Methanex Q2 2024 Earnings Call Transcript

Quartr
Provided by Quartr
July 31, 2024

There are 13 speakers on the call.

Operator

Good morning. My name is Aaron, and I will be your conference operator for today. At this time, I would like to welcome everyone to the Methanex Corporation 2024 Second 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

Thank you. I would now like to turn our call over to the Director of Investor Relations at Methanex, Ms. Sarah Harriott. Please go ahead, Ms. Harriott.

Speaker 1

Good morning, everyone. Welcome to our Q2 2024 results conference call. Our 2024 second quarter news release, management's discussion and analysis and financial statements can be accessed from the Financial 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 risks and uncertainties that may cause the stated outcome to differ materially from the actual outcome.

Speaker 1

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 Q2 2024 MD and A and to our 2023 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 reflects our 63.1 percent economic interest in the Atlas facility, our 50% economic interest in the Egypt facility and our 60% interest in Waterfront Shipping.

Speaker 1

In addition, we report 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 effects. 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. Rich Sumner, for his comments and a question and answer period.

Speaker 2

Thank you, Sarah, and good morning, everyone. Appreciate you joining us today as we discuss our Q2 2024 results. Our Q2 average realized price of $3.52 per tonne and produced sales of approximately 1,600,000 tonnes generated adjusted EBITDA of $164,000,000 and adjusted net income of $0.62 per share. Adjusted EBITDA was higher compared to the Q1 of 2024, primarily due to a higher average realized price. Our 2nd quarter was negatively impacted by $13,000,000 of G3 delay cost recognized in adjusted EBITDA, which was comprised of costs associated with monthly utilities take or pay contracts and employee costs.

Speaker 2

Excluding the G3 these G3 costs, adjusted EBITDA would have been $177,000,000 The safe restart of G3 continues to be our company's top priority. During the quarter, the G3 team completed the repair to the auto thermal informer and implemented conditions to allow us to progress back into startup. I'm very pleased to report that yesterday we reached 1st methanol production from G3 and we expect the plant to ramp up to full rates in the coming weeks. The safety performance of our team and partners on the T3 project has been outstanding. And I would like to extend my personal thanks to the team for their continued hard work and dedication to completing this project safely.

Speaker 2

G3 significantly increases our cash flow generation capability and has one of the lowest emission intensity profiles in the industry. Now turning to the Q2 methanol pricing and market dynamics. Our Q2 global average realized price of $3.52 per ton was $9 higher than the previous quarter. Through the 1st part of the quarter, methanol markets tightened with increased demand outpacing supply, leading to a significant global inventory drawdown and increasing methanol prices. Markets remain tight in the Atlantic basin and rebalanced in China in June when demand slowed down with several methanol to olefins or MTO units taking maintenance or lowering operating rates.

Speaker 2

We believe operating rates from MTO producers are increasingly becoming the balance on the global market as supply struggles to keep pace with demand growth. Overall, global methanol demand was higher compared to the Q1 of 2024. Traditional chemical applications and energy related demand grew above 3% compared to the prior quarter, driven by increased economic activity globally, seasonally high construction and transportation activities and favorable energy pricing, which continues to support methanol demand into energy applications. MTO demand decreased in the quarter as plants took outages or lowered operating rates in line with methanol supply constraints and increasing methanol prices. MTO operating rates decreased from around 85% in the first quarter to operating rates between 50% 60 percent through June and into July.

Speaker 2

With various improvements in methanol supply through the quarter, we've recently seen 1 large MDO unit restart, but 3 large scale units are currently idle, representing approximately 4,000,000 to 5,000,000 tonnes of annual demand. On the supply side, we saw various planned and unplanned outages and feedstock constraints restricting supply availability in the second quarter. This limited supply from various regions globally and in particular methanol production from Iran was slower to enter the market after seasonal gas restrictions. As a result, global inventory levels were under meaningful pressure, reaching 18 month lows low levels in China and increasing prices drove operating lower operating rates from the MTO sector, which led to a more balanced market in China. Towards the end of the quarter, we've seen various improvements in methanol supply and inventories globally, although markets remain quite tight.

Speaker 2

And as I already noted, there remains considerable MTO demand available to restart. We are seeing methanol pricing around $2.90 per tonne in China and we continue to see premiums above these levels in all regional markets. We estimate the marginal cost of production based on coal pricing in China to be around $2.70 to $2.80 per tonne. Looking ahead to the Q3, we expect to see continued tight methanol markets. We're seeing healthy demand growth across all traditional and energy related downstream sectors with empty operating rates influenced by the availability of supply.

Speaker 2

We anticipate this increasing demand will be met by increased operating rates in the industry as well as new supply from G3, which will be partially offset by our supply reduction in Trinidad in September when we shut down Atlas and restart Titan. Additionally, the 1,800,000,000 tonne plant in Malaysia has announced it will be starting in 2024. As always, we continue to monitor the macroeconomic environment and its impact on global methanol demand. Now turning to our production. Methanex production in the 2nd quarter was lower compared to the Q1 due to gas constraints in Chile, Egypt and New Zealand.

Speaker 2

In Chile, we're currently in the period of lower gas supplies available from Argentina, so we're operating one plant at less than full capacity. We continue to make progress on gas availability from Chile and Argentina. And based on production year to date, a successful turnaround at Chile IV that will improve efficiency on restart and progress we've made securing gas from Argentina for the non winter period this year, we expect 2024 production will be slightly above the high end of our guidance of 1,200,000 tonnes. In Egypt, the plant produced at high rates after the syngas compressor maintenance completed in mid February. In early June, the plant was temporarily idled when significantly increased seasonal demand for power generation due to elevated temperatures in the country led to various measures by the government to manage gas balances, including curtailments to industrial plants.

Speaker 2

The plant restarted at reduced operating rates shortly thereafter and has operated at fluctuating rates based on gas availability with current operating rates at approximately 80%. We've seen some stabilization of gas balances in the country, but we expect to see some continued limitations on supply as we progress through the Q3. In New Zealand, we operated 1 plant through the 2nd quarter due to both lower than expected gas deliveries from upstream suppliers as well as from the redirection of some of our contractual gas for use in the broader energy sector. The country's overall energy balances are currently very tight with demand seasonally high during the southern hemisphere winter combined with low hydro levels and relatively lower gas supply in 2024 compared with previous years. As a result, we believe some of our contractual gas has been redirected to the electricity and other domestic energy markets.

Speaker 2

We're in continuing discussions with our gas suppliers to ensure our contractual entitlements are being respected as well as engaging with our gas suppliers and government agencies in supporting efforts to improve energy balances in the country. Based on our production year to date and current gas deliveries, we expect 2024 production will be below the low end of our previous guidance of 1,000,000 tonnes. Now turning to our current financial position and outlook. We ended the Q1 with approximately $390,000,000 of cash. With the G3 plant now in the process of start up, the project is now complete.

Speaker 2

The total final capital cost is slightly less than $1,300,000,000 excluding fixed costs related to the delay and we do not currently have any further growth capital commitments. Our primary focus for capital for the remainder of 2024 is to repay rather than refinance the $300,000,000 bond due in December. Turning to the Q3. Our European quarterly price was posted at €535 per metric tonne, a €10 per tonne increase. Our North America, Asia Pacific and China prices for August were posted at 6.95 dollars $400 $3.80 per tonne respectively.

Speaker 2

We estimate that based on these posted prices, our July August average realized price range is between approximately $3.50 $3.60 per metric tonne. We expect adjusted EBITDA for the Q3 will be lower than the Q2 due primarily to lower produced sales from Chile and New Zealand and G III's initial inventory build post startup. We expect sales of produced product and earnings for the Q4 of 2024 to be more representative of the run rate of our company with G III at full production. We'd now be happy to answer questions.

Operator

Thank you. Our first question comes from the line of Ben Isaacson with Scotiabank. Your line is live.

Speaker 3

Thank you very much and good morning everyone. Two questions for me. First one is on New Zealand. New Zealand seems to be disappointing on a fairly consistent basis. Does it make sense to indefinitely idle one of the 2 Montanui plants?

Speaker 3

I mean there's several benefits for this. The risk profile of your portfolio of assets improves. You have reduced variability of free cash flow, which may result in a higher multiple. You take out a little bit of capacity from the market. Can you just comment on that?

Speaker 3

Thank you.

Speaker 2

Thanks, Ben. Yes, so right now we're working through a lot of I'd say 2 big issues right now. 1 is, as you say, I think the gas from the upstream, the investments that are being made in existing fields, both new wells as well as investing to enhance performance of existing wells. I think we've seen gas deliveries lower than expectations. I think we also are working through the short term dynamics in the industry where we believe some of our gas that would be coming to us may not be.

Speaker 2

And that's so that's something we're also working through. But certainly, right now, I think you should be thinking about in the foreseeable months here a one plant operation. And over the next few months, we'll be assessing what our views are for the rest of the year and considering how we should be operating those assets. So I think there'll be more to come as we assess the rest of the year here.

Speaker 3

Thank you for that. And my follow-up question is on the Entropy deal, which is really quite interesting, but it's also a little bit scary because there's the potential for others to do this as well. So can you run through what are the constraints for that's preventing everyone else from kind of copying what you've done and adding another 5% to 10% of supply, that would be helpful. And actually, if you could actually maybe give a number in terms of how much capacity is there that can be that could also

Speaker 4

do this? Thank you.

Speaker 2

Yes. Maybe I'll just give a bit of background on that project. I think 1st and foremost, we're happy to be working with Entropy, which is a technology provider who already has this technology in place in gas processing plant in Alberta with sequestration. I think when you think have to think about jurisdictions that, 1, are going to have regulatory and supportive regulatory framework. We also have to have sequestration available.

Speaker 2

And so it's not I wouldn't say it's just easy to replicate. But we're excited to be exploring this opportunity in the pre feed stage here. Just to give you a sense, it will capture about 400 metric tonnes of CO2 per day, about 2 thirds of that would be used in our production and the remaining third would sequestered in underground caverns close to our plant. And that's all being worked on, the infrastructure on making this commercial. And so we're excited to do it.

Speaker 2

I think this debottlenecking will add, like we said, around 50,000 tonnes of low carbon methanol. And so yes, we'll work through everything in this pre feed stage and trying to get to a point of decision making sometime in the middle of 2025.

Speaker 3

Thank you very much.

Operator

Thank you for your question. Our next question comes from the line of Mike Leithead with Barclays Capital. Your line is live.

Speaker 5

Great. Thanks. Good morning, guys. First question, just on G3, congrats on successfully starting that up. What is your current expectation for when that should be sort of fully running, fully utilized, fully flowing then through the P and L and you guys are getting commensurate earnings?

Speaker 5

And then if we just kind of use where we are roughly today in terms of methanol and gas, just what's your sort of latest best estimate of the annualized EBITDA we should expect from this plan?

Speaker 2

So I guess the wrap up I'll start with the wrap up period. We expect as we disclosed, look, we'll be ramping up to full rates in the coming weeks. As of today, the plant's operating at 70% operating rates, which is how we start up a plant and then we steadily increase over time. There could be points in time where you're testing all the different elements of the plant and you may take it down for a period to bring it back up. But as of right now, we're at 70% operating rates and we'll be there for a period to increase steadily increase in the coming weeks here.

Speaker 2

So the ramp up is relatively we plan it to be relatively quick. In terms of how it will actually impact earnings, I think that it's safe to say we don't expect a lot of G3 coming through in the Q3. But we would expect that to be a fairly sometime around the end of this quarter and the beginning of next quarter. So inventory flows are not all that easy to track through our system, but I would say it's we've guided that 2020, the Q4 should look something like a run rate with G3. In terms of the run rate EBITDA from G3, we've guided that at $3.50 a tonne, which we think we're slightly above that, that it generates around $200,000,000 to $250,000,000 in EBITDA per year depending on gas between $3 $4 in MMBtu.

Speaker 2

So hopefully that answers your questions there.

Speaker 5

Yes, that's super helpful. And then just a couple of quick follow ups on the entropy announcement. NTRP announcement. First, is that correct in hearing that if everything goes to plan, you should expect to make FID by mid-twenty 25. 2, can you just speak to how dependent this project going forward is on receiving government funding?

Speaker 5

And then just briefly, is this sort of a one off opportunity just because of the plan and the location? Or if this goes well, this is something you could seek to replicate at some of your other plants as well?

Speaker 2

Yes. So I'll start with start with this the initial phase and the timelines here. So this is a phase this is actually this project is part of an initial a 2 step phase project. The first phase is a unit that would capture 400 metric tons per day. About 2 thirds of that would be used in our production and about a third would be sequestered underground.

Speaker 2

So that when you think about value, what we will be paying, we'll be paying for that CO2 value in methanol production for 2 thirds of it and another third will be we'll need to get carbon credits for sequestering CO2. And there's obviously a regime of carbon tax and carbon credits in Canada that we will be that will support this project. In addition to that, there's other incentive programs provincially and federally that this will look to access and we think that we will be eligible for. All of those things we'll be looking at through the pre FEED stage. The Phase 2 of the project is actually to really scale this, such that you would triple the size of it and you would capture all of our Scope 1 emissions and sequester all of the effectively all of the CO2 from the Scope 1 of the plant.

Speaker 2

That will take more work, more infrastructure that would be required and a lot more certainty around the carbon framework that would support and carbon pricing framework that would support that second phase investment. So hopefully that helps answer your question.

Operator

Great.

Speaker 5

Thank you.

Operator

Thank you. Thank you for your questions. Our next question comes from the line of Josh Spector with UBS. Your line is live.

Speaker 6

Hey, guys. This is James Cannon on for Josh. I just wanted to poke on what's going on with the discount rate. It seems like while it's crept up over time this year, it's been a lot higher so far. I think based on your comments on Q3 to date, it seems like we're relatively stable with the last quarter's levels.

Speaker 6

But kind of looking beyond that, how should we think through the rest of the year and kind of into next?

Speaker 2

Well, I think when we look at our pricing, we've been guiding for the Q2, we guided to around $3.45 to $3.50 per tonne. I think we averaged $3.52 per tonne for the quarter. For this coming quarter, we're guiding to $3.50 to $3.60 per tonne. And when I look at where pricing is, we've got cost curve levels at $2.90 to $300 per ton in China. So I think when we look at it, we're setting price as to what a reasonable market price should be in all the regions we're selling into and we're achieving significant premiums, I think, which is reflective of tight market balances, which we expect to continue for the rest of the year, as I said in the earlier remarks.

Speaker 2

So we're not as focused on the discount. We're focused on realizations. And I do think you've seen discounts creeping up mainly because that's the competitive way of pricing into the market, not what we think is reflective of lower

Speaker 6

realizations. Okay, got it. And then I think through the quarter, I saw some reports on curtailments to Trinidad gas. I think you called out a couple of unplanned outages. I was wondering were those related?

Speaker 6

And can you comment on how you're seeing that develop through this quarter?

Speaker 2

Yes. So those were not gas related. Our outages was we had our air separation unit went down in Trinidad and we had to perform some maintenance in Trinidad. But there was gas outages in the upstream during the quarter, didn't affect our operations, but it did affect other producers at the point leases estate. So, but yes, unrelated for our Atlas operations.

Operator

Okay. Thank you. Thanks for your questions. Our next question comes from the line of Joel Jackson with BMO Capital Markets. Your line is live.

Speaker 7

Hi, Rich. I'm going to ask 3 quick questions if you allow me. First, on your maintained guidance for 7,000,000 tonnes of Methanex produced volume, How round is that 7,000,000 tonnes? Is it more like 6,500,000 to 7,000,000 tonnes? And the reason I say is to make all your numbers work, it's kind of hard.

Speaker 7

You say Q3 production will be a little bit lower than Q2. To get that 7,000,000 for the full year, you need to run rate, I don't know, like a 10,000,000 tonne run rate in the 4th quarter. That'd be everything going full out. Can you maybe talk about how round the 7,000,000 ton number is?

Speaker 2

I think we feel good about the 7,000,000 ton with G3 where it is right now and our expectation for G3. I've talked about some ups and downs as it relates to Chile and New Zealand and I think most of the other things are factored in. So we feel pretty good at the 7,000,000 tonne range for the quarter or for the year, sorry.

Speaker 3

For the year, got you.

Speaker 7

And then second question, second question, the Egypt repair that you had, you obviously put back online 7 months ago. You've got some insurance settlement maybe coming from that. Can you talk about that? And that's obviously not including your EBITDA forecast, but I imagine that would be put into EBITDA one of these quarters coming up.

Speaker 2

Yes, we expect to collect on insurance in the coming quarter. So I think that's going to we should expect to see insurance proceeds coming in, in Q3.

Speaker 7

But that's not included in your guidance in the outlook last night?

Speaker 2

No, that's not included in the guidance.

Speaker 7

And finally, I mean, now that you're just you've got G3 starting up the last day or 2, HubSpotter probably ramped up over the next month or so, got the maturing debt later in the Q4, What is the signpost now to be comfortable to buy back stock when you're ready to go again on the buyback?

Speaker 2

I mean, right now, our first priority is to the debt and we still have some cash to build in advance of that. So that's our main focus today. I think once we move past that, we don't have any major growth capital. I think we can start looking at use of capital beyond that. We have said that there'd be we've got a very strong free cash flow profile as you know and there would be room for considering share repurchases along with we do think there's some room for the debt, but we think we can do things at a balanced way there post building up for our $300,000,000 debt repayment.

Speaker 2

So I think what we want to do is focus on that today. And then once we get confident we're there, we can consider other uses of capital beyond.

Speaker 7

Thank you.

Operator

Our next question comes from the line of Steve Hansen with Raymond James. Your line is live.

Speaker 8

Yes. Good morning, guys. Thanks for the time. I wanted to follow-up on Joel's question indirectly about the buyback. I think in the past, you said that €200,000,000 to €250,000,000 of cash is sort of like a comfortable position you'd like to keep on the balance sheet at any given time just to operate the business methodically?

Speaker 8

I mean, has that changed at all with G3 production coming online? Do you need slightly more than that? Just trying to get a sense for that comfort position, so we can think about the excess cash build and how that might go to other uses?

Speaker 2

Yes. I think we would be in the range of $250,000,000 to $300,000,000 Just when we look at where our cash is earned and how we need to move it around to run the business, that's sort of our comfort level. So I wouldn't think that there's a meaningful change with G3 and not having the capital spend there. But yes, that's sort of a range to be using, Steve.

Speaker 8

Okay. That's helpful. And then just jumping over to Chile, you've obviously been successful at procuring some additional gas there. You've talked about increased availability there before, but it's taken some time to ultimately execute on getting the gas. Is there anything changed in the market down there that's allowed you greater comfort to secure more gas?

Speaker 8

Or what are we seeing down there?

Speaker 2

I'm very comfortable around securing gas outside of the winter period, right? We've got a lot of gas available to us from Argentina outside the winter period, in fact, more than our needs. I think we're being offered more than we need for our Chilean operations, which is very positive. The challenge will be through the winter period because gas is restricted from an export perspective. We are in early discussions there about the winter period because the country is increasingly trying to ramp up pipeline connections and gas takeaway capability out of the Vaca Muerta.

Speaker 2

They're also developing fields in the south, which is going to add in another 5,000,000 cubic meters into the grid that's effectively stranded. And so, we're a very logical purchaser for that gas. So, I think these things are going to develop, but our goal is to have year round gas in Chile given the dynamics in Argentina.

Speaker 8

Okay. That's helpful. And then just one final one, if I may, is going back to Ben's question at the very outset and some of the challenges in New Zealand. I mean, is there an ability to move any one of those plants over time you've done in the past? Those are older facilities, of course, but is there any context around whether a move of facility might make some sense in terms of optimization of the footprint?

Speaker 2

Yes. Well, I guess the first thing is, maybe just the relocation economics and how they work. Relocation economics aren't significant savings over on capital. And so it's usually if you're looking at that, it's more trying to execute a project to grow methanol supply in a shorter timeframe and that's where you get value. I don't think we're in that position today.

Speaker 2

These plants are not I don't think would be the plants you would look to move. And I don't think we're in a position today to be making that decision or being exploring that based on our gas outlook at this point. We want to we need to get a better feel for the medium, long term in the country before would be looking at anything like that.

Speaker 8

Okay, very good. Appreciate the help.

Operator

Thanks for your questions. Our next question comes from the line of Hassan Ahmed with Alembic Global. Your line is live.

Speaker 4

Good morning, Rich. Just wanted to revisit a bunch of questions that were asked earlier about New Zealand. I mean, obviously, you guys have gas contracts in place over there. I'm just trying to get a sort of if you could dig a bit deeper into the structure of those contracts. Is there any restitution?

Speaker 4

Could you receive any payments maybe for the gas deliveries that did not happen?

Speaker 2

So I think maybe I'll start with the contracts themselves. These contracts, we have entitlement to gas per year, but that is based off of what they are bringing to market, right? And there is priority in terms of gas. And so if the gas is available and our contracts should be fulfilled, yes, there's restitution that should be paid. And that's certainly when we say we're in discussions with our gas suppliers.

Speaker 2

These are some of the discussions that are being had. Now if the gas is not available and their portfolio is not delivering, that's another issue. We don't have deliver or pay obligations on those gas contracts if the gas is not producing. So I think there's 2 issues there and we're dealing with both of them right now.

Speaker 4

Very helpful. And as a follow-up, on the demand side of things, in sort of the press release, you guys talked about global methanol demand being up sequentially. Just wanted to get a better sense of what the inventory situation looks like? Is demand improving? Maybe potentially because of a restock?

Speaker 4

And part and parcel with that, what are you guys seeing above and beyond just the MTO side in terms of Chinese demand? And maybe if you could on the China side also parlay that with if you are possibly seeing any maybe shutdowns in Chinese capacity as well?

Speaker 2

I will. Thanks, Hassan. In terms of overall demand, maybe I'll just give a snapshot of the market globally and look to last year and where we are this year. Last year, we would say the market was probably around 92,000,000 tonnes. And that does include a slow start in China.

Speaker 2

But today, for the first half of 2024, we're probably in the 95,000,000 to 96,000,000 tonnes. And that's with MTO flat or slightly lower than last year. So when we think about demand growth, it's actually been pretty strong and healthy around the different sectors compared to last year. I think when we look around the markets outside of China, growth rates are about 3% over last year. And then when we're looking in China, we're seeing growth rates for traditional demand at about 4% to 5% over last year.

Speaker 2

And then the energy related demand that's in China, which is quite meaningful, is also at around 4% rates over last year. So I think that's actually really putting stress on the methanol markets and the ability to meet that demand with supply. And that's where the MTO sector, I think, is really becoming that balance. When we think about China demand, the domestic economy is still something we watch really closely and Export markets have been stronger this year, which has helped bring that demand up. In terms of operating rates in China, we're seeing operating rates in China above 60%.

Speaker 2

So that's actually reasonably high relative to past performance there. And so we don't think there's a lot of latent capacity that can come on in China to meet this growing demand. So we do that's our view is that we are in a tight market. Inventories are reflective of that. There could be swings between when MDO shuts down and when it starts up.

Speaker 2

But we would say we're in a pretty structurally tight market right now with inventories pretty tight.

Speaker 4

Very helpful, Rich. Thank you so much.

Operator

Thank you for your question. Our next question comes from the line of Nelson Inc. With RBC Capital Markets. Your line is live.

Speaker 9

Great, thanks and good morning everyone. First question is on Trinidad in terms of Titan restarting and mothballing Atlas. Now that you're kind of heading up to that point, should we expect any kind of one time costs to impact EBITDA in Q3? And then also, is the gas contract, the current one that's expiring, does it expire like in early September or at the end of September?

Speaker 2

So yes, the in terms of cost, you shouldn't expect any cost. And we are planning this to be quite a seamless transition from Atlas to Titan. So we are not expecting a lot of downtime or periods where we're not producing at all in Trinidad. And then when it relates to gas contracts, you can think mid September timeframe for the changeover there.

Speaker 9

Okay. And then just to clarify on the Atlas asset, are there any do you expect any like write downs or is there any debt still at Atlas that needs to be repaid over the next over the coming months?

Speaker 2

No debt. And when we think about the asset values, we look at Trinidad as a group and that's something we always review. I don't think we're going to point towards any asset write downs at this time and but we do look at it. These assets are they're older assets. So we don't have a ton of book value associated with them.

Speaker 2

And but that's something we'll look at as we look at our accounts each year.

Speaker 9

Great. Thanks. And then my next question relates to the So I think your partner is going to be investing most of the CapEx or it will be coming from grants. So from your perspective, like from a cost perspective, is it mostly the are you paying for the operating costs and the CO2 feedstock that you'll be using?

Speaker 2

So is it somewhat

Speaker 9

neutral from a cost per metric ton of methanol production? Or is it going to cost you more because you're producing lower or less carbon intensive methanol? Can you just talk about the economics, assuming the pre FEED and FEED and all that gives you the green light to move forward with the project?

Speaker 2

Yes. Thanks. So commercial arrangements aren't finalized. That's one thing I want to start with where a part of the pre FEED will also be looking at what the commercial structures should look like. And so I think when we what we in our initial press release, we said Entropi would own construct and own the unit.

Speaker 2

Obviously, they are the technology provider and the experts on this technology. But we're looking at the commercial arrangements as part of the pre FEED process. But when you think about the economics, you're right. Like the as I said, 2 thirds of the economics will come from what we pay for the economics of producing methanol to produce incremental tonnes. And then the remainder will come through sequestration of value of carbon credits for storing CO2 underground.

Speaker 2

So you can think of the methanol generating 2 thirds of the value and the carbon credits generating 1 third of the value. And as it relates to those pricing, we're looking at what it takes to make this project work. And in addition, I think what regulatory support is available that will help push this forward as well. So and all of that, we're looking through the pre FEED process.

Speaker 9

Okay. So I guess very big picture, for it to work from Methanex's perspective given that you're mainly kind of paying for the CO2, is do you want to be kind of cost neutral but generate lower carbon intensive methanol? Is that your like is that the benefit you're looking for or?

Speaker 2

I think maybe your question is a little bit are we expecting to generate a blue premium or something that allows us to market this above cost. I don't think that the blue if that's the question, I don't think the blue there's a blue methanol market today that we're expecting is going to support this project because that market really is undeveloped. And so what we need is the value of this methanol from a conventional methanol to work and to make sense in terms of generating additional earnings or EBITDA from that methanol production.

Speaker 3

I see. That makes sense.

Speaker 9

I'll leave it there. Thank you.

Operator

Thank you for your questions. Our next question is from the line of Matthew Blair with TPH. Your line is live.

Speaker 10

Thank you. Good morning, Rich. Could you give us a sense on exactly how much inventory you're looking to build in the Q3 or any sort of metrics like days inventory you're targeting with G3 online?

Speaker 2

Yes. I think, 1st foremost, like I think a lot of the inventory will be managed through our sales levels. And we don't expect that our sales levels change dramatically with G3. What we will see is a mix of inventory. We'll have more produced product and less purchased product in our system.

Speaker 2

So it's we're not targeting a change in inventory to support G3. I do think what you should expect to see is that this is lower cost inventory that we'll be holding versus buying product on the market. So there could be some positives on our working capital that we can look forward to on that.

Speaker 10

Sounds good. And then the G3 delay costs were $25,000,000 in the 1st quarter down to $13,000,000 in the 2nd quarter. Should we pencil in anything for the 3rd quarter?

Speaker 2

No. Well, yes, sorry, 1 month of G3 delayed cost for July. And that will be kind of you could take our number in the second quarter divided by 3.

Operator

Great. Thank you. Our next question is from the line of Laurence Alexander with Jefferies. Your line is live.

Speaker 11

Good morning. Could you give a quick update on sort of how quickly the marine demand should be flowing through in the next couple of years? I mean, we see kind of the longer term build rate, which is how much of an impact we should be thinking of for next year. And how much of how are those companies discussing with you sort of supply, given sort of how the tight the market looks to be getting?

Speaker 2

Yes. Thanks, Lauren. So on the marine demand, maybe talk to where we are today and then how that will kind of develop over time. Right now, we talked about last year being the 1st year where methanol ships outpaced LNG in terms of the order book. Right now, we're expecting that order book is well over 300 ships on the water in the 20 28, 20 29 timeframe.

Speaker 2

And I think what we're doing is talking about demand potential because it's difficult to say exactly what the demand would be. And when we quote demand potential, we're not saying this is what the total demand will be. But the demand potential will start off next year probably the total demand potential is somewhere close to 10,000,000 tonnes now. There will be a 1,500,000 or so next year and then you build up to 3.5 and then you're up to 7 and then you work your way into the 10,000,000 tonnes of demand potential. Now the big question is what will they actually burn because these are dual fuel vessels.

Speaker 2

And to your point, we're having a lot of discussions with shipping companies about supply. And I think a lot of those discussions start with low carbon or green methanol because that the intent here is a lot of these ships are looking to methanol from a decarbonization perspective. I think they're seeing that, 1, there's not a lot of availability and 2, the cost is really high to begin with. So we're also we are in discussions as well about conventional methanol. I think securing supply is going to be critical and that's what our low carbon solutions team is working on with the shipping company.

Speaker 2

So, it's really hard for us to kind of give you precise numbers until we've worked through starting to see securing some contracts and working with the shipping industry more as they make their decisions on these future fuel choices they're going to make. So we hope to be able to give you more insight as this develops, because we are getting closer to the time frames where these ships are in the water.

Speaker 3

Thank you.

Operator

Thank you for your question. We have a question from Charles Neivert with Piper Sandler. Your line is live.

Speaker 12

Good morning, guys. You talked about MTO being sort of the tipping or balancing point for the industry. Can you talk a little bit about where the price of methanol needs to be to sort of push it out or take it back in? I mean, we're sort of balancing on the line maybe now. Can we go higher and still keep the MTO plants in or and this is all assuming that the ethylene and polyethylene markets stay approximately where they are.

Speaker 12

But under that circumstance, where are we on that pricing?

Speaker 2

Yes. I'll start with the pricing. We're at very low pricing, low like historically low. So it's hard to see it getting worse. We've had ethylene propylene prices in Asia be between $800 $900 per tonne for quite some time.

Speaker 2

And that just on a historical basis, that would be correlated to about a $40 oil price environment. And so we think that there really is a low at the very low cycle right now. That translates into a C2, C3 kind of straight affordability at around where the cost curve is today. So call it that 280 level. These guys have integrated there are a lot of them are integrated downstream.

Speaker 2

So when you look at integration and the full value chain, there's usually more value when you go further down and so it's higher than that. But I think when we start moving into pricing from ethanol, kind of getting above the $320,000,000 to $350,000,000 range, we start to some pressure on their operations. And today, pricing is in and around that $290,000,000 level and it's holding. So and we've seen 1 MTO unit large scale just recently start up. So I think we're kind of in this where cost curve and MTO affordability is in this $2.80 to $3.20 kind of level and we've seen that be quite stable in China around that.

Speaker 2

If there's an improvement in ethylene and propylene markets, you would expect that the ability to pay goes up and increasingly this is a demand driven industry right now. And so we think that that would further support pricing.

Speaker 12

Thanks very much.

Operator

Thank you for your question. And ladies and gentlemen, there are no further questions at this time. And I'll now turn the call back over to Mr. Rich Sumner.

Speaker 2

Right. Well, thank you for your questions and interest in our company. We hope you'll join us in November when we update you on our Q3 results.

Operator

Thank you. And this does conclude today's conference call. You may now disconnect. Have a great day.

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Earnings Conference Call
Methanex Q2 2024
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