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Methanex Corporation
10/26/2023
Good morning, my name is Julie Ann and I will be your conference operator today. At this time, I would like to welcome everyone to the MESINEX Corporation 2023 Third Quarter Results Conference Call. All lines have been placed on mute to prevent any background noise. After the speaker's remarks, there will be a question and answer session. If you would like to ask a question during that time, simply press star followed by the number one on your telephone keypad. If you would like to withdraw your question, please press star one again. I would now like to turn the conference call over to the Director of Investor Relations at Methanex, Ms. Sarah Harriot. Please go ahead, Ms. Harriot.
Thank you. Good morning, everyone. Welcome to our third quarter 2023 results conference call. Our 2023 third quarter news release, management's discussion and analysis, and financial statements can be accessed from the reports tab of the investor relations page on our website at methanex.com. I would like to remind our listeners that our comments and answers to your questions today may contain forward-looking information. This information by its nature is subject to risks and uncertainties that may cause the stated outcome to differ materially from the actual outcome. Certain material factors or assumptions were applied in drawing the conclusions or making the forecast or projections which are included in the forward-looking information. Please refer to our third quarter 2023 MD&A and our 2022 annual report for more information. I would also like to caution our listeners that any projections provided today regarding Methanex's future financial performance are effective as of today's date. It is our policy not to comment on or update this guidance between quarters. For clarification, any references to revenue, EBITDA, adjusted EBITDA, cash flow, adjusted income, or adjusted earnings per share made in today's remarks reflect our 63.1% economic interest in the Atlas facility, our 50% economic interest in the Egypt facility, and our 60% interest in Waterford shipping. In addition, we report our adjusted EBITDA and adjusted net income to exclude the mark-to-market impact on our share-based compensation and the impact of certain items associated with specific identified events. These items are non-GAAP measures and ratios that do not have any standardized meaning prescribed by GAAP and therefore unlikely to be comparable to similar measures presented by other companies. We report these non-GAAP measures in this way because we believe that they are a better measure of underlying operating performance, and we encourage analysts covering the company to report their estimates in this manner. I would now like to turn the call over to Methanex's president and CEO, Mr. Rich Sumner, for his comments and a question and answer period.
Thank you, Sarah, and good morning, everyone. We appreciate you joining us today as we discuss our third quarter 2023 results. For the third quarter, our average realized price of $303 per ton and produced sales of approximately 1.5 million tons generated adjusted EBITDA of $105 million and adjusted net income of 2 cents per share. Adjusted EBITDA was lower compared to the second quarter due to a lower average realized price and lower produced sales. Through the third quarter, we saw improving method market conditions, with stronger demand from certain sectors, as well as moderation in global operating rates, mainly from various supply outages in North America, Middle East, and Southeast Asia. Methanol demand improvements were primarily driven by stronger demand in China, with increased demand for MTB and other fuel applications, as well as improved demand for methanol to olefins, with a number of MTO plants restarting operations in the third quarter. We are currently seeing very high operating rates across the MTO sector, which we believe is driven by the completion of planned downstream expansions, as well as some improvements in affordability from a higher energy and olefins pricing during the quarter. However, we believe economic pressure remains on this sector under current market conditions. We can continue to carefully monitor the global macroeconomic environment. And during the third quarter, we saw relatively compared with the second quarter. Coal pricing in China increased during the third quarter from around 800 RMB per ton to above 1,000 RMB per ton currently, which we believe was primarily driven by various industry supply disruptions. We currently estimate the global cost curve to be over $300 per ton based on current coal pricing in China. Overall, continued high energy pricing and improved supply-demand fundamentals has led to slightly higher pricing throughout the third quarter and into the fourth quarter. Our November posted prices in North America, Asia Pacific, and China were posted at 549, 370, and $360 per metric ton, respectively. And our fourth quarter European price was posted at 375 euros per metric ton. Based on our October and November posted prices, we estimate our global average realized price to be approximately $310 to $320 per metric ton for these two months. In the third quarter, we had lower production due to scheduled turnarounds in New Zealand and Chile and seasonal gas restrictions in Chile. We are encouraged by the pace of gas development in Argentina and the continued supply rates from ENAB in Chile. Increasing gas supply from Argentina allowed us to restart our second Chilean plant in September, earlier than previous years. We expect both plants to run at full rates from the end of September through April 2024, the southern hemisphere summer months, and are increasing our Chile production guidance for 2023 from a range of 800 to 900,000 tons to a range of 900,000 to 1 million tons based on improved gas availability from Argentina. Earlier in October, we also announced that we signed a two-year natural gas agreement with the National Gas Company of Trinidad and Tobago to restart our fully owned Titan plant and simultaneously idle the Atlas plant in September 2024. I want to thank our team for their hard work to ensure that we maintained operations in Trinidad, which is a strategic part of our global portfolio. The gas situation in Trinidad in the near term is challenging, which is reflected in the short term of the new gas contract. We remain committed to working with the NGC and the government to secure long-term economic gas supply. We entered the third quarter in a strong financial position with approximately $500 million of cash and $300 million of undrawn backup liquidity. Our capital priorities are to complete the Geismar III project and allocate any excess cash to repay rather than refinance the $300 million bond due at the end of 2024. Construction of our G3 project is progressing safely to plan. Construction is nearly complete and the team is in the final handover, testing and commissioning phases. We expect to achieve commercial production around the end of the year and within our budget range of $1.25 to $1.3 billion. The remaining $140 to $190 million of cash expenditures, including approximately $50 million in accounts payable, is fully funded with cash on hand. Looking ahead to the fourth quarter of 2023, we're expecting higher adjusted EBITDA with a higher realized methanol price and higher produced sales. We remain focused on delivering strong operational results from our existing assets and completing the G3 project. We are well positioned during this period of economic uncertainty with growing cash flow generation capability from G3 and a portfolio of assets that can generate cash flow across a wide range of methanol prices.
We would now be happy to answer questions.
Thank you. At this time, I would like to remind everyone, in order to ask a question, please press star then the number one on your telephone keypad. We ask that you please limit yourself to one question and one follow-up. For additional questions, please rejoin the queue. Our first question comes from Ben Isaacson from Scotiabank. Please go ahead. Your line is open.
Thank you very much, and good morning, everyone. Rich, question on Trinidad. You said that the gas situation has been challenging, which was the reason for the short-term deal. Does that mean that you don't have confidence that it'll get better? Is that why? I mean, if it's challenging, presumably it's challenging in the short term. And then as part of that same question, what was the rationale to idle a plant that was running and then bring on, and then spin CapEx to restart Titan? Is that because there was going to be a major turnaround for Atlas that you wanted to avoid? Just trying to understand the whole Trinidad story. And then just maybe as my follow-up, can you just talk about any risk to eMethanex due to the shutdown of the Tamar platform off of Israel? Thank you. Okay.
Thanks, Matt. On Trinidad, and we all talk about that the, The near term, and the reason we call it challenging, is I think we talked about previously that the gas market's tight in Trinidad. In the near term, what we see today is there's about, when you look across LNG, ammonia, and methanol, that's about 4.5 BCF of demand per day. Current production is in the range of 2.5 to 3 BCF. And the government, no, we haven't given up on the fact that that situation is going to get better because there's a lot of things happening in Trinidad. And we believe there's a lot of incentives today to restart capacity that is there across the estate. And these are long assets that have run really reliably over time in Trinidad. So certainly not, we are working to understand all of the initiatives that are being taken. And we remain really committed to working with NGC and the government of Trinidad as they work with the upstream on improving that situation. The reason we started up the decision around Titan versus Atlas is because of the near-term situation. They were offering a fairly short term contract. And when you look at the economics under that contract in the short term, it made sense to run Titan. And as you said, we don't have a turnaround in front of us like we do in Atlas. That plant had gone through a major maintenance just before we'd idled it. I think that was back in 2019. It made sense from an economic perspective and also I would call it an organization perspective. We want to keep our team in place. Our global manufacturing team is a huge part of our organization. We're really pleased that we'll have the Titan asset running at the end of next year. We will shift and create a Titan restart team now that will be focused on getting that plant up and running safely and reliably. You asked about Egypt. I'll answer that. You know, I think as of right now, what we've seen is there has been a shutdown of the So Israel is an exporter of gas to both Jordan and Egypt. Israel has shut in the Tamar field, which has impacted the flow of gas into Egypt. That is not affecting the available of gas to the industrial producers there. We do understand there may be impact to LNG producers. So as of right now, that's not impacting
our operations or other industrial producers in in egypt i appreciate it rich thanks so much our next question comes from joel jackson from bmo capital markets please go ahead your line is open oh good morning a couple questions short term and then i'll do a long term i'll do short term first just looking at some of your guidance for q4 can you say if you expect q4 ebada to be higher you said everything will be higher will be higher than Q4 of 22. And when you gave your price guidance at 310 to 320, it looks like you're using a higher discount rate than Q3. And then would you be having some inventory builds in Q4 like you normally do?
Okay.
So for Q4, I haven't done that comparison. Our reference was in comparison to Q3, Joel, for higher pricing and higher produced sales. As it relates to the discount rate, we don't expect a big difference in the discount rate so maybe we can take that one offline and then inventory build yes we do we have seen a number of quarters here with inventory build on our produced sales so we probably you know accounting is accounting but we would expect that at some point we'll also be seeing a benefit of pulling through produced sales as well so hopefully that answers it's a bit of bit of context to the quarter for you.
Okay, and then my longer-term question. Yes, I just want to ask for 24. That's a longer term now. If you look at the production for 24, can we talk about off a basis a little more than 6.5, can we talk about what you expect for 24? So I would imagine you expect G3 could ramp across Q1. You have almost near production there next year. I would imagine You switch over from Atlas to Titan, but there might be a hiccup there. Like, would you lose some tons? Would you be running both plants overlapping for a month? Or would you lose some tons on a ramp down and a ramp up? Any other changes in New Zealand or anywhere else with better gas in Chile? Like, should we expect, you know, 2 million tons more in production next year, a million and a half? Like, can you just give us some ideas?
We will update our guidance formally towards the end of this year, but maybe I'll give you some preliminary thoughts there. We will, for Chile, like I said, we'll be operating two plants at full rates at least until April of next year. Already, we've got those gas contracts in place today and we'll be working on the similar contracts for next year. This is the first time in a very long time that we've operated two plants at full rate. So we're really excited about that. And we'll be working on replicating that out for the summer month period for next year. So I would expect when we were at 800 to 900 this year, that that number will be higher for Chile. For Trinidad, know we will we're going to be working as the gas contracts are working simultaneously so we will be trying to uh i don't expect a lot of overlap there um but we will try it will be kind of a you know a an idling and then a startup of titan um so you can kind of do the the numbers on how that change happens and then i think the big one will be also g3 um you know we'll tension here is obviously to start up around the end of the year but it will take time before g3 actually works through our inventory flows so you probably got a 45 to 70 day inventory bill before g3 starts you know kind of coming through the earnings um egypt we would expect similar results to you know we've been operating at high rates and uh New Zealand, we'll update our guidance today. It's at 1.3 to 1.4 million tons. And we'll be, you know, that's probably a similar level we would be at. But we'll update it more formally. And we also have to factor in scheduled, you know, scheduled turnarounds as well.
So more to come there. Thank you.
Our next question comes from Steve Hansen from Raymond James.
Please go ahead. Your line is open.
Yeah, thanks, guys. Rich, can you go back to the Chilean gas situation just in a little bit more detail? It sounds like on the back of some recent success, there's an opportunity to secure some more gas going forward. Just trying to understand what that means for the production profile next year, I guess, through the summer months in particular down there. And now we should think about maybe even the medium-longer-term profile for the production complex.
Yeah, thanks, Steve. So a bit of a background on what's happening in Chile, and a lot of this is what's happening in Argentina. Argentina is developing the Vaca Morte field in the Neuquén Basin, and this is quite a prolific field. What they're trying to do is they're investing in pipeline infrastructure so gas development is a lot of success around gas development and what they have done is they are working on connecting that field into the major grid in argentina argentina consumes about 120 million cubic meters a day in gas uh what they did is they they commissioned a pipeline uh that is now delivering in in the third quarter that's now delivering 10 million cubic meters into the grid. They're working on adding compression to that pipeline, which would add another 10 million cubic meters per day into the grid as well. And that will happen sometime in the first half of 2024. And then what they are also working on is another pipeline connection, which would double that capacity that would come on in the 2025 timeframe. In addition to that, there's a development that's happening in the Austral Basin by Total and Wintershell and a consortium there called the El Phoenix Project, and that's located really close to our plants. So all of these developments are significantly improving the domestic gas balances in Argentina. And as well, that supports export markets, which we are very well positioned there with our assets. So we're really pleased to say that we're going to be operating two plants at full rates during this sort of eight-month period. And like I said, the first time in a very long time we've been doing that. And we're going to work on longer-term gas. We think that focusing on the non-winter months is the right thing now. And over time, we'd also be hoping to improve our gas position during the winter months. But these are things we'll continue to update on as we progress through.
Very good. Thank you.
And just one follow-up on the G3 in terms of the commissioning and the inventory bill that you described. I know it's early, but can you give us a sense for whether the 45 to 60 or 70, when do you describe, will all take place in Q1 from your standpoint today, or will that start to build through the later part of Q4?
Yeah, I think right now the way to do it is starting in Q1. That would be probably the right way to think of it, starting in around the beginning of the first quarter.
Okay, very helpful. Thank you.
Our next question comes from Hassan Ahmed from Alembic Global. Please go ahead. Your line is open.
Morning, Rich. You know, you guys saw a nice uptake across all your regions. Obviously, you know, Europe, pricing-wise, Europe's obviously for the quarter, so no reflection there as yet. I'm just trying to understand the delta between sort of North American pricing and China slash Asian pricing. I mean, even if I were to discount North American pricing, there is still as much as a $70, $80 a ton delta between those pricing levels in the regions. So just trying to get a better sense of why that exists. I mean, it seems to me above and beyond shipping.
Yeah, Hassan, thanks for the question. I think... Hopefully I'll answer your question the right way here for you to make sense of it. I think if you were to look at discount levels across the regions rather than our global discount, because you can't really apply the average discount to all the prices, it's really that each region does have its own kind of market discount levels, which do vary quite widely depending on which region you're looking at. So our ARPs, if you were to look at our ARPs by region, that would probably make more sense and probably more reflective of kind of, you know, reasonable pricing differentials between those. So it's hard to look at the global discount and apply that and try to make sense of those prices relative to, say, spots or other markers.
Understood, understood. And, you know, just coming back to a sort of broader question, I know it's, all sort of recent occurrences and the like in the Middle East. But I mean, are you guys seeing any meaningful shifts as a result of that in trade flows? I mean, I guess more specifically, what are you guys hearing in terms of Iranian product?
Yeah, so as of right now, we're not hearing any disruptions as of today. know first we are we're monitoring this situation very closely and you know really hoping for a peaceful and sustainable uh resolution here for everyone but um we haven't seen any disruption you know is is israel uh doesn't have any meaningful really methanol demand nor is there any supply and in the area there there's no methanol trade routes that are impacted now if this were to escalate in the region, a lot of things could be impacted, including methanol. But we haven't seen any of those disruptions yet, but that could impact crude, it could impact LNG trade flows, methanol trade flows. And so those could have really meaningful impacts on the industry. But we haven't seen any of that yet, but we're really closely monitoring to see...
know obviously what what what's gonna how this is gonna unfold very helpful rich thanks so much our next question comes from matthew blair from tudor picker and bolt please go ahead your line is open hey uh good good afternoon um or good morning sorry uh could you talk about any opportunities you're looking at for your underutilized assets is there a chance that you could you know, take apart Atlas, move it to the U.S. like you did with some of your Chile plants a long time ago, or is there an opportunity for converting those assets into an e-methamol plant?
Yeah, so we, in terms of relocation in Trinidad at this point, we remain committed to Trinidad, and we are you know, we think there's a lot of incentives today to get assets, underutilized assets operating in place where they, you know, where they are today. And that assets operated really well for us in Trinidad. So we are focused there. Now we have, we do have experience relocating plants. We moved Chile two and three to Geismar. Our experience on plant relocation is that the capital cost savings are really not that meaningful. It's really about speed. The construction timeframe can probably be, you know, you could probably save a year in terms of the construction timeframes versus building new. So it has advantages there. We're not considering that today for Atlas as we want to work on getting longer-term sustainable gas in Trinidad. But that is something that we've done before. We have a lot of experience with. And there is that speed advantage in the event that you wanted to move quickly on a project.
Sounds good.
And then could you talk a little bit about the moving parts on cash flows in 2024? Should we think of your capex moving down to the, I don't know, $150 to $200 million range? I think you mentioned the debt pay down of about $300 million next year. There's also the dividend of $50 million plus potentially a working capital build as you ramp up G3. Would the remainder, any remaining cash flow go to buybacks in that scenario?
so i think the right number to use is on the capex is the lower of your range they're around 150 million um and i think you've uh you've got all the numbers in in terms of the other uh cash outlays so yeah we're focused on the 300 million dollar bond and i think as of today you know today's pricing um we're probably that's the main focus uh you know we we uh generate a little over 200 million in free cash flow with G3 at $300 methanol price. Above that, then you're probably getting above the bond if you get closer to 350. We still see the market environment today is supportive of what we need to repay the bond, but we're really focused on that. If we were to have a really stronger methanol market, then you start looking at free cash flow beyond beyond the debt repayment. We don't have any major capital ahead of us, and so it would be looking at returning excess cash and likely some balanced approach between looking at the balance sheet further on deleverance.
But we're really focused on the $300 million bond today. Great. Thank you.
Our next question comes from Josh Spector from UBS. Please go ahead. Your line is open.
Yeah, hi. Thanks for taking my question. I guess first I just wanted to ask a follow-up on the cash flow side. So when you think about the working capital build next year with the G3 startup, I mean, you're already purchasing and reselling some tons. So is there a way to size kind of the net impact as you would expect that to be in terms of cash use to build that inventory?
Yeah, we're not really concerned with the working capital build up here i don't think that there's any strategies we're having in terms of managing that uh downward where uh you will see we are buying a lot of product today which we we will significantly reduce uh with g3 coming online because we're not going to be growing our sales by 1.8 million tons next year we've already grown ourselves so you'll see a lot of purchase product being displaced by produced product, which would be supportive of lower inventory values anyways.
Yeah, so I appreciate that. I guess that's where I was kind of going. Does the two kind of net offset each other so it's not really a major cash use? Is that kind of what you're saying, or should we be thinking about it as somewhat of a cash use? Yes.
Okay.
And then the other question I had was just more on cost curve and just methanol price support. If I heard your comment correctly, You talked about $300 a ton methanol price support. Your posted pricing in China is higher. I guess, what do you view as the pricing driver here? Is it the fuel value? Is it coal? And how does that evolve into next year in your view?
Our posted price is higher, but after discount, we're probably in a, you know, we're kind of closer to those levels. What's driving the price today is really it's going to be the marginal producer cost, which is a coal producer cost in China. And then the other factor that we look very closely at is the affordability of methanol primarily into the olefins industry. And I think right now we would say that both of those factors are kind of pointing to the levels where we are today in China at around 200 spot pricings and around 280 to $300. You know, we have seen some improvement in the olefins market, and I would say that that sector relative to oil pricing today, is pricing well under where it would be on a kind of mid-cycle basis. So we've seen tons of pressure on that sector that we would, in a kind of mid-cycle energy pricing at $90 oil, we would expect much, much higher pricing. And especially when MTO is operating at the highest rates, I think we've ever seen today as an example where that sector is operating at 90% operating rates over a very high base because we've added MTO plants last year. So if we had a better market there, I would expect that would be driving ethanol prices higher than where we are today.
Okay, thank you very much.
Again, if you'd like to ask a question, press star, then the number one on your telephone keypad. Our next question comes from Lawrence Alexander from Jefferies. Please go ahead. Your line is open.
Hi. Good morning. This is actually Kevin Estock. I'm for Lawrence Alexander. So it looks like most of my questions have been asked, but I guess I was wondering if you could give maybe any updates from since the last calls around your strategy on green and blue methanol. And I guess maybe how current interest rates might impact future investments. I guess I get a sense of your rate sensitivity, too, as it relates to your strategy. Thank you.
Yeah, thanks. Maybe when you think about the low carbon space, the strategy is really looking at both sides, both the demand and the supply side. I didn't mention it in the opening comments, but there continues to be a lot of momentum in marine fuels. Right now, over 200 ships plan to be in the water in the 27-28 timeframe. It represents around 7 million tons of demand if those ships are to run on a methanol 100% of the time. So we are working with major international shipping companies. This is a container shipping segment leading the way, but there's interest in dry bulk tankers and so at cruise ships. So we're working with that industry. We've got a number of MOUs signed, working closely with the shipping industry on their desire for green, blue, conventional methanol. Say green, it looks like for green methanol, it's mainly being driven by the European market in shipping. And that a lot is on the back of what's happening on the emissions trading scheme, as well as EU maritime regulations around carbon emissions. We're having a lot of other discussions around blue and conventional methanol as well. And then on the supply side, we're working on a number of projects. I would say first and foremost, we've been certified to be able to purchase our renewable natural gas in North America and produce green methanol. And our Geismar plants and our marketing regions are certified. to be able to sell that product through to customers, certified product through to customers. And then we're looking at the feasibility of projects at our sites. And that would be using renewable hydrogen and CO2 to sort of green the assets. And we're looking at multiple feasibility within our existing sites. We're also in discussions with other projects that are out there that would like to work with us on off-takes. So we're trying to understand how we can open up as many economically efficient supply alternatives for the marine industry around green methanol. And there's a lot of discussions happening, and we'll hope to be able to report more as we progress in this area.
Great. Thank you very much.
There are no further questions at this time. I will now turn the call back over to Mr. Rich Sumner.
All right. Well, thank you for your questions and interest in our company. We hope you will join us in February when we update you on our fourth quarter results.
This concludes today's conference call.