teams. We're not seeing, like I said, any impact on demand, and I think we're expecting quite a few planned outages coming up here in the May-June period, which, in our view, are going to continue have a favorable supply-demand balance, which will lead to strong pricing. Cost curve hasn't been setting the pricing. If you look at the last two quarters, we've been well above the cost curve. It's been really supply issues that's led to the higher pricing than cost curve, and we'll continue to watch it. But when we look at all the puts and takes, we think conditions are still pretty tight and inventories are pretty low throughout the system. So we'll continue to follow it. One caveat, and I said it in my opening remarks, we are expecting a bit more supply from Iran as they come out of their winter, and we're seeing that as we speak, but we're also seeing, like I said, other planned and unplanned outages.

Okay, and then if I recall, I think you said you would kind of have the next really good view on where costs are going for G3, I think, I want to say June or sometime this summer, so When are you going to have a really good handle on the remaining cost of G3 if you're going to have any material inflation? Maybe you can give an update on how much the remaining costs are fixed versus variable. What are the biggest deltas for cost, good or bad, that could happen as you finish the last, I guess, what, six quarters of that project?

Really, the only cost that we're facing going forward is labor. All the equipment's on site, the engineering's done. We've actually completed most of the civil works. We're starting to come out of ground. We've got a video that we just produced that we'll throw up on the website for you to see. And if you come to our investor day in June, you'll be able to see it firsthand and the progress we've made. So it's really a round of labor. And, you know, as of today, you know, we're quite a bit through the construction of the civil, like I said, and the labor rates that we forecasted and the productivity numbers we forecasted are bang on. So... We're not having to compete with labor in the area. There's not any other large projects being constructed during this time. We've got a wonderful site there. It's a safe site. We've got parking for everybody. It's easy to get in and out. So it's a preferred site for people to work at. So as of today, we are not seeing any pressure on labor or productivity, and that's the one thing that we'll continue to monitor. I'll remind you, On this project, we have quite a bit larger owner's team than we did on G1 and G2. So we're much more involved in the scheduling and the workflows, et cetera, than we were in the previous projects. And that really helps with productivity. We've got about 1,100 people on site today. So coordinating all that activity is really important to make sure your productivity doesn't fall off.

Just if I do want to follow up on that. So is the way to think about it that, and you've talked about this before, that when you estimated the budget a long time ago, you put in so much contingencies, even if you're seeing inflation, it's not worse than your contingencies. Is that fair?

Yeah, we haven't barely touched the contingency. And it's, you know, it's a very large contingency based on, you know, let's say compared to previous projects we've had. So I think we'd have to see, you know, rates and productivity increase significantly on rates or productivity decrease significantly before we use up all that contingency. Even if we did use up all the contingency, we'd still be in line with the guidance that we've given you for completing the project. I feel really good at where we are in the project. First priority is always safety. If you have a safe site, then you've got a high-quality project and a good productive site. That's our focus. Thanks a lot. Thanks, Joel.

Thank you. The next question is from Nelson Ng from RBC Capital Markets. Please go ahead.

Great, thanks. And congrats on a strong quarter. First question is on Egypt. So the 20-day outage, should we think of that as a full turnaround? So that would be one of the two to three turnarounds we expect each year?

I think I would think of it as a partial turnaround, Nelson. There were some things that we had to take the plan off to address from a safety perspective. We couldn't continue on, so we addressed those. When you plan a turnaround, you plan a bunch of people, you plan a bunch of catalysts and equipment, and that's years in the making. So you should think of that as we did some of the work that we would do in a normal turnaround during that outage. So if we did have a turnaround there at some time in the near future, some of the work would have already been done.

Okay, thanks for that. And then just on that topic, you mentioned that you expect multiple plants to be shut down for turnarounds in the sector. Can you mention any particular regions that are going to get hit harder on the supply side?

Yeah, maybe I'll ask Rich Sumner, our VP of Marketing, Senior VP of Marketing and Logistics, to answer that.

The plants that we see heading into turnaround, we know that in Russia there's a few plants there that would be regularly scheduled. In Europe, the plant in Norway. We know in Trinidad there's already a plant down. And then in Southeast Asia, Malaysia and Brunei both have plant turnarounds. And as of today as well, we know that there are some ongoing issues in Iran happening today as well.

Okay, thanks. And then just moving on to the dividend, so the dividend increase, can you talk about what you see long-term for the dividend? Can you see it getting back up to the pre-pandemic levels in 2019, or should we expect that to be much further on the horizon?

Well, I think we've mentioned previous times that we've seen a lot of volatility in the last 10 years. You know, we've seen prices ranging from 200 to 500. So, you know, it's really been volatile for a number of black swan events that happen, and you know them as well as I do. So I think after the last one, the COVID lockdowns, we kind of came to the conclusion that having flexibility and how we return money to shareholders has got a lot of value. So I think there is room to continue to increase our dividend as we bring on G3 and pricing continues to be strong. And, you know, we'll look at that. But I think our preferred, you know, at this point in time is to use the share buyback and the flexibility it allows to return cash to shareholders. So, you know, getting back to pre-pandemic levels of the dividend, you know, I don't see that in the near term. Okay, got it. Thanks. I'll leave it there.

Thank you. The next question is from Jacob Bout from CIBC. Please go ahead. Good morning.

I have another question here on G3. So we talked a bit about inflation. How about supply chain and procurement? Is that having any issues or foresee any issues here for the start of G3?

Yeah, like I said, we've got all the major equipment on site. So, you know, the biggest issues would have been major pieces of equipment and getting them made because they take a lot of parts and stuff from other people as well. But having those on site, you know, gives us a lot of comfort. You know, typically with the small things like nuts and bolts and, you know, this and that, we would have, you know, a few weeks supply chain. But what our team's done down there is they've anticipated potential issues in supply chain and ordering those types of equipment or small parts way in advance. So we've seen the odd thing here or there, but really hasn't delayed the project or been a huge impact on, like I said, the productivity or the completion at this time. So I know the team's on top of it, and it's one of their key risk factors they're managing, and we certainly haven't seen any significant impact on the project because of supply chain issues at this time.

Okay, and then maybe a bigger picture type question, you know, just as you think about the fallout of the Russian-Ukraine war, you know, what do you think of the long-term implications from the methanol industry? You know, do you think there's going to be more of a focus on stable methanol supply, you know, industry moving away from Russian gas-based methanol supply? And what do you think is the opportunity here for Methanexco?

I guess it depends on how significant the war continues and what happens as they get wound up and what happens with the energy complex as a result. It seems to me Europe is set on moving away from Russian energy. You know, so that means that they're going to have to be replaced from elsewhere, which is going to, in my view, lead to higher prices. And if there's higher gas prices in Europe, that's going to mean less production of methanol. Certainly the Norwegians might decide to maybe gas instead of making methanol, that could be an option for them as well. Russia itself continues to make methanol, and they consume methanol in the country, and they export about 1.5 to 1.8 million tons. Almost from day one of the war, our customers told us they did not want to get Russian material. And I think that's pretty much across the board in the European customers, so they're placing supply chains, which is leading to higher costs. So, you know, you don't like to see these disruptions and wars, but, you know, we're certainly not benefiting to the same extent that some of the agricultural businesses are, but certainly it's been something that's been disruptive for our customers, and I think they're going to be reluctant to sign up for Russian material in the near term. So I think that'll mean companies like us will be in more favor for contracts as we go through the process this year.

Thank you, Derek. Thank you, John.

Thanks, Derek. Thank you. The next question is from Steve Hansen from Raymond James. Please go ahead.

Yeah, good morning, guys. Thanks. John, just a question on gas prices. We've seen... pretty extraordinary moves in the domestic gas market through spring this year. I think we're over $7 at the hub now. I know you're extremely well positioned domestically with your various contracts in place, but you do have some open exposure as it stands. Do you want to maybe just give us an update on your gas thinking here today?

Yeah, so we're continuing to want to hedge gas out in front of G3 and for our expiring hedges and contracts for G1 and G2, and we've done that in the last six months, and Certainly, right now, the price is a little out of our range where we'd like to hedge gas, but we're looking at it every day. But, you know, right now, 65% of our needs in North America are either fixed priced or hedged at, you know, relatively really low prices compared to what we're seeing in ACO and Henry Hubbs. So, you know, I think we've done this since we started G1 and G2, and, you know, we were on the other side of that hedge for some time, and here we are, and you know, with $70 gas. So we're really well positioned versus our competitors who we don't believe have hedged much of their gas at all for any length of time. So, you know, I always thought that was a natural hedge for us as well because they're going to be much higher on the cost curve than we are because they're not hedged on gas. So I think we're extremely well positioned. And, you know, we chose that rate of 65 because, you know, You know, if things get really out of whack on gas and, you know, we get above the cost curve, then we can lower operating rates to those levels, but we don't anticipate getting there. You know, when we look at the gas market fundamentals in North America, we still have that kind of $4 range in our mind, lots of gas in that range, and it doesn't mean we won't see times like we're seeing today outside that range, and we'll probably see lower than $4 as well. The commodity and... You know, that doesn't take much. Having said that, too, you know, there hasn't been a lot of exploration and development in the last two or three years because of COVID and now because of ESG issues. So, you know, what happens when there's no development exploration? There's, you know, there's less supply, which leads to higher prices. So we'll see how things go forward. But certainly at today's prices, anybody that's got reserves would want to be developing them and selling them.

Okay, that's helpful. This one fell up on New Zealand. The gas supply there continues to be challenged. We know that. We've seen some of the history there recently. How long do you think it will take to get some better visibility on your feedstock needs there? Do you think we're talking a year from now, two years from now? I know there's been talk about development exercises in the offshore there, but the government is also... you know, got a pretty hard tilt on how they view that sort of broader complex. So just, you know, where are we at in that broader development, you know, from your perspective and obviously your assets that are sitting there? Thanks.

Yeah, there's a lot of drilling going on as we speak. So there's been success and there's more fields, you know, the Pokohara field that had the upset is being drilled. And we'll know in the next quarter, I would say, what the results are. So, you know, I think high energy prices, again, are really good for us because the suppliers, which are all private in New Zealand, that have reserves, will want to develop. They're getting a great price for their gas at current ethanol prices. And obviously the liquids that they're getting with the gas there is very, very rich in liquids. And at $100 oil, they're getting a lot of money for the liquids. So I think, you know, New Zealand as a country, they've been running a lot of coal-fired electricity generation as well, and certainly that's not good for their directions on going to zero carbon. So we've always said to go from where we are to zero overnight is physically impossible, but you can make steps along the way, like using natural gas. So I think these higher energy prices and what's going on in the world with the wars and the displacements got governments thinking a little differently about some of their aspirations in the short term and keeping the aspirations in the long term for low-carbon economies.

Okay, great. Looking forward to see you guys in a couple months. Thanks.

Great. Thank you. The next question is from Mike Leadhead from Barclays. Please go ahead.

Great. Thanks. Good morning, John. Just one question for me on the morning. Just one question for me today. It's on the cash. And I'll say it's a very high class problem to have. But back of the envelope, you have about a billion one of cash today, about 675 of that earmarked for G3. You're generating about 300 million or so of operating cash each of the last three quarters. And just when I think about potential uses, maintenance capex isn't that much. Your new dividend is, I don't know, 50-ish million a year. And you can only buy back, call it another 100, 150 million or so shares through September under the current bid. So, if you're projecting conditions are expecting to stay strong near term, just how are you thinking about deploying the excess cash or keeping it on the balance sheet? And would you consider a special dividend in the interim? Thanks.

Yeah. So, you know, we're looking at all those options and including retiring debt. So, we have debt that's coming due in 2024. and we could do a make-hole on that and retire that as well. So we said we wanted to de-lever from where we were, and we've done that by paying off the construction loan, about just under $200 million, $175 million, you know, last year. So we want to continue to de-lever. We want to have that 3-to-1 at 275 methanol to 300 methanol, even down to debt. So I think by retiring those bonds, we'll be well within that range of where we want to be. So we do have that as another potential use of cash. So I think I'd be doing that before I'd be doing a special dividend. But, you know, let's see how things turn out here in the next quarter or so. And September is not a heck of a long time away. And we've just announced another share buyback. And we'll complete that, you know, based on the pricing that we're seeing today. And then, you know, we'll roll into another quarter. NCIB in September provided, you know, the conditions of the methanol market remain strong. So I think we've got lots of options. I don't particularly like special dividends myself. You know, I think they cause tax problems for our shareholders. And I think where our stock price is, you know, I'm trailing EBITDA. We're trading at three or four multiples. So I think the best use of cash today is by far to buy back our shares, and that's what we'll be focused on.

Great, and again, as I said, a high-class problem to have. Have a good one. Thanks. Thank you.

Thank you. The next question is from Hassan Hamed from Alembic Global Advisors. Please go ahead.

Morning, John. Hi, Hassan. John, a question around European methanol capacity. You know, if my numbers are correct, it's roughly, call it 10%, of global capacity. Just wondering, you know, with gas prices where they are right now, are you already seeing some curtailments there? And if not, you know, if the current sort of geopolitical conditions continue, would you expect to see sort of curtailments, shutdowns, and the like?

Yeah, I don't know how you can pay the European gas price today and make methanol and create any cash, so. You know, I think we've seen OCI shut down last fall, right? And that was before the war, when gas prices got, I think, $6, $7 or whatever. I can't remember exactly, but they were underwater. Certainly, the Norwegians have the ability to on-cell gas and not make methanol, but they have contracts they've got to honor. So I think that's more of a medium-term decision for them if they wanted to do that. There's a couple of refineries there that are making methanol in Germany, and we've seen them, you know, take time as well, And then, obviously, the impact on our customers with high energy prices, too. You know, does that impact their ability to compete? And would we see shifted, you know, demand for our product go to other regions? So there's a lot of moving parts here. But, you know, if the LNG market today is at $17, $20 in an MMVTU and Europe's going to wean itself off of Russian gas, it's going to come from LNG. And, you know, you just can't make at that price unless you get $1,000 plus a ton for the product. So I think unless something was to change with the directions of both Russia and Europe, it's going to be tough for not only methanol but for ammonia and nitrogen and a lot of things that rely on natural gas.

Makes sense. Thanks for that. And as a follow-up, could you comment a little bit about what you're seeing in terms of inventory levels? I know maybe there are a couple of moving parts because you talked about, you know, higher sort of levels of turnaround happening. So maybe that sort of bloats inventory levels a bit. But sort of cutting through this noise, where do you see inventory levels sitting right now?

Yeah, our experience is when you're in, you know, so-called high prices, and that's what people are calling the current situation for methanol pricing, people don't want to have a lot of inventory because they're anticipating the price to go down. So I think people are running their supply chain as skinny as they can, and that's been the case for probably the last 12, 18 months. You know, we have quite a good visibility on the east coast of China, and those inventories are really low. So, you know, certainly we don't see an excess amount of inventory through the system.

Very helpful, John. Thank you so much.

Thank you. The next question is from Roland Rausch from Crown Investments. Please go ahead.

Hey, John, how are you? Good, Roland. How are you? All right. Well, look, I have to tag on that one question and spare with me on the total return of capital issue, right? So, you know, you've already grossed it up to roughly 6 million shares or 10% share purchase. You bought... As of two days ago, 3.8 million, that leaves 2.2 million shares to be purchased. You've bought 1.9 million in the first quarter. You bought half a million shares just in that first 26 days in April. You're sitting on 1.1 billion of cash. You wouldn't raise dividends significantly. So, by my math, by June, July, you must have bought back the shares. I've got one technical question for you and Sarah, why you can only start with the new purchase on May 2nd and why you couldn't do it immediately. So, long story short, John, what do you do if you bought the rest of the shares back by July? You're sitting on, you know, by our math, $1.4 billion of cash. I'm sure you cannot accelerate the capex with G3 because, you know, the pieces are coming in. And you said it takes another six quarters. So what do you do with the massive cash buildup?

Yeah, so the reason we couldn't start the second buyback until May 2nd was because of blackout because of quarter ends. So that's the reason for that, Roland. Right, right. So we will start it up on May 2nd and churn through it like we have been. I mentioned already we have the ability to look at retiring the debt early if we do have that much excess cash through a make-whole arrangement. So that's something we could consider. Or we could look at what the market fundamentals, if they continue the way they are today, that would probably be a good option for us. Also, there's, you know, a substantial issuer bid that, you know, could be considered. But at that, for something like that, it would be more like a, you know, $300 million kind of, you know, substantial issuer bid. So, we'd like to build the cash on the balance sheet before we did that. So, if we had that, that could be another option for us. And then it would only be another couple months before we do another NCIB, which is our preferred way to do buybacks. So, I think we do have options. If we're seeing prices like we see today and cash generation like we see today and the continued great progress on G3, we'll look at all those options to return cash to shareholders. Okay.

So, allow me one more. So, if you were done before or significantly ahead of the end of September, could you launch another 10% or 5%? What's the way you would do these share purchases then? Or leave them to you? Right.

Yeah, for a normal course issuer bid, we can only do 10% of the public vote in a 12-month period. So that means we couldn't do a normal course until this September period comes. But we could do a substantial issuer bid. But what I'd say there, the nice thing about normal course is you don't have to make a large commitment. You can just take so many shares per day or so much money per day, and if market conditions change, then you can adjust. on a substantial issue bid before we'd want to have the cash on the balance sheet to do that. And, you know, you'd have to do, like I said, $200 million, $300 million. But a current cash generation, you know, and if that continues for the next few quarters, we could consider that as well. So I think we have options, and we're committed to getting to those, the leveraged targets that I've already mentioned and returning all excess cash to shareholders. So we've got lots of things we could consider And we just hope that the current market and the current pricing continues and everybody will be benefiting. Thank you.

Thanks Roland. Thank you. The next question is from Lawrence Alexander from Jefferies. Please go ahead.

Good morning. Two questions. One is with the discussion earlier about customers wanting reliability of supply, Would that have any impact on, would that help you narrow the discount between the posted prices and the realized prices, or is the dynamic completely separate there? And secondly, could, sorry, go ahead.

Yeah, I think that's a good point. I mean, you know, if customers have less choice, then, you know, the power shifts a little bit to the suppliers. So we won't know until we get into renegotiation, but if they have less choice and, there's less liquidity in Europe, as example, then certainly the suppliers will have a bit more ability to think about maybe clawing back some of the discounts. So that is something that could happen. We'll just see how things evolve here with the Russian supply and the wars. But even if it gets all tomorrow, I think there's still going to be a reluctance of customers in Europe to be using Russian product, but we'll see how things evolve.

Okay, great. And secondly, can you give an update on your thinking about both green methanol and the order backlog for marine fuel, you know, your fuel-flexible ships? In particular, are you seeing fleets becoming more comfortable with larger orders or ordering several ships at a time or larger ships or being more comfortable with the transition? So can you just help with our feedback on both of those?

Sure. So what's on order or on the water today are 65 ocean-going vessels. And there's more and more interest every day, it seems. If those 65 vessels that have the capability to run on methanol ran on methanol 100% of the time, that would be 1.5 million tons of demand. So that's what's on the water, what's coming in the next couple of years. Obviously, Maersk has been very public about wanting green methanol to run their ships, and we're obviously in discussion with Maersk about supplying green methanol. We have the ability to do this in Geismar plants where we're certified to make green methanol using renewable natural gas. The challenge is the economics. It's one thing to want to use green methanol. It's another thing to pay for it. green methanol. And if you look at renewable natural gas or if you look at the other pathways to making green methanol, you need around $1,000 a ton in a selling price to make it work. So, you know, we have that ability. We're in discussions with Maersk, and I know they're in discussions with a number of different parties, and they're going to be facing those same economics. But our view has always been as the shipping industry converts to methanol, they'll use natural gas-based methanol with the intention as the economics get better or the ability to afford green methanol, it gets through the system that they'll want to, you know, slowly convert. But they can use the combination as well. I think what's going to happen is, like, if they get enough, the methanol we're going to make in Geismar 3 is going to have our lowest carbon footprint of any of our plants. And maybe customers will start saying, I want the Geismar 3 molecules because they have 0.4 of a ton of CO2 versus others that have 0.6 or Chinese coal that has five times 0.4. So it's evolving. I think the willingness to pay is not there yet. I'll remind you, we were the early investors in CRI in Iceland to make green methanol from CO2 off a power plant and hydrogen through electrolysis. using cheap energy. And it's a small pilot plant of 4,000 tons. And, you know, we could barely sell that out. So I think the market will develop. But it's kind of a chicken and the egg now. But we have a team, internal team, that's looking at all the possible avenues to green methanol. And when it makes sense for us to invest, you should expect us to invest

And I guess also, can you just, one clarification, if I may, is you had the comment earlier that the kind of breakeven for someone making methanol in Europe at current LNG prices would be around 1,000, which is also around where you peg the green methanol kind of economics. As you look at kind of the European policy around carbon, you know, adjustments at the border and how they're talking about dealing with those, you know, putting taxes on imports. Is there, should we be thinking about sort of the possibility that the green methanol in Europe gets pulled forward and that Methanex might participate in that? Or how are you thinking about the moving pieces on the regulatory side?

Yeah, those are all under discussion with how things end up with governments. I'm not a good predictor of how governments behave or what they decide, but certainly aware of all of those discussions. You know, it's kind of before we make significant investments, we want to have a place to sell the product where we can make a dollar, right? We're not going to do, you know, make it for $1,000 and sell it for $500. We're not going to have a company very long if we do those things. So we're certainly willing to make investments in the green methanol space. The challenge is there's no market for it today that's willing to pay. So that may change, and if that changes, we'll be making investments. So like I said, it's a bit of a chicken and the egg, but... We're looking at all the different technologies out there that are thinking of doing green methanol. And the other challenge with the technologies, they're not very scalable, and they're not very reliable, especially the electrolyzers. So lots of issues with the technologies, but you'd have to have some certainty that if you're going to invest some millions of dollars in a plant that you can sell it and make a profit. So you'd have to have a contract signed. for the offtake of that plant that allows the economics to work. So certainly up to now, we haven't been able to secure a contract that allows us even to make renewable methanol from natural gas in Geismar.

Okay, great. Thank you.

Thank you.

Thank you. The next question is from Josh Spector from UBS. Please go ahead.

Yeah, hi. Thanks for taking my question. Just coming back to the U.S. gas hedging strategy and just thinking in the context of Europe and everything that's been discussed earlier, and if the U.S. is part of the solution in terms of exporting LNG over to Europe to solve that problem, does that change your thoughts around the hedging strategy of Methanex two, three years from now? And to the extent, coupling that with the excess cash comments, Do you ever think about co-investing in some of the upstream supplier development as a way to get you an off-take gas contract as part of that? Is that something you think about or no?

Been there, done that. Wasn't very successful. We're a methanol producer. We're not an exploration and development company. I never say never, but highly unlikely under my watch, but the next CEO might have a different view. So, I never say never, but, you know, you can take that as no, we couldn't invest upstream in oil and gas. As far as our hedging strategy, yeah, it'll remain the same. We want to be hedged for about 65% of our requirements for G1 and G2 and slightly less for G3. And then we include Medicine Hat in the hedge profile because it's all one market in North America. So we're out there. We have a strategy in place. We're executing over the last 12 months for further hedges for G3 and for the ones that are expiring in G1 and G2. And when we get to the range that we think makes sense, we'll continue to do so. So there's really no change in our hedging strategy at this time.

Okay, thanks. Just on the Mitsui partnership that you guys now closed, I was just wondering if you could talk about some of the benefits to both parties in that transaction. I guess for you, it's clear you unlock some cash. I assume you're thinking with their kind of scale, they can maybe improve or go get some better operations that help reduce the cost of the entire fleet. But from their end, I'm not exactly sure. Are there specific economics for them that drive methanol fuel adoption or anything else that

reason for them to want to enter this with you that drives the the fuel adoption benefit that you cited in the releases thanks yeah so we you know the benefits for us are obviously unlocked value for an asset that we didn't get any value for um you know our waterfront shipping which is a fantastic organization and will continue to be a standalone organization we'll continue to be able to you know manage that and send the ships where we want etc What MOL got, obviously, is a great customer. They have now a locked-in customer for a long time because they have an ownership position in waterfront shipping, and Methanex contracts its shipping to waterfront. So they got Methanex as a long-term customer. So that really helps with their ideas around replacement ships, et cetera. We've been partnering with them on methanol-based carriers for a long time anyway. So they've already been in that game, and they understand that game, and they've been a good partner. We also get a great shipping partner that's, you know, way larger than us in the shipping industry. And, you know, we do a lot of backhaul cargos, but a third of what we carry today is not methanol on a backhaul basis. And certainly if you have an owner that has a lot more ships than you do, it gives you a lot more options to think about doing more backhaul or other backhauls with their ships. So, you know, it's early days, but we're really excited about the potential there and I think it was a win-win deal for both companies, and that's usually the ones that do the best and that survive the longest, so we're very happy with it.

Got it. Thank you.

Thank you. The next question is from Jason Croshaw from Polaris Capital Management. Please go ahead.

Great. Hey, John. Good morning. Just maybe two quick questions here. Just one on Russia. I mean, obviously, I assume that tonnage is making its way into the market somehow. Any idea how much of that is selling at a discount? I mean, have your marketing people kind of heard through the grapevine, or can they sell that at market price? I guess just out of curiosity is the first question.

Yeah, so we're seeing some of it. Not all of it is getting out. Like I said, it's about 1.5 to 1.8. So we are seeing cargoes out of Finland, you know, more than normal, let's say, larger cargoes, and they're making their way to mainly India and China. And right now those markets are open for the Russians. They are the lowest-priced markets in the world, so de facto versus what they would have got in Europe, they're getting less, not to mention the freight penalty that they're absorbing because of the extra freight to get it from Russia all the way to India and China. So their economics would be not as attractive as before. They were, you know, no longer wanting to buy Russian in Europe. So, yeah, some of it's getting out. But like Rich mentioned earlier, this is usually the turnaround season for the Russian plants as they come out of their winter. So there'd be less production at this time of the year into the summer anyway. So we are monitoring it. We do have really great visibility. because of the ports that we monitor where the product is coming out of. But we certainly wouldn't say all of that 1.5 to 1.8 has been placed in other markets. David Morgan Got it.

No, that's great. Thank you. And then I guess the other question is, I mean, I think you mentioned on GASMR III, I think the number you said at $400 on methanol, it might be a F325 EBITDA number. Correct me if I'm wrong on that. But if that's the case, what's the gas price assumption on that? Is that a I mean, you referenced kind of $4 gas as your kind of medium or long-term assumption. Is it also a $4 gas price assumption that gets us to that number? Or maybe just give me some color on the economics there.

$3.25 is the number for the gas based on that EBITDA generation. So, if you have a higher gas in your model, you can, you know, do the conversion. So, that's based on $3.25. So, that's at $3.25 gas. Okay.

And then... For the 65% hedge, just remind me what's the duration of the hedge and when do those start to roll off and you have to hedge at higher prices?

It's different. G1 was a 10-year fixed price contract. G2 was rolling hedges for 10 years as well for 40%. For the site, it was about 65% between the two. Then Madison had it through 2031 on a fixed price for most of the gas there.

Got it. So, I mean, it sounds like, I mean, I'm going to have to get my calendar out, but, I mean, by and large, it doesn't sound like you're going to have a substantially unhedged position or less hedged position next year or the year out. I mean, is that a fair assumption?

That's a very good assumption. And like I said earlier, we've been putting further hedges in for G3, right? Yeah. out in the section. So, yeah, we're not exposed beyond the spot component that we've been buying, which is around 35% of our needs for the next few years.

Got it. No, that's great. And then I guess the last question is, I mean, you commented that, you know, you think a fair amount of your competitors don't have the same hedge position, right, in the U.S., I'm assuming. And so, I mean, do you think the kind of the U.S. methanol price prices reflecting the reality of the current spot gas price? Or do you think, you know, if some of your peers have kind of shorter duration hedges, you know, as those roll off, you know, maybe the U.S. methanol price needs to reflect the gas price reality, and who knows what the gas price is. But, I mean, I guess in your assessment, you know, the current U.S. methanol price is reflective of what do you think kind of the blended gas costs price for the producers? I mean, I know it's sort of kind of a long-winded, obscure question, but I mean, how do I think of that?

Yeah, at today's methanol prices in the U.S., if you're paying $7, $8 for gas, you're still cash positive. So even if they are buying spot gas, but obviously the margins are really slim at those prices. So you'd have to have a view that these $7, $8 gas prices are shorter term in the But if you've got to view their longer term or higher, then they're going to be under pressure, which will either lead to shutdowns or higher prices. And if you have shutdowns, you're going to get higher prices. So that's why we never wanted to be exposed. We always wanted to be able to run our plants with a $200 delivered cash cost to China, you know, through a hedging and fixed price contracts. Obviously, when prices were $250, you know, it wasn't as attractive for us as it is today. But I think our strategy of having certainty and being able to run our plants and service our customers is proving out to be the right one. So I'm really glad we're not 100% exposed in North America to spot gas today.

Got it. No, that's great. Thanks for the color and good luck. Appreciate it. Thank you.

Thank you. Thank you. We ask that you please limit yourself to one question and one follow-up. The next question is from Sherilyn Radbourne from TD Securities. Please go ahead.

Thanks very much and good morning. Most of my questions have been answered, but in terms of the discussion on green methanol, we're just hoping you could talk about how that influences your thinking about the next project beyond Geismar 3 in terms of location and so forth, if at all, and whether there are things that you can do to lower the carbon intensity of your existing plant network.

Yes. It does. Let's say G3 is going to buy us some time. We want to grow in line with the market. If you look at the market today, the demand is probably similar to just pre-COVID levels. So we haven't seen any real significant demand growth in the last few years. So as G3 comes on and things normalize, that'll satisfy our growth needs for quite some time. As well, our focus will be on getting our idle plant in New Zealand and Trinidad restarted. So that'll technically be growth for us today because they're idle today. So that'll be our focus. As far as the green methanol, like I said earlier, it's small scale. So I think the largest that you could do that we're aware of for a CRI type plant is 100,000 tons. So that's 18 Geismar 3s. And the capital cost versus Geismar 3 will be substantially, substantially higher. So, you know, I think the other issue, you know, carbon intensity and emitting carbon and you're making 25-year investments, what's the world going to look like from a carbon tax point of view, et cetera? So all of those things are going to go into our decision-making, you know, and certainly the locations that we would choose, you know, may be impacted by carbon tax regimes. But, you know, our view is probably the world will always end up being, you know, somewhat having the same carbon price, whether it's through import duties or whatever. So the other option we have to really lower our carbon footprint is carbon capture and storage. And we're looking at both Geismar and Medicine Hat, where there are reservoirs available to do carbon capture and storage. Obviously, there's capital involved in operating costs, but we have a team looking at those this year. And that would reduce our carbon footprint significantly, 80%, 90%. So those are possibilities in North America. We don't have the same kind of structure in some of the other regions because there's not as plentiful reservoirs today. But we'll look at it for North America. If it makes sense there, then we'll think about expanding it. And our teams are looking at other things we can do to lower our carbon footprint. and intensity, but, you know, the chemistry is the chemistry for our existing plants, and there's only so much you can do. The biggest bang we would make was carbon capture and storage. We're also going to be testing out some new equipment. We think even, you know, G3 is down to 0.4 a ton of CO2 per ton of methanol by changing some equipment, and, you know, we think we can get it down to 0.2 for any new builds, but we've got to prove that that equipment over the next coming years And then if you buy renewable energy in the area, you can almost get to a zero carbon footprint using natural gas. So there's many pathways we're looking at here. And obviously, we're going to look at everything and consider everything and look at the economics and make decisions around what makes sense for the 20 years from now when we'll have to make some guesses around what the regime might look like. great um and then since no one has asked about titan maybe you can just give us a quick update on the gas situation in trinidad and the potential to restart that plant at some point yeah so right now uh the upstream and the government are negotiating their contracts are coming up this year and you know until that negotiation gets finalized i would say it's unlikely you should expect us titan for us to secure a gas contract to allow that to restart but Those contracts will be negotiated this year, and the government has told us they want to keep all the downstream alive, and they just need to have their contracts renegotiated with the upstream, and that's ongoing. So we're continuing to dialogue with the government, and our intent is to get gas at an economic price that allows us to operate tight and through the cycle, and that's what we're focused on.

Thank you for the time.

Thank you. Thank you. The last question will be from Matthew Blair from Tudor Pickering Holt. Please go ahead.

Hey, good morning, John. When thinking about your Q2 outlook, do you think it's reasonable to assume that your sales of methanol will be up quarter over quarter just as you roll off some of the outages and planned maintenance from Q1? I think you also tend to have an inventory release in Q2. Or do you think that would all be offset by probably lower production at Chile just due to seasonal factors?

Yeah, so you're talking about our produced molecules. It's really hard to guess even this far into the quarter because of the way the FIFO layers work around the world. So if we do have less of our produced molecules in our sales, traditionally there is a product release from our produced inventory. I'd say going into this quarter, if I look at the makeup of our inventory, We have much higher produced inventory today than we normally would entering into a quarter. I'm not sure how it's all going to work out. I don't really pay that close attention to it because I think we're longer term. To me, every molecule we produce today, we're making $200 a ton in EBITDA, so that's what I focus on. What quarter it gets in and how it flows, that's above my pay grade. I'm really focused on making sure we run the plants reliably and safely and and get that product to our customers.

Sounds good. I'll leave it there. Thanks.

Thank you. Okay. Thanks for all the questions. We are pleased to share our excellent financial results with you today. We've continued to demonstrate the strength of our business model and our competitive advantage of delivering secure and reliable supply to our customers. We believe that the long-term outlook for methanol is robust. Methanol is an essential building block for hundreds of consumers and industrial products as well as cleaner burning fuel that can help improve air quality by reducing emissions compared to traditional fuels such as diesel or coal. Our asset portfolio generates meaningful cash flow across a wide range of methanol prices. Our capital allocation priorities remain the same. We use cash that we generate to maintain our business, pursue value accretive growth opportunities, and continue our strong track record of returning excess cash to shareholders. We will continue to execute on our strategy to deliver significant value to our shareholders. Thank you for joining us today, and we'll speak with you in July. And thank you for the interest in our company.

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