Methanex Q3 2023 Earnings Call Transcript

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Provided by Quartr
October 26, 2023

There are 10 speakers on the call.

Operator

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 Methanex Corporation 2023 Third Quarter Results Conference Call. All lines have been placed on mute to prevent any background noise. After the speakers' remarks, there will be a question and answer session.

Operator

If you would like to withdraw your question, please press star 1 again. I would now like to turn the conference call over to the Director of Investor Relations at Mechenix, Ms. Sarah Harriott. Please go ahead, Ms. Harriott.

Speaker 1

Thank you. Good morning, everyone. Welcome to our Q3 2023 results Conference Call. Our 2023 Q3 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.

Speaker 1

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 Q3 2023 MD and 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.

Speaker 1

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 percent economic interest in the Atlas facility, our 50 percent 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.

Speaker 1

Rich Sumner for his comments and question and answer period.

Speaker 2

Thank you, Sarah, and good morning, everyone. We appreciate you joining us today as we discuss our Q3 2023 results. For the Q3, our average realized price of $303 per tonne and produced sales of approximately 1,500,000 tonnes generated adjusted EBITDA of $105,000,000 and adjusted net income of $0.02 per share. Adjusted EBITDA was lower compared to the Q2 due to a lower average realized price and lower produced sales. Through the Q3, 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.

Speaker 2

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 and the Q3. 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 this global macroeconomic environment. And during the Q3, we saw relatively flat demand outside of China for methanol into traditional chemical locations compared with the Q2.

Speaker 2

Coal pricing in China increased during the Q3 from around RMB800 per ton to above RMB1000 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 tonne based on current coal pricing in China. Overall continued high energy pricing and improved supply demand fundamentals has led to slightly higher pricing throughout Q3 and into the Q4. Our November posted prices in North America, Asia Pacific and China were posted at $5.49 $3.70 $3.60 per metric tonne respectively, and our Q4 European price was posted at €3.75 per metric tonne. Based on our October November posted prices, We estimate our craft global average realized price to be approximately $3.10 to $3.20 per metric tonne for these two months.

Speaker 2

In the Q3, 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 INAB in Chile. Increasing gas supply from Argentina allowed us to restart our 2nd 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 800,000 to 900,000 tonnes to a range of 900,000 tonnes to 1,000,000 tonnes based on improved gas availability from Argentina. Earlier in October, we also announced that we signed a 2 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.

Speaker 2

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 Q3 in a strong financial position with approximately $500,000,000 of cash and $300,000,000 of undrawn backup liquidity. Our capital priorities are to complete the Geismar 3 project and allocate any excess cash to repay rather than refinance the $300,000,000 bond due at the end of 2024.

Speaker 2

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 $1,250,000,000 to $1,300,000,000 The remaining $140,000,000 to $190,000,000 of cash expenditures, including approximately $50,000,000 in accounts payable is fully funded with cash on hand. Looking ahead to the Q4 of 2023, we are 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.

Speaker 2

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.

Operator

Thank you. Our first question comes from Ben Isaacson from Scotiabank. Please go ahead. Your line is open.

Speaker 3

Thank you very much and good morning everyone.

Speaker 4

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 will 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 spend CapEx to restart Titan?

Speaker 4

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 of Israel? Thank you.

Speaker 2

Thanks, Matt. On Trinidad, I'll talk about the kind of the near term and the reason we call it challenging is, I think previously that the gas market is tight in Trinidad. And 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 Bcf 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.

Speaker 2

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 as they 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 contract. And when you look at the economics under that contract in the short term, it made sense to run Titan.

Speaker 2

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. So it made sense from an economic perspective and also I would call it an organization perspective. We want to keep our team in place.

Speaker 2

Our global manufacturing team is part of our huge part of our organization. And we're really pleased that we've got that we'll have the Titan asset running at the end of next Steer and 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. 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.

Speaker 2

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 are other industrial producers in Egypt.

Speaker 4

Appreciate it, Rich. Thanks so much.

Operator

Our next question comes from Joel Jackson from BMO Capital Markets. Please go ahead. Your line is open.

Speaker 3

Good morning. A couple of 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 EBITDA to be higher, you said everything will be higher, will be higher than Q4 of 2022. And when you gave your price guidance of 3.10 to 3.20, Looks like you're using a higher discount rate than Q3.

Speaker 3

And then would you be having some inventory build in Q4 like you normally do?

Speaker 2

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 count 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.

Speaker 2

So we probably 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 a bit of context to the quarter for you.

Speaker 3

Okay. And then my longer term question. Yes, I just want to ask the 24, but that's a longer term now.

Speaker 2

Yes.

Speaker 5

If you look

Speaker 3

at the production profile for 2024, can we talk about like off a basis little more than 6.5. Can we talk about what you expect for 2024? 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.

Speaker 3

Like would you lose some tons? Would you be running both plants Overlapping for a month or would we lose some tons on our ramp down and our ramp up? Any other changes in New Zealand or anywhere else, maybe better gas in Chile? Like should we expect 2,000,000 tons born production next year, 1,500,000 tons, like can you just give us some ideas?

Speaker 2

Yes. We will update our guidance Formally towards the end of this year, but I will maybe I'll give you kind of some preliminary thoughts there. We are we will for Chile, Like I said, we'll be operating 2 plants at full rates until at least until April of next year. So 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 2 plants at Fulbright.

Speaker 2

So we're really excited about that and we'll be working on replicating that out in the for the summer month period for next year. So I would expect When we were at 800 to 900 this year, that number we hire for Chile. For Trinidad, we will we are going to be working as The gas contracts are working simultaneously. So we will be trying to I don't expect a lot of overlap there, But we will try it will be kind of an idling and then a startup of Titan. So you can Kind of do the numbers on how that change happens.

Speaker 2

And then I think the big one will be also G3. The intention 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 build before G3 starts kind of coming through the earnings. Egypt, we would expect similar results to we've been operating at high rates. And New Zealand will update our guidance today.

Speaker 2

It's at 1,300,000 to 1,400,000 tonnes. And we'll be 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 turnarounds as well. So more to come

Speaker 6

there. Thank you.

Operator

Our next question comes from Steve Hansen from Raymond James. Please go ahead. Your line is open.

Speaker 7

Yes. 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 how we should think about maybe even the medium, longer term profile for the production of the company.

Speaker 7

Yes.

Speaker 2

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 Muerta field in the Neuquen 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.

Speaker 2

And what they have done is they are working on connecting that field into the major grid in Argentina. Argentina consumes about 120,000,000 cubic meters a day in gas. What they did is they commissioned a pipeline that is now delivering in the Q3 that's now delivering 10,000,000 cubic meters into the grid. They're working on adding compression to that pipeline, which would add another 10,000,000 cubic meters per day into the grid as well. So and that will happen sometime in the first half of twenty twenty four.

Speaker 2

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 Wintershall and a consortium there called the ElPhoenix 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 2 plants at full rates during this This is sort of 8 month period. And like I said, the first time in a very long time, we've been doing that.

Speaker 2

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.

Speaker 7

Very good. Thank you. And just to just one follow-up on the G3 in terms of the commissioning And the inventory build that you described, I know it's early, but can you give us a sense for whether the 45 to 60 or 78 window you described will all take place in Q1 from your standpoint today or will that start to build through the later part of Q4?

Speaker 2

Yes. I think right now the way to do is starting in Q1. That would be probably the right way to think of it Around starting in around the beginning of Q1.

Speaker 7

Okay, very helpful. Thank you.

Operator

Our next question comes from Hassan Ahmed from Alembic Global. Please go ahead. Your line is open.

Speaker 8

Good morning, Rich. You guys saw a nice uptake across all your regions. Obviously, Europe Pricing wise, Europe is 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 ChinaAsian pricing. I mean even if I were to discount North American pricing.

Speaker 8

There is still, call it, as much as a $70, dollars 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.

Speaker 2

Yes, Hassane, 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, 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 Very 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 Reasonable pricing differentials between those.

Speaker 2

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.

Speaker 8

Understood, understood. And 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?

Speaker 2

Yes. So as of right now, We're not hearing any disruptions as of today. First, we are monitoring this situation very closely and really Hoping for a peaceful and sustainable resolution here for everyone. But we haven't seen any disruption. Israel doesn't have any meaningful really methanol demand nor is there any supply.

Speaker 2

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. So, but we haven't seen any of those disruptions Yes, 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 and but we haven't seen any of that yet, but we're really closely monitoring to see Obviously, what's going to how this is going to unfold.

Speaker 8

Very helpful, Rich. Thanks so much.

Operator

Our next question comes from Matthew Blair from Tudor, Pickering, Holt. Please go ahead. Your line is open.

Speaker 9

Hey, good afternoon or good morning, sorry. Could you talk about any opportunities you're looking at for your underutilized assets. Is there a chance that you could take apart Atlas, move it to the U. S. Like you did with some of your Chile plants a long time ago?

Speaker 9

Or is there an opportunity for converting those assets into an eMethanol plant?

Speaker 2

Yes. So We in terms of relocation in Trinidad at this point, we remain committed to Trinidad and We are we think there's a lot of incentives today to get assets underutilized assets operating in place where they are today and that asset operated really well for us in Trinidad. So we are focused there. Now, we have We do have experience relocating plants. We moved Chile 2 and 3 to Geismar.

Speaker 2

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 could probably save a year on 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.

Speaker 2

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.

Speaker 9

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, $150,000,000 to $200 or $200,000,000 range. I think you mentioned the debt pay down of about $300,000,000 next year. There's also the dividend of $50,000,000 plus Potentially a working capital build as you ramp up G3. Would the remainder, any remaining cash flow go to buybacks in that scenario?

Speaker 2

So I think the right number to use is on the CapEx is at the lower of your range around 150,000,000 And I think you've got all the numbers in terms of the other cash outlays. So yes, we're focused on the $300,000,000 bond. And I think as of today, today's pricing, We're probably that's the main focus. We generate a little over $200,000,000 in free cash flow with G3 $300 methanol price. Above that, then you're probably getting above the bond if you Get closer to $350,000,000 We still see the market environment today is supportive of what we need to repay the bond, but we're really focused on that.

Speaker 2

If we were to have a really stronger methanol market, then you start looking at free cash flow 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 delevering. But we're really focused on the $300,000,000 bond today.

Speaker 9

Great. Thank you.

Operator

Our next question comes from Josh Spector from UBS. Please go ahead. Your line is open.

Speaker 5

Yes. 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 start up, I mean, you're already purchasing and reselling some tons.

Speaker 5

So is there a way to size kind of the net impact as you would expect that to be in terms of cash used to build that inventory?

Speaker 2

Yes. 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 downward. You will see we are buying a lot of product today, which We will significantly reduce with G3 coming online because we're not going to be growing our sales by 1,800,000 tons Next year, we've already grown our sales. So you'll see a lot of purchased product being displaced by produced product, which would be supportive of lower inventory values anyways.

Speaker 5

Yes. So I appreciate that. I guess that's where it's kind of going. So the 2 kind of net offset each So there's so it's not really a major cash use. Is that kind of what you're saying?

Speaker 5

Or should we be thinking about it as somewhat of a cash use?

Speaker 2

Yes.

Speaker 5

Okay. And then the other question I have was just more on cost curve and just methanol price support. I mean, if I heard your comment correctly, You talked about $300 a ton methanol price support, your post pricing in China is higher. I guess, what do you view as the pricing driver Here, is it the fuel value? Is it coal?

Speaker 5

And then how does that evolve into next year in your view?

Speaker 2

Our posted price is higher, but after discount, we're probably in a we're kind of closer to that 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 into 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 pricing is in around $2.80 to $300 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 have on a kind of mid cycle basis. So we've seen tons of pressure on that sector that we would in a normal in a kind of mid cycle Energy pricing at $90 oil, we would expect much, much higher pricing.

Speaker 2

And especially when MTO is operating at the highest rates I think we've ever seen today. As an example, that sector is operating at 90 percent 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 Methanol prices higher than where we are today.

Speaker 6

Okay. Thank you very much.

Operator

Our next question comes from Laurence Alexander from Jefferies. Please go ahead. Your line is open.

Speaker 6

Hi, good morning. This is actually Kevin stock on for Laurence Alexander. So it looks like most

Speaker 5

of my questions

Speaker 6

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'm just trying to

Speaker 5

get a sense of your

Speaker 6

rate sensitivity too as it relates to your strategy. Thank you.

Speaker 2

Yes, thanks. Maybe when you think about the low carbon space, the strategy is really looking at both side, 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 planned to be in the water in the 20 27, 20 28 timeframe. It represents around 7,000,000 tonnes of demand if those ships are going to run on a methanol 100% of the time.

Speaker 2

So We are working with major international shipping companies. This is a container shipping segments leading the way, but there's interest in dry bulk, tankers and so at cruise ships. So we're working with that entry. We've got a number of MOU signed working closely with the shipping 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 for 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.

Speaker 2

We're having a lot of other discussions around blue and conventional methanol as well. So and then on the supply side, we're working on a number projects. I would say 1st and foremost, we've been certified to be able to purchase our Renewable natural gas in North America and produce green methanol at 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 offtakes.

Speaker 2

And 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.

Speaker 6

Great. Thank you very much.

Operator

There are no further questions at this time. I will now turn the call back over to Mr. Rich Sumner.

Speaker 2

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 Q4 results.

Operator

This concludes today's conference call. You may now disconnect.

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