Earnings Call Transcript - MEOH Q3 2023

Operator, Operator

Good morning. My name is Julie Ann, and I'll 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. 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.

Sarah Herriott, Director of Investor Relations

Thank you. Good morning, everyone. Welcome to our third quarter 2023 results conference call. Our 2023 third quarter news release, Management's Discussion and Analysis, and Financial Statements can be accessed from the Reports tab of the Investor Relations page on our website at methanex.com. I would like to remind our listeners that our comments and answers to your questions today may contain forward-looking information. This information, by its nature, is subject to risks and uncertainties that may cause the stated outcome to differ materially from the actual outcome. Certain material factors or assumptions were applied in drawing the conclusions, or making the forecast, or projections which are included in the forward-looking information. Please refer to our third quarter 2023 MD&A and our 2022 Annual Report for more information. I would also like to caution our listeners that any projections provided today regarding Methanex's future financial performance are effective as of today's date. It is our policy not to comment on or update this guidance between quarters. For clarification, any references to revenue, EBITDA, adjusted EBITDA, cash flow, adjusted income or adjusted earnings per share made in today's remarks reflect our 63.1% economic interest in the Atlas facility, our 50% economic interest in the Egypt facility, and our 60% interest in Waterfront Shipping. In addition, we report our adjusted EBITDA and adjusted net income to exclude the mark-to-market impact on our share-based compensation and the impact of certain items associated with specific identified events. These items are non-GAAP measures and ratios that do not have any standardized meaning prescribed by GAAP and therefore are unlikely to be comparable to similar measures presented by other companies. We report these non-GAAP measures in this way, because we believe that they are a better measure of underlying operating performance and we encourage analysts covering the company to report their estimates in this manner. I would now like to turn the call over to Methanex's President and CEO, Mr. Rich Sumner, for his comments and a question-and-answer period.

Rich Sumner, President and CEO

Thank you, Sarah, and good morning, everyone. We appreciate you joining us today, as we discuss our third quarter 2023 results. For the third quarter, our average realized price of $303 per tonne and produced sales of approximately 1.5 million tonnes generated adjusted EBITDA of $105 million and adjusted net income of $0.02 per share. Adjusted EBITDA was lower compared to the second quarter due to a lower average realized price and lower produced sales. Through the third quarter, we saw improving market conditions with stronger demand from certain sectors, as well as moderation in global operating rates, mainly from various supply outages in North America, the Middle East, and Southeast Asia. Methanol demand improvements were primarily driven by stronger demand in China, with increased demand for MTBE and other fuel applications, as well as improved demand for methanol-to-olefins, with a number of MTO plants restarting operations in the third quarter. We are currently seeing very high operating rates across the MTO sector, which we believe is driven by the completion of planned downstream expansions, as well as some improvements in affordability from higher energy and olefins pricing during the quarter. However, we believe economic pressure remains on this sector under current market conditions. We can continue to carefully monitor the global macroeconomic environment, and during the third quarter, we saw relatively flat demand outside of China for methanol into traditional chemical applications compared to the second quarter. Coal pricing in China increased during the third quarter from around RMB800 per tonne to above RMB1,000 per tonne 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 have led to slightly higher pricing throughout the third quarter and into the fourth quarter. Our November posted prices in North America, Asia-Pacific, and China were posted at $549, $370, and $360 per metric tonne respectively. And our fourth quarter European price was posted at €375 per metric tonne. Based on our October and November posted prices, we estimate our global average realized price to be approximately $310 to $320 per metric tonne for these two months. In the third quarter, we had lower production due to scheduled turnarounds in New Zealand and Chile, and seasonal gas restrictions in Chile. We are encouraged by the pace of gas development in Argentina and the continued supply rates from ENAP in Chile. Increasing gas supply from Argentina allowed us to restart our second Chilean plant in September, earlier than previous years. We expect both plants to run at full rates from the end of September through April 2024, the Southern Hemisphere summer months, and are increasing our Chile production guidance for 2023 from a range of 800,000 tonnes to 900,000 tonnes to a range of 900,000 tonnes to 1 million tonnes based on improved gas availability from Argentina. Earlier in October, we also announced that we signed a two-year natural gas agreement with the National Gas Company of Trinidad and Tobago to restart our fully owned Titan plant and simultaneously idle the Atlas plant in September 2024. I want to thank our team for their hard work to ensure that we maintained operations in Trinidad, which is a strategic part of our global portfolio. The gas situation in Trinidad in the near-term is challenging, which is reflected in the short-term of the new gas contract. We remain committed to working with the NGC and the government to secure long-term economic gas supply. We entered the third quarter in a strong financial position with approximately $500 million of cash and $300 million of undrawn backup liquidity. Our capital priorities are to complete the Geismar 3 project and allocate any excess cash to repay rather than refinance the $300 million bond due at the end of 2024. The construction of our G3 project is progressing safely to plan. Construction is nearly complete and the team is in the final handover, testing, and commissioning phases. We expect to achieve commercial production around the end of the year and within our budget range of $1.25 billion to $1.3 billion. The remaining $140 million to $190 million of cash expenditures, including approximately $50 million in accounts payable, is fully funded with cash on hand. Looking ahead to the fourth quarter of 2023, we 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. 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, Operator

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

Ben Isaacson, Analyst

Thank you very much, and good morning, everyone. Rich, I have a question about Trinidad. You mentioned that the gas situation has been challenging, which led to the short-term deal. Does this indicate a lack of confidence that the situation will improve? If it is challenging, shouldn't that be a short-term issue? Additionally, what was the reasoning behind idling a plant that was operational and then investing capital to restart Titan? Was this a preventive measure to avoid significant issues with Atlas? I am trying to get a clearer picture of the entire Trinidad situation. Also, as a follow-up, could you discuss any risks at E-Methanex due to the shutdown of the Tamara platform off the coast of Israel? Thank you.

Rich Sumner, President and CEO

Thanks, Ben. Regarding Trinidad, I want to address the near-term situation, which we describe as challenging due to the tight gas market there. Currently, the demand across LNG, ammonia, and methanol is approximately 4.5 Bcf per day, while production stands at around 2.5 to 3 Bcf. However, we remain optimistic that improvements will occur since there are various initiatives underway in Trinidad, and we believe there are significant incentives to restart existing capacity. These assets have historically operated reliably. We are committed to collaborating with the NGC and the government of Trinidad as they work with the upstream sector to enhance the situation. Our decision to favor Titan over Atlas was influenced by the short-term contract offered for Titan, which financially made sense for us, especially since we don't have a turnaround situation with Titan like we do with Atlas. The Atlas plant had already undergone major maintenance prior to its idling back in 2019. It was also important for us to maintain our global manufacturing team, which is a crucial part of our organization. We are pleased that Titan will be operational by the end of next year, and we will establish a restart team dedicated to ensuring that the plant operates safely and reliably. You inquired about Egypt?

Ben Isaacson, Analyst

Yes.

Rich Sumner, President and CEO

I'll answer that. Currently, there has been a shutdown in which Israel, as an exporter of gas to both Jordan and Egypt, has closed the Tamara field. This closure has affected the flow of gas into Egypt, but it is not impacting the availability of gas to the industrial producers there. However, we recognize that there may be consequences for LNG producers. As of now, this situation is not influencing our operations or other industrial producers in Egypt.

Ben Isaacson, Analyst

Appreciated, Rich. Thanks so much.

Operator, Operator

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

Joel Jackson, Analyst

Well, 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 it be higher than Q4 of '22? And when you gave your price guidance of $310 to $320, it looks like you're using a higher discount rate than Q3. And then would you be having some inventory bills in Q4, like you normally do?

Rich Sumner, President and CEO

Okay. Regarding Q4, I haven't made that comparison yet. Our reference point was comparing it to Q3, where we saw higher pricing and increased sales. As for the discount rate, we do not anticipate a significant change. We can discuss that further later. About inventory bills, yes, we've experienced several quarters with inventory bills related to our produced sales. Accounting will remain consistent, but we expect to see some benefits from the produced sales down the line. I hope that provides some context for you regarding the quarter.

Joel Jackson, Analyst

Okay. And then my longer-term question.

Rich Sumner, President and CEO

Does that help?

Joel Jackson, Analyst

Yes. That's why I asked '24. That’s a clearly longer-term now.

Rich Sumner, President and CEO

Yes, yes.

Joel Jackson, Analyst

If you look at the production for '24, can you give about like off a base of a 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. Would you lose some tonnes? Would you be running both plants overlapping for a month, or would you lose some tonnes on a ramp-down and a ramp-up? Any other changes in New Zealand or anywhere else with better gas in Chile? Like, should we expect 2 million tonnes more in production next year, 1.5 million tonnes? Can you just give us some ideas?

Rich Sumner, President and CEO

Yes, we will formally update our guidance towards the end of this year, but I can share some preliminary thoughts. For Chile, we'll be operating two plants at full capacity until at least April next year. We already have gas contracts in place and will be working on similar contracts for the following year. This is the first time in a long while that we've operated two plants at full capacity, and we are very excited about it. We plan to replicate this for the summer months next year. I expect that while we are at 800 to 900 this year, that number will be higher for Chile. For Trinidad, we are working on gas contracts simultaneously, which means I don't anticipate much overlap, but it will involve idling and then starting up Titan. You can calculate how that change will impact us. Also, a major focus will be on G3, with plans to start up around the end of the year, though it will take some time before G3 begins to affect our inventory flow. Expect a 45 to 70-day inventory buildup before G3 contributes to earnings. For Egypt, we anticipate results in line with our operations at high rates, and we will update our guidance for New Zealand today. Our target is between 1.3 million tonnes and 1.4 million tonnes, and we should remain around that level. A more formal update will come, and we also need to consider scheduled turnarounds. More information will be provided soon.

Joel Jackson, Analyst

Thank you.

Operator, Operator

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

Steve Hansen, Analyst

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 pressure in profile next year, I guess, through the summer months in particular down there? And now we should think about maybe even the medium, longer-term profile for the pressure in the complex?

Rich Sumner, President and CEO

Thank you, Steve. To provide some context about the situation in Chile, much of it mirrors what's occurring in Argentina. Argentina is working on the Vaca Muerta field in the Neuquen Basin, which is a highly productive area. They are investing in pipeline infrastructure, resulting in significant success in gas development. They are connecting this field to the main grid in Argentina, which consumes around 120 million cubic meters of gas daily. Recently, a pipeline was commissioned that is currently delivering 10 million cubic meters to the grid during the third quarter. There are plans to add compression to this pipeline, which would increase capacity by another 10 million cubic meters per day, expected to be operational in the first half of 2024. Additionally, another pipeline connection is in development that could double that capacity by 2025. There's also progress in the Austral Basin, particularly with the El Phoenix project led by Total and Wintershall, located near our facilities. All of these developments are greatly enhancing the domestic gas situation in Argentina, which will also benefit export markets where we are well positioned with our assets. We are excited to operate two plants at full capacity during this upcoming eight-month period, something we haven't done in a long time. We plan to focus on gas supply outside of winter months and improve our winter supply over time. We will keep you updated on our progress.

Steve Hansen, Analyst

Very good. Thank you. And just one follow-up on the G3 in terms of the commissioning and the inventory bill that you described. I know it's early, but can you give us a sense for whether the 45 to 60, or 70 when you describe will all take place in Q1 from your standpoint today, or will that start to build through the later part of Q4?

Rich Sumner, President and CEO

Yes. I think the best approach is to start in the first quarter. That's probably the right timeframe to consider, around the beginning of Q1.

Operator, Operator

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

Hassan Ahmed, Analyst

Good morning, Rich.

Rich Sumner, President and CEO

Good morning.

Hassan Ahmed, Analyst

You saw a significant increase across all your regions, particularly in Europe, although there hasn't been any pricing reflection in Europe for the quarter yet. I'm trying to grasp the difference between North American pricing and pricing in China/Asia. Even if I were to overlook North American pricing, there's still a difference of around $70 to $80 per tonne between those regions. I'm trying to understand why that difference exists, as it seems to be more than just shipping costs.

Rich Sumner, President and CEO

Yes, Hassan. Thanks for the question. I think, hopefully, I'll answer your question the right way here for you to make sense of it. I think if you were to look at discount levels across the regions rather than our global discount, because you can't really apply the average discount to all the prices. It's really that each region does have its own kind of market discount levels, which do vary quite widely depending on which region you're looking at. So, our ARPs, if you were to look at our ARPs by region, that would probably make more sense and probably more reflective of kind of reasonable pricing differentials between those. So, it's hard to look at the global discount and apply that and try to make sense of those prices relative to say, spots or other markers.

Hassan Ahmed, Analyst

Understood. And just coming back to sort of broader question. I know it’s all 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 products?

Rich Sumner, President and CEO

Yes. Currently, we are not experiencing any disruptions. We are closely monitoring the situation and are hopeful for a peaceful and sustainable resolution, but no disruptions have been observed. Israel does not have significant methanol demand, nor is there any supply, and there are no affected methanol trade routes in the area. However, should the situation escalate, it could impact various factors, including methanol as well as crude and LNG trade flows. While we haven't seen those disruptions yet, we are watching closely to see how things will develop.

Hassan Ahmed, Analyst

Very helpful, Rich. Thanks so much.

Operator, Operator

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

Matthew Blair, Analyst

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? Or is there an opportunity for converting those assets into an E-methanol plant?

Rich Sumner, President and CEO

Yes. In terms of relocation in Trinidad, we are committed to Trinidad. We believe there are significant incentives to operate underutilized assets where they currently are, and those assets have performed well for us in Trinidad. Our focus remains there. We do have experience with plant relocations, having moved our Chile 2 and 3 facilities to Geismar. Our experience with relocating plants shows that while the capital cost savings are not substantial, the speed advantage is significant. We could potentially save about a year in construction time compared to building new facilities. However, we are not considering this for Atlas at the moment, as we aim to secure long-term sustainable gas in Trinidad. That said, we have extensive experience in plant relocation, and there is a speed advantage if we needed to act quickly on a project.

Matthew Blair, Analyst

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

Rich Sumner, President and CEO

So, I think the right number to use on the CapEx is the lower of your range, around $150 million. And I think you've got all the numbers in terms of the other cash outlays. So yes, we're focused on the $300 million bond. And I think as of today’s pricing more probably, that's the main focus. We generate a little over $200 million in free cash flow with G3 at a $300 methanol price. Above that then, you're probably getting above the bond. If you get closer to $350 million. We still see the market environment today is supportive of what we need to repay the bond, but we're really focused on that. If we were to have a really stronger methanol market, then you start looking at free cash flow beyond the debt repayment. We don't have any major capital ahead of us. And so we would be looking at returning excess cash and likely some balanced approach between looking at the balance sheet further on deleverage. But we're really focused on the $300 million bond today.

Matthew Blair, Analyst

Great. Thank you.

Operator, Operator

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

Josh Spector, Analyst

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 startup, I mean, you're already purchasing and reselling some tonnes. So, is there a way to size kind of the net impact that you would expect that to be in terms of cash use to build that inventory?

Rich Sumner, President and CEO

Yes, we are not particularly worried about the working capital buildup. I don't think we have any specific strategies in place to manage that down. Currently, we are purchasing a significant amount of product, but once G3 is operational, we will reduce those purchases because we do not expect to increase our sales by 1.8 million tonnes next year since we have already seen sales growth. Therefore, you will notice that a lot of purchased products will be replaced by produced products, which should lead to lower inventory values.

Josh Spector, Analyst

Yes. So, I appreciate that. I guess, that's where I was kind of going. So it do kind of net offset each other, so it's not really a major cash use. Is that kind of what you're saying or should we be thinking about it as somewhat of a cash use?

Rich Sumner, President and CEO

Yes.

Josh Spector, Analyst

Okay. And then the other question I have is just more on the cost curve and just methanol price support. If I heard your comment correctly, you talked about $300 a tonne methanol price support. Your posted pricing in China is higher. I guess, what do you view as the pricing driver here? Is it the fuel value? Is it coal? And then how does that evolve into next year in your view?

Rich Sumner, President and CEO

Our posted price is higher, but after discount, we're likely closer to those levels. The current price is driven by the marginal producer cost, which reflects co-producer costs in China. Another important factor is the affordability of methanol, particularly in the olefins industry. Right now, both of these factors are indicating the current pricing levels in China, around $200 for spot prices and $280 to $300. We have observed some improvement in the olefins market, but this sector is currently priced well below where it would be under normal mid-cycle conditions. Under a typical mid-cycle energy pricing scenario with oil at $90, we would anticipate much higher prices. Particularly, with MTO operating at its highest rates ever, this sector is running at 90% capacity over a strong base due to the addition of MTO plants last year. If the market were more favorable, I would expect it to drive methanol prices higher than they are now.

Josh Spector, Analyst

Okay. Thank you very much.

Operator, Operator

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

Kevin Estok, Analyst

Hi. Good morning. This is actually Kevin Estok on for Laurence Alexander. So, it looks like most of my questions have been asked, but I guess I was wondering if you could give me any updates 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, you're going to get a sense of your rate sensitivity too, as it relates to your strategy. Thank you.

Rich Sumner, President and CEO

Thank you. When considering the low-carbon sector, our strategy focuses on both the demand and supply sides. I didn't mention this earlier, but there is significant momentum in marine fuels. Currently, more than 200 ships are scheduled to be operational in the 2027-2028 period, which could create approximately 7 million tonnes of demand if these vessels utilize methanol exclusively. We are collaborating with large international shipping companies, particularly in the container shipping sector, while also exploring interests in dry bulk, tankers, and cruise ships. We have several memorandums of understanding signed and are closely engaging with the shipping industry regarding their interest in green, blue, and conventional methanol. The demand for green methanol is predominantly driven by the European shipping market, influenced by the emissions trading scheme and EU Maritime regulations concerning carbon emissions. We are also discussing blue and conventional methanol options. On the supply side, we are pursuing numerous projects. Notably, we have received certification to purchase renewable natural gas in North America and produce green methanol at our Geismar plants. Our marketing regions are certified to sell this product to customers. We are evaluating the feasibility of projects at our sites, focusing on using renewable hydrogen and CO2 to transition our assets. Additionally, we are in talks with other projects interested in collaboration on off-take agreements. Our goal is to explore as many cost-effective supply options for the marine industry regarding green methanol. Many discussions are ongoing, and we hope to update you further as we make progress in this area.

Kevin Estok, Analyst

Great. Thank you very much.

Operator, Operator

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

Rich Sumner, President and CEO

All right. Well, thank you for your questions and interest in our company. We hope you will join us in February, when we update you on our fourth quarter results.

Operator, Operator

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