Methanex Corporation

Ladies and gentlemen, thank you for standing by. Welcome to the Methanex Corporation Q3 2022 earnings call. I would now like to turn the conference call over to Ms. Sarah Harriot. Please go ahead, Ms. Harriot.

Good morning, everyone. Welcome to our third quarter 2022 results conference call. Our 2022 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 methanx.com. I would like to remind our listeners that our comments and answers to your questions today may contain forward-looking statements. This information, by its nature, is subject to risks and uncertainties that may cause the stated outcomes 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 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 and 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 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 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. This morning, we have Rich Sumner on the call, who will become our new president and CEO on January 1st, 2023. It has been a privilege to serve as Methanex president and CEO for the past 10 years. I look forward to seeing Rich continue to extend our global market leadership position, as well as continue to lead our strong performance and safety in operations as he assumes the CEO role. On the call today, We'll review our third quarter 2022 financial results, provide an overview of the methanol markets, discuss our operational results, and share our near-term outlook. Then we'll open up the call for questions. Our average realized price of $377 per ton generated adjusted EBITDA of $192 million and adjusted net income of $49 million or 69 cents per share. Adjusted EBITDA was lower in the third quarter compared to the second due to a lower average realized price, lower sales of Methanex-produced methanol because of planned turnarounds and some unplanned outages, and higher spot gas costs in North America that impacted EBITDA by approximately $10 million. This was partly offset by redirecting and selling our contracted natural gas in Egypt. Global methanol demand in the third quarter was flat compared to the second quarter of 2022. Demand from the traditional chemical applications was down slightly with acetic acid plant restarts in North America being offset by other plant outages and logistics constraints across various downstream sectors, as well as a slowdown in demand growth primarily in Europe and China. Demand for methanol to olefins, or MTO, remains stable with the startup of the new Bohai Chemical MTO plant, which can consume up to 1.8 million tons of methanol, ramping up to 70% in the third quarter. This offset lower operating rates from existing plants in July and August, as MTO affordability came under pressure. Demand from energy-related applications increased in the third quarter, as easing COVID-19 restrictions in China led to an increase in demand for MTDB and other fuel applications. Industry operating rates decreased in the third quarter because of extended turnarounds as well as planned and unplanned outages globally. We estimate the industry cost curve based on the marginal coal producer cost in China to be approximately $350 per ton. Our November posted prices remained healthy North American prices remain flat at $585 per ton. Asia Pacific and China prices remain flat at $410 a ton and $395 per ton respectively. Our European contract price is set quarterly, and we decreased our fourth quarter 2022 price by 45 euros per ton to 510 euros per ton. Less volatile spot prices in the third quarter, primarily in China, led to a lower discount rate of 21.5% compared to the second quarter. We're currently seeing demand similar in the third quarter, similar to the third quarter. We recognize there's potential downside risk in demand due to the energy crisis in Europe, extended COVID-19 lockdowns in China, global inflationary pressures, and rising interest rates impact on consumer sentiment and demand. High global energy prices enhance methanol's cost competitiveness against alternative fuels, which could lead to increased methanol demand. Demand from the shipping industry continues to grow. And based on existing dual fuel ships and orders today, we expect potential demand to increase from approximately 300,000 tons today to 2 million tons of demand over the next few years. Our production levels were lower in the third quarter compared to the second quarter. due to two planned turnarounds, some unplanned outages and a redirection of sale of our contracted gas in Egypt, which I will discuss after an update on the rest of our sites. Medicine Hat had lower production in the third quarter due to an unplanned outage in July caused by storm damage impacting the plant's power supply. Geismar had lower production in the third quarter due to an unplanned outage in July, which we extended due to elevated gas prices at the time. Also, at the end of September, the utility supplier for the Geismar site experienced an extended loss of power due to a failed transformer, which lasted until mid-October. The team took this opportunity to advance some critical Geismar 3 tie-ins. We are forecasting a natural gas price of approximately $580 in the MMBTU for the fourth quarter for the 35% spot portion of natural gas purchases that are not contracted. In Chile, production was lower in the third quarter, although higher than the third quarter of 2021, as only Chile 1 was operating due to limited gas availability from Argentina. We typically experience lower gas deliveries in the southern hemisphere winter months, impacting our second and third quarters. Chile 4 restarted in mid October with gas deliveries from Argentina that we expect will allow us to operate both plants through the first quarter of 2023. We estimate the 2022 production to be approximately 9.9 million tons. In New Zealand, we completed a successful turnaround at Mata Nui 1, which restarted in mid-September. Mata Nui 2 operated throughout the third quarter, but at lower levels due to gas availability restrictions from the Maui gas field. We expect both plants to be operating at full rate sometime in the fourth quarter. Based on the production today and our outlook for natural gas in New Zealand, we estimate that 2022 production to be between 1.2 and 1.3 million tons. We had low levels of production from Egypt in the third quarter as we completed an extended plan turnaround. The timing of the turnaround enabled us to enter into an agreement to redirect and sell the plants contracted natural gas from late July to late October. This was a unique opportunity to utilize excess LNG capacity in Egypt during a period of elevated LNG prices in Europe, and was done in collaboration with our Egyptian government partners. We estimate that the sale and redirection of our gas resulted in an incremental benefit to the third quarter of approximately $35 million, compared to using this gas for production of methanol for the period of time it was not scheduled to be under turnaround. The plant is in the process of restarting. We ended the third quarter in strong financial position with approximately $890 million of cash, excluding non-controlling interest and including our share of cash in the Atlas Joint Venture, and we have $600 million of undrawn backup liquidity. We remain committed to our disciplined approach to capital allocation. We continue to focus on maintaining our business, pursuing economic value-added growth opportunities that exceed our cost of capital by three percentage points and returning excess cash to shareholders. Construction of our Advantage G3 project is progressing safely and is scheduled to be completed in the fourth quarter next year. We have spent approximately $810 million before capitalized interest to the end of the third quarter and expect approximately $450 million to $500 million remaining capital cost before capitalized interest, which is fully funded with cash on hand. Our asset portfolio and cash flow generation capability will be significantly enhanced when G3 comes online next year. With our G3 project being fully funded, our strong cash position and our ability to generate meaningful cash flow across a wide range of methanol prices, we are well positioned during this period of economic uncertainty to the continued returning cash to shareholders through a sustainable growing dividend and share buybacks, including our 5% share buyback announced in mid-September. Production in the fourth quarter is expected to be approximately 1.6 million tons, much higher than the third quarter. We anticipate a build of produced inventory through the quarter as the methanol sold in the quarter will be more weighted to purchase product as a result of our FIFO inventory flows. Based on our posted prices in October and November and higher expected produce sales, we expect higher adjusted EBITDA in the fourth quarter compared to the third quarter if the one-time benefit of the Egypt natural gas sale of $35 million is removed. In the medium term, the methanol market outlook is positive and we have growing cash flow generation capability with G3 coming online in the fourth quarter next year. At $375 a metric ton methanol price and $4 MMBTU gas, we expect G3 to generate approximately $250 million of EBITDA per year. We have a strong balance sheet and committed to deliver on our capital allocation commitments of returning excess cash to shareholders. Looking forward, our geographic diversity advantage feedstock cost position with 85% of natural gas needs in North America hedged next year and our unique global supply chain will continue to allow us to be the methanol supplier of choice and deliver value to shareholders. We would now be happy to answer questions.