Methanex Corp Q1 FY2023 Earnings Call

Good morning. My name is Brent and I will be your conference operator today. I would like to welcome everyone to the Methanex Corporation 2023 First Quarter Results Conference Call. All lines have been muted to avoid background noise. After the speakers' remarks, there will be a question-and-answer session. I would now like to turn the conference call over to the Director of Investor Relations at Methanex, Ms. Sarah Herriott. Please go ahead, Ms. Herriott.

Good morning, everyone. Welcome to our first quarter 2023 results conference call. Our 2023 first quarter news release, management discussion and analysis and financial statements can be accessed from the Reports tab of the Investor Relations page on our website at methanex.com. I'd like to remind our listeners that our comments and answers to your questions today may contain forward-looking information. This information, by its nature, is subject to risks and uncertainties that may cause the stated outcome to differ materially from the actual outcome. Certain material factors or assumptions were applied in drawing the conclusions or making the forecasts or projections, which are included in the forward-looking information. Please refer to our first quarter 2023 MD&A and to 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 guidance between quarters. For clarification, any references to revenue, average realized price, EBITDA, adjusted EBITDA, cash flow, adjusted income or adjusted earnings per share made in today's remarks reflects our 63.1% economic interest in the Atlas facility, our 50% economic interest in the Egypt facility and our 60% interest in Waterfront Shipping. In addition, we report our adjusted EBITDA and adjusted net income to exclude the mark-to-market impact on share-based compensation and the impact of certain items associated with specific identified events. These items are non-GAAP measures and ratios that do not have any standardized meaning prescribed by GAAP, and therefore, unlikely to be comparable to similar measures presented by other companies. We report these non-GAAP measures in this way because we believe they are a better measure of underlying operating performance and we encourage analysts covering the company to report their estimates in this manner. I would now like to turn the call over to Methanex's President and CEO, Mr. 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 first quarter 2023 results. For the first quarter, our average realized price of $371 per ton and produced sales of approximately 1.65 million tons generated adjusted EBITDA of $209 million and adjusted net income of $1.11 per share. Adjusted EBITDA was higher in the first quarter compared to the fourth quarter, primarily due to higher sales of Methanex-produced methanol driven by higher production in Egypt, Atlas, and Chile. Throughout the first quarter, we saw a relatively balanced global market, which continues to be underpinned by high global energy prices. Global methanol demand in the first quarter was flat compared to the fourth quarter 2022. Demand for traditional chemical applications decreased slightly due to the seasonal slowdown in manufacturing activity, including the slowdown in China during the Lunar New Year. Demand for methanol to olefins, or MTO, increased slightly in the first quarter with some improved operating rates through the quarter as several production units increased production on improving margins and increased methanol availability. Demand for energy applications, including MTBE, biodiesel, and various fuel applications in China increased slightly, driven mainly by levels of economic activity as well as continued cost competitiveness in today's high energy price environment. During the first part of the quarter, industry operating rates in China and Iran were negatively impacted by the seasonal diversion of natural gas to meet power demand, and Atlantic operating rates were lower due to planned and unplanned outages. Starting near the end of the first quarter, we saw strong operating rates in the U.S. Gulf and easing of gas curtailments in China and Iran, leading to increased production, which led to lower methanol prices globally. Our average realized price for the first quarter was $371 per metric ton compared to $373 per metric ton for the fourth quarter. And our first quarter discount rate was in line with our guidance for 2023 at approximately 21%. Coal pricing in China continues to remain strong at a level above RMB1,000 per ton, and we estimate the industry cost curve based on a marginal producer cost in China to be approximately $320 per ton to $340 per ton. Our May posted prices in North America, Asia Pacific, and China decreased by $20, $10 and $15 per metric ton, respectively, and our Q2 European price was posted EUR10 per metric ton higher than Q1 2023. We continue to closely monitor the macroeconomic and energy price environment with inflationary pressures and resulting tight monetary policies presenting headwinds for global economic growth. Notwithstanding these risks, we expect demand for traditional chemical applications to increase as we move into the housing and construction season and from continued growth in the Chinese economy after their COVID reopening and Chinese Lunar New Year holiday in the first quarter. In addition, MTO operating rates have continued to improve, and two MTO units representing approximately 1.5 million tons of annual demand are in the process of restarting production. We also continue to see a high global energy price environment, which enhances methanol's cost competitiveness against alternative fuels supporting demand growth. In the short term, we expect the recent methanol operating rate increases mainly from Iran and China to support increasing demand. For the remainder of 2023, we do not anticipate capacity additions besides one plant in China and our Geismar 3 project with expected production in the fourth quarter. Regarding the emerging marine market, interest from the marine industry and orders for dual-fuel vessels able to run on methanol continue to grow. During the first quarter, approximately 35 additional vessel orders were placed, bringing the total number of dual-fuel vessels on order to over 135. We estimate that demand potential will grow from approximately 300,000 tons today to 4 million tons over the next few years. In February, we completed the first-ever net-zero voyage, fueled by bio-methanol produced from our Geismar plant in partnership with Mitsui OSK Lines or MOL. Our collaboration with MOL demonstrates the versatility of methanol as a great fuel with a pathway to net-zero emissions. Turning to operations, our production levels were higher in the first quarter compared to the fourth quarter with limited unplanned outages. The team safely and successfully completed a planned turnaround at G1 with the plant restarting production in February. We ended the first quarter in a strong financial position with approximately $709 million of cash, excluding non-controlling interest and including our share in the Atlas joint venture and with $300 million of undrawn backup liquidity. We remain committed to returning excess cash to shareholders through our ongoing 5% normal course issuer bid that expires in September. And we announced that our board approved an increase of our quarterly dividend by 6% to $0.185 per share. This group increases in line with our 5% share repurchase program and maintains our cash outlay for dividend payments at approximately $50 million per annum. Construction on our G3 project is progressing safely, on time, and on budget, with production expected in the fourth quarter of this year. Overall, the G3 project is over 80% complete, and the team has started to shift from mechanical construction activities to commissioning activities. The expected G3 capital remains unchanged at $1.25 billion to $1.3 billion, and we have spent approximately $995 million before capitalized interest to the end of the first quarter. The remaining $330 million to $380 million of cash expenditures, including approximately $75 million in accounts payable, is fully funded with cash on hand. Looking ahead to the second quarter of 2023, we expect a lower methanol price environment, and as a result, we're expecting a lower adjusted EBITDA in the second quarter of 2023 compared with the first quarter. Our overall production guidance for the year of 6.5 million metric tons of equity production excluding G3 remains unchanged. In the medium term, the methanol market outlook is positive and we will have growing cash flow generation capability with G3 production expected in the fourth quarter of this year. At a $375 per ton realized price and $4 per mmBtu gas price, we expect G3 to generate approximately $250 million of adjusted EBITDA per year. With our G3 project being fully funded with cash on hand and our ability to generate meaningful cash flows across a wide range of methanol prices, we are well-positioned during this period of economic uncertainty to maintain a strong balance sheet, pursue economic value, growth of value-added growth opportunities, and continue returning excess cash to shareholders. We would now be happy to answer questions.

Your first question is from Joel Jackson with BMO Capital Markets. Your line is open.

Good morning.

Hi, Joel.

One trend that we've been watching in methanol has been that your posted price for North America versus U.S. Gulf spot to the premiums of the North American posted price versus U.S. Gulf spot have been quite high, reaching some of the peaks that you've had in the last seven years. Can you talk about that? And typically, that's not been a bad time to have Methanex stock when the premiums have actually been higher than normal?

Certainly. Over time, new capacity has been introduced in the U.S., which is a market that is heavily contracted. Many new U.S. producers have not fully contracted their production. In the first quarter, U.S. Gulf production was relatively low, but as the quarter progressed, it returned to higher operating levels. Many of these producers are depending on exports in a small U.S. spot market, which likely accounts for less than 5% of the overall methanol business in the country. During periods of high volume, we see distress pricing, and at one point, spot market prices dropped to around $250 per ton. Currently, they are closer to $300 per ton. There are times when prices dip significantly due to a limited number of cargos available at the same time that production levels are high. However, I don't see this as reflective of global methanol prices. New supply from Iran and China, along with U.S. Gulf producers, has contributed to the reductions in our contract pricing for several consecutive months.

Okay, before I ask my second question, I just want to get a clarification. Did you say that Q2 earnings would be lower than Q1 of 2023 or lower than Q2 of 2022?

Lower than Q1 of 2023, just based on our decrease in methanol prices that we've had over the last few months.

And then my question would be then, so in the commissioning phase of G3, that's great and still targeting first production for Q4. Is there a path if things go right, you could have first production in Q3? Like what would have to happen to that first production in Q3? Or is that not possible?

Yes. Maybe just I'll speak to G3. So during the quarter, we completed our 60% construction completion review. This is the last real deep dive on both cost and schedule. And that confirmed both our cost estimates of $1.25 million to $1.3 million as well as our expected start-up timing in the fourth quarter. We are really concentrated first and foremost on safety for this project. And then, of course, quality as well. And so we're not, we feel really good about the progress that we're making there and the timelines we have is to deliver high-quality projects safely on time, on budget.

Okay. Thank you.

Your next question is from Ben Isaacson with Scotiabank. Your line is open.

Thank you very much, and good morning, everyone. Two questions for me, one long term and one short term. On the long term, Rich, when you think out kind of 5, 7, 10 years into the future, can you talk about the possibility of a new project for Methanex? Is that something you're thinking about? And if so, what would the kind of timeline be and what locations would you be thinking about?

Yes, thank you, Ben. Looking ahead, we see a positive demand-supply outlook, especially in the medium to long term. We are aware of current economic challenges that may affect the pace of demand growth. Even when we forecast modest growth rates, taking into account potential demand for marine fuels, we don't anticipate significant capacity additions. Our G3 project positions us well for the medium term. However, to execute a project today, considering all the necessary work, it would take until the end of the decade to add a new project. Currently, we are focused on advancing a range of options. While this won't involve substantial capital investment in the next few years, it is about creating possibilities for the company regarding which growth opportunities to pursue next. We will proceed carefully, assessing the market and defining our growth strategy. The timelines indicate that starting today, even through the selection process, would require several years before entering activities like front-end engineering design, final investment decision, and construction, by which point we would already be at the end of the decade before a new project is in place.

And just as a follow-up to that, excuse me, how do you balance some of the idle plants, such as Waitara Valley or Titan or even in Chile? It doesn't run through the summer. Would it be something that you would consider possibly relocating one of those plants, or is this something that would be greenfield, or is it just way too early right now?

I think that we have several options to consider, including both brownfield opportunities within our portfolio, such as Geismar and Medicine Hat, as well as land in Egypt. We are also evaluating greenfield sites in other regions. Relocating plants is an option, but it's probably not our main focus. In assessing plant relocations, the economic benefits may not exist. However, we aren't ruling it out entirely. Currently, our main priority is securing enough gas to bring those plants online, and we want to explore opportunities to utilize that capacity where it is present. Overall, we are considering both brownfield and greenfield options.

Great, thank you. I have a quick question regarding the short term. You mentioned the cost curve, supply and demand, and freight. Can you provide some insight on inventories? How are inventories looking throughout the channel? Are they elevated based on what you can see?

I think it really depends on which market you are focusing on. We've experienced very low inventories in the Asian markets, particularly in China. Even currently, we are likely not back to average inventory levels; there is product available, and we expect that some of this might be addressed with additional product from Iran, but overall levels remain below average. In the Atlantic markets, recent operating rates have influenced pricing in the U.S. because we needed to export a certain volume. Europe seems to be at balanced inventory levels, while the U.S. has been high and required exports. So, the situation varies globally, but I would say that, overall, we are currently in a balanced market.

Great. Thanks so much. Appreciate it.

Your next question comes from the line of Hassan Ahmed with Alembic Global. Your line is open.

Good morning, Rich. Just wanted to revisit near-term supply/demand fundamentals. Obviously, in the commentary, a bunch of puts and takes around supply. I mean this you guys mentioned Natgas being redirected in Q1 in Iran and China. And, obviously, now operating rates sort of picking up over there. Obviously, a new facility expected to come online in China this year, G3 as well. But some sort of positive commentary on the demand side with China reopening and the like. So, I guess, the question is that with all of these puts and takes both on the supply and the demand side effect, do you still expect 2023 to be a year where demand growth outstrips supply growth? Also keeping in mind how sequentially, obviously in Q1, you know, demand growth was relatively flat.

That's a great question, Ahmed. We're paying close attention to this right now. We observed a noticeable drop in demand going into Q1, stemming from significant declines in Q4, which set our baseline for Q1. However, things are starting to improve toward the end of Q1, though overall, demand remained stable from Q4 to Q1. In breaking it down by segments, the traditional demand sector is experiencing a seasonally slow first quarter. We're approaching the housing and construction season, which should strengthen demand. In China, we expect some positive effects after the Lunar New Year and as the economy opens up, although traditional demand has been slower than we anticipated. On the MTO side, rates have been consistently rising through Q1, and we are in the process of starting up two plants, translating to an additional 1.5 million tons of demand. Overall, we still need to see more demand growth from our current levels to offset the incoming supply. When we review Q1 on an annualized basis, it certainly hasn't returned to the level of the full year in 2022. Continued demand growth is necessary for overall industry growth, leading to a balanced market with new supply. The G3 facility will begin operations in the fourth quarter, but it won't significantly impact the market until the first quarter of 2024. Currently, there's not much new capacity being introduced. We're closely monitoring demand to determine whether we will see overall growth for the year, which we anticipate at this point, but we're keeping a watchful eye.

Understood. Very helpful. And as a follow-up, you know, kind of something you alluded to towards the end of your answer, just the G3 ramp-up. I mean, you obviously talked about first production in Q4. But, you know, obviously, you guys, particularly in Geismar, have had relatively recent sort of startup experiences. So, how should we expect to see that ramp up through the course of Q4? And when do you think we will be at sort of full production with regards to G3?

I wouldn't go into too much detail on that. We have our schedule, which involves various factors. However, I can provide an update on our current projects and the startup phase. Currently, our focus has been on mechanical construction, including piping installation and welding, all necessary for building the plant. We've now moved on to electrical installation, fireproofing, and painting. We're also in the process of system turnover, which involves transferring the systems to different areas of the plant. Additionally, we're starting activities like steam blowing and hydro testing for the piping system. All of these steps are planned for the startup process, and we expect the startup period to take weeks rather than months. We're confident that we will follow our startup schedule in the fourth quarter, although I can't specify the exact timing.

Got it. Thanks so much, Rich. Very helpful.

Your next question comes from Steve Hansen with Raymond James. Your line is open.

Yes. Good morning, guys. Just a quick follow-up, Rich, to some of your remarks earlier on Joel's question, I believe. Can you remind us as to how the G3 contract structures work in terms of the sales? Where are you targeting geography wise? How much of the volume is already contracted? Just so we can get a sense for how the volumes are going to flow here once we go live.

Sure. We increased our sales position last year and reached a level where we’re now trending around 11.5 million tons in sales. Looking ahead to next year, we don't require significant sales growth to position ourselves in G3. We've already effectively pre-marketed at least half of that plant. Last year, we experienced balanced growth, with a stronger focus on the Atlantic markets. This year, you can expect a modest increase in our sales position, but we are not aiming to aggressively re-contract or secure additional contracts for G3. Instead, you will likely see a reduction in purchasing within our system once G3 commences operations, creating a balance between decreased purchasing and some increased sales for the upcoming year.

Okay. That's helpful. Thank you.

Does that help? Okay.

Yeah. I know. That's really good perspective. I guess, trying to think about it in the context to some degree of where the price points will be hit. There's quite a delta between Asian contracted prices and North America. I know you talked about underwriting the economics of the plant as an export facility to Asia, but I did not know volume was going to flow necessarily.

Yeah. I think last year we made significant gains in the Atlantic markets largely due to the Russian sanctions, which caused a lot of Russian materials to flow into various other markets. I believe we were successful in that regard. We will consider where to direct our marketing efforts. We don’t have a strong need for sales growth next year, so I think we are in a great position to be selective about which markets we will target.

Okay. Helpful. And then, just one quick follow-up on the capital allocation. The dividend going up in line with the buyback. Is that a good way to think about future allocations going forward? You're going to have a lot of cash flow, of course, in the next year and beyond. I presume the buyback will continue. But should we expect a dividend to really increase with the same pace as the share buyback goes out?

I believe we want the dividend to be sustainable. Part of that will depend on improvements we see in the business. When we notice those improvements, we will evaluate the dividend. While we have generally preferred flexible distributions through share repurchases, the launch of G3 gives us the opportunity to consider the dividend as well. I don't want to suggest that this is the only way to approach it moving forward.

Your next question is from the line of Laurence Alexander with Jefferies. Your line is open.

Good morning. I guess, first of all, as China reopens, where do you see the combination of MTO, DME, and industrial boiler demand going in the next couple of years? How much flex should we be thinking about for the supply-demand balance?

Sure. When we look at the current situation, particularly in the first quarter, MTO operating rates are around 65%, which corresponds to approximately 14 to 14.5 million tons of output from a total capacity of about 21 million tons. An increase of 10% in that operating rate could lead to an additional 2 million tons of demand. Historically, we have typically seen operating rates between 80% and 90%. Therefore, if the olefins sector is healthier and returns to these historical operating rates, we could see an additional 3 million tons of structural demand. With China's reopening, we anticipate that traditional derivatives will correlate with GDP and economic growth, leading to significant demand for these products in China. Similarly, as economic activity increases and transportation fuels, heating, and cooking demands rise, we expect a higher overall demand for energy applications. The estimated traditional demand in China is around 20 million tons per year, while energy demand stands at about 15 to 20 million tons. Therefore, we believe that China's reopening will have a substantial impact. Although we haven't seen this translate into action yet, we can project these growth rates onto the anticipated volumes.

Very helpful. Can you provide us with an overview? We've had a bit more time to analyze the US and European stimulus packages. Where do you see the various proposed green methanol platforms fitting into the cost curve after subsidies? Additionally, we're hearing more about ammonia as a competitor for methanol in shipping to replace bunker fuel. Could you share your thoughts on how you envision the arbitrage playing out?

Sure. To begin with the first question on regulations, the most significant regulation we're currently examining is the Inflation Reduction Act. Many companies are exploring opportunities associated with this Act, and we're certainly analyzing the economics of carbon capture at our Geismar facility in light of the government incentives and the infrastructure being developed for carbon capture. Initially, the capital costs are substantial, and while government incentives are beneficial, the market still requires a premium for the project to advance. Regarding green fuels, several subsidies are driving demand. We estimate that the UK fuel blending market will involve around 150,000 to 200,000 tons of green methanol. Much of the demand is driven by customers' willingness to pay a premium for low-carbon methanol, and we are engaged in discussions with numerous shipping companies on this front. On the competitiveness side, the shipping market alone represents an annual methanol demand of about 400 million to 500 million tons on an energy-equivalent basis. This market is enormous, and as we consider methanol, ammonia, and hydrogen as future shipping fuels, there is ample opportunity for all. Shipping companies have already committed to 4 million tons of demand potential, and we are anticipating further commitments. Once those decisions are made, it's less about competing against ammonia or hydrogen and more about the economic advantages over diesel. We foresee demand potential in this area, which will depend on methanol's cost competitiveness compared to diesel and the costs associated with decarbonizing both fuels. We are very enthusiastic about this opportunity, and our low-carbon solutions group is actively exploring what solutions we can offer to the shipping industry.

As you mentioned, there are discussions among customers in some areas about the green premium. Is there any insight into the size of the premium being talked about? Additionally, is this also reflected in longer-term offtake agreements, or is it primarily for transactions?

I'm going to say it's early. And certainly something that with the zero carbon voyage that zero-carbon voyage, I mentioned in the opening remarks that was based on renewable natural gas, and we're obviously active in the renewable natural gas market, and we're having discussions with shipping companies about whether that makes sense to do longer term for their needs. And so we're hoping to be able to announce things going forward, but still early discussions.

Okay. Thank you.

Your next question is from the line of Matthew Blair with TPH. Your line is open.

Hey. Good morning. Thanks for taking my question. I was hoping you could talk a little bit more about the operations in New Zealand in the quarter. Op rates look quite strong, but you held your 2023 guidance unchanged, I believe. So yes, any more details on New Zealand would be great?

Yes. So we did have a strong quarter in New Zealand. And it was in line with our expectations. When we look actually for the remainder of the year, we said that we have three turnarounds this year, and we will be doing some maintenance in New Zealand this year. So we are holding to our production forecast for the year. When we look at New Zealand, we have two primary suppliers there, OMV and Todd, and the production volumes and forecasts we provide are based off of us working with them on the results of their production and their upstream activities that they're working on. So we continue to hold to the forecast today, and we're quite comfortable at this level for the next few years, and we're working with them on the results of their work that they are doing in the Taranaki Basin and we'll continue to provide guidance on where that leaves us on production forecast. But that's why we're holding to the number that we have for the year.

Sounds good. And then could you expand a little bit more on your RNG efforts? I guess, what percent of your total feedstock is RNG and how might that change going forward? Do you ever see yourself moving into the actual RNG production market? And what's the driver here? Is this coming from customer request? Or is this Methanex looking to comply with GHG targets and ESG targets?

The size of that business is currently quite small, with only one long-term R&D contract in place that involves minimal volume, making it a good starting point. The driving force behind this interest comes from customers in the shipping industry and traditional chemical sectors who are looking into green methanol, though it comes at a significant premium. We are collaborating with them to secure long-term offtake agreements and customer commitments. Regarding the RNG market, the total demand for RNG in North America matches about 3 million tons of methanol, but there is competition as much of the RNG is directed towards natural gas vehicles. This is an area we wish to explore further as we engage with our customers. We are not the only player interested in the R&D aspect, so we must consider the competitive landscape. We are indeed looking into this mainly due to customer interest and are optimistic about the opportunities it presents.

Great. Thank you.

Your next question is from the line of Nelson Ng with RBC Capital Markets. Your line is open.

Great. Thanks. First question is just a follow-up to Steve's question about production and sales mix. So I guess based on your commentary, should we assume that after Q3 is up and running and fully producing, the sales mix within the regions like Asia, China, U.S. and Europe. Should we assume that the sales mix will be relatively stable? Or will more products go into China?

I think assuming a relatively stable sales mix is what we would guide to similar to what we've guided in the past.

Thanks for your question. It seems that the ramp-up of the China reopening is happening more slowly than we had anticipated. Do you have any early insights on how things are progressing since the Lunar New Year? Are you observing any recent improvements, or is the situation in China still moving at a slow pace?

On the MTO side, we are definitely experiencing a ramp-up, which is attributed to better economics and increased methanol availability. It's important to note that a significant portion of Iranian supply is sent to MTO and we believe it is offered at a lower price compared to international rates, making it more appealing and enhancing affordability for the MTO industry. In other energy applications, we are noticing some strength in MTB vehicle fuels and cooking and thermal uses, driven by an overall increase in economic activity in the country. However, we have not yet seen demand pull from traditional chemical sectors, which we are monitoring closely. There are indications from manufacturing numbers that suggest growth, and export numbers are also improving. It often takes time for this to translate back to methanol, as we are at the initial stage of the value chain, which means there are inventories and other factors to work through. We are keeping a close watch to determine when we might see demand, but currently, we have not observed the anticipated growth in traditional chemical applications that would align with a 5% GDP growth, for instance.

Okay. Thanks for all the color, Rich. I'll leave it there.

Yeah. Thanks.

Your next question is from the line of Jacob Bout with CIBC. Your line is open.

Good morning.

Jacob.

I had a question here just on your thoughts around M&A. I know historically, the focus has been either greenfield or brownfield. But how do you think about M&A in the current market, even with, say, some of your competitors looking at strategic reviews or that type of thing? Is that something on your radar? Or how are you pushing that?

Yes, we always want to keep M&A on our radar. While the industry is experiencing some slowdown currently, we believe there is still growth potential in the long term with limited capacity additions. M&A isn't the only way to achieve growth, but we are open to exploring opportunities if they make sense. That said, it can be challenging depending on the location of the assets and the synergies we can realize. We have G3 coming online, which is an Atlantic-based asset, and we need to consider the synergies generated by any M&A activities and ensure the value aligns with our expectations. We are definitely not closing the door on M&A and are open to discussions.

Okay. And then my second question is just how you're approaching gas hedging right now. I mean gas prices have moved down quite significantly over the past quarter. So how are you approaching it and how much have you locked in?

Today, we have 85% of our hedges in place for 2023. Our goal is to achieve around 70% hedging for our North America portfolio in the first three years beyond that. We are fully hedged for 2024 and 2025 with G3 operational. However, for time frames beyond 2025, we have less hedging in place. We are actively monitoring the medium to long-term market developments. Despite the current prices, the longer-term pricing hasn’t decreased to our desired levels, so we are being patient before adding more hedges. We are also aware of the anticipation for increased LNG capacity and demand over the longer term, but we’re seeing some pressure from rising capital costs and possible regulatory changes. We will continue to watch for any shifts in the market that might present hedging opportunities.

Okay. Great. Thank you.

Your next question is from the line of Josh Spector with UBS. Your line is open.

Yeah. Hi. Thanks for taking my question. I actually wanted to follow-up on the gas side of things. So, my understanding, you're pretty heavily hedged here. But with lower U.S. gas cost and your FIFO reporting, your first quarter numbers, I assume that's not fully reflecting the $2 to $3 gas. So, how much of a benefit would you expect to see, as you go into next quarter? Or would we see minimal because of the hedges?

We are 85% hedged, and the movement in spot prices is definitely benefiting our 15% unhedged position. There may have been a slight lingering effect from last year in our first quarter, but I don’t anticipate a significant impact in the second quarter. The changes this time didn’t involve much inventory that would affect Q1, so I wouldn't expect it to provide a considerable earnings boost for Q2.

And just to be clear. Okay. And just on the hedging, we're talking about U.S. gas explicitly not your whole portfolio, correct?

That's correct, yes.

And just I wanted to ask on the agreement announced in Egypt on that infrastructure development pipeline. Does that change anything for you? Is there any additional capacity creep needed to feed that at some time? Or does that change the mix or pricing of that product? Just curious on any thoughts around that. Thanks.

This is a formaldehyde build-out right next door that has been in the works for quite some time. We're pleased to have signed a supply agreement for a relatively modest volume of about 40,000 tonnes of methanol per year, which will be supplied via pipeline from the adjacent site. Ideally, the best business we can do with our customers is to have the pipeline right next door. While we are happy to support this project, the level of sales doesn't significantly impact our sales mix or anything like that. Nonetheless, we are pleased to support this project and cater to our customers' downstream demand growth.

Got it. Appreciate the thoughts. Thanks.

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

Thank you for your questions and interest in our company. Looking forward, we are well positioned with our current asset portfolio and a strong balance sheet. Our G3 project is fully funded, progressing safely on time and on budget, and we expect to be in production in the fourth quarter of this year. We hope you will join us in July when we update you on our second quarter results.

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