Q3 2020 Methanex Corp Earnings Call
All participants please standby your conference is ready to begin.
Ladies and gentlemen, thank you for standing by welcome to the Methanex Corporation Q3, 2020 earnings call I would now like to turn the conference call over to Ms. Kim Campbell. Please go ahead.
Good morning, everyone welcome to our third quarter 2020 results conference call, our 2023rd quarter News release management's discussion and analysis. The financial statements can be accessed from the reports tab of the Investor Relations page on our website at Mednax Dot com.
I would like to remind our listeners that our comments and answers to your questions. Today may contain forward looking information.
Information by its nature is subject to risks and uncertainties that may cause the stated outcomes to differ materially from the actual outcome.
Certain material factors or assumptions were applied in drawing conclusions or making the forecasts or projections, which are included in the forward looking information.
Please refer to our third quarter, 2020, and DNA and to our 20 Ninee annual report for more information.
I would also like to caution our listeners that any projections provided today regarding methanexs future financial performance are effective as of today.
It is our policy not to comment on or update this guidance between quarters.
For clarification any references to revenue EBITDA cash flow or income made in today's remarks reflect our 63.1% economic interest in the Atlas facility and our 50% economic interest in the Egypt, Chile.
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 identified event.
We report these non-GAAP measures in this way to make them 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 Methanexs, President and CEO Mr., John Floren for his comments and a question and answer period.
Good morning.
And everyone is continues to stay safe and healthy.
Third quarter, we continued to demonstrate the resilience of our business through this difficult time.
Our manufacturing operations and supply chain to run safely and effectively endemic which has enabled us to deliver on our commitment.
A secure and reliable supplier to our customers around the world.
We'd like to express our appreciation to our team members across the globe over demonstrated their ongoing commitment and agility this year.
This morning, we will comment on our Q3 results provide an overview of what we're seeing in the methanol markets and discuss how we continue to manage our business in this challenging environment include.
Including additional steps that we've recently taken to increase liquidity and preserving financial flexibility through this uncertain time and emerge stronger when mark market conditions further improve.
Now I will turn to the third quarter results.
We recorded adjusted EBITDA of $40 million, which was higher than the second quarter. As a result of higher average realized price was partially offset by lower sales of methanex produce broader.
And our costs, we recorded an adjusted net loss of 70 $579 million or $1.83 cents per share in the third quarter higher compared to the second quarter, primarily due to the onetime finance charge of $15.4 million related to the early repayment over $250 million.
Unsecured notes that were due in March 2022.
Excluding this one time finance charge, we would have recorded an adjusted net loss of $68 million or 87 per share.
Now turning to the methanol market.
We estimate the global methanol demand increased by approximately 9% in the third quarter of 2020 compared to the second quarter as economic activity rebounded around the world and methanol demand recovered across all regions and end use markets.
Globally demand for traditional chemical applications improved as manufacturing activity recovered, particularly in the automotive and construction industries.
Demand for energy related applications, including MTV biodiesel and other fuel applications improved as ground transportation fuel demand saw some recovery.
But also olefin demand has remained strong throughout 2020.
While demand has recovered in the third quarter of 2020 global demand global methanol demand in the year through Q3, 2020 remains 3% lower than the comparable year to date period, and 29, P.M. below pre cobot expectations for 3% to 4% growth.
On an annual basis, we estimated the forecast demand and 2020 will be lower than the 2019 by 3 million tons versus Pico at expectations for 3 million tons of growth.
As a result, we estimate that 2020 global demand will be 6 million tons lower than pre covert forecast, reflecting the demand destruction, resulting from the pandemic.
Global methanol industry supply declined in the third quarter of 2020 compared to the second quarter.
Due to various planned and unplanned outages and planned shutdowns to respond to lower methanol demand.
Our Titan plant in Trinidad remains idle, while our Chile, four plant, which has been idle since April 1st is in the process of restarting.
Overall, the combination of increased but that all demand and lower industry supply is tight and global inventory levels and moved methanol prices higher.
We estimate that the industry cost curve, which which continues to be set in China is approximately 200 to $240 per ton spot.
Spot prices in China are above this range today.
As a result of the tighter market conditions are posted prices for October and November increase.
We recently posted our November North American price, which increased by 13% to $379 per ton.
In our Asia Pacific price, which increased to $310 per ton.
Our European contract price is set quarterly and our fourth quarter posted price is 275 euros for $320 per ton.
Now turning to our operations.
Production levels were lower in the third quarter as we undertook planned maintenance activities, our medicine hat facility at our office facility in Trinidad.
In New Zealand, our production levels were lower in the third quarter as a result of risk.
Sheep lower gas deliveries as previously forecast.
We expect to receive higher gas deliveries in the fourth quarter.
No in Geismar, both for our plants ran at full operating rates during the third quarter.
Completed our low capital cost Geismar, one de bottlenecking project to increase our production capacity by approximately 10% or 100000 metric tons per year and expect to ramp up to our new full production capability for geismar, one over the coming weeks.
In Trinidad we commenced the planned turnaround at our Atlas facility towards the end of the quarter and expect to resume production in early November.
Our Titan facility remains idle negotiations, but the national gas company of Trinidad and Tobago or long term gas agreement continue.
In Chile, our production levels were lower in the third quarter as we receive lower natural gas deliveries during the southern hemisphere winter months, when natural gas supplies are needed for residential heating.
As global methanol demand is improving we are in the process of restarting our Chile four plant.
In Egypt, our plant ran at nearly full operating rates.
Medicine hat or production levels were lower as we commenced a planned turnaround in August 2020, and subsequently completed at the end of October.
Now I will turn to our balance sheet and the current unprecedented environment impacted by both COVID-19 and challenging commodity prices the path and pays for global economic recovery, the methanol demand remain uncertain.
We believe that it's prudent to plan for a wide range of scenarios, including the possibility of a prolonged period of lower methanol demand and lower ethanol prices.
We have taken a series of actions in 2020 to preserve liquidity and improved financial flexibility. During this uncertain time.
Including deferring approximately $500 million in capital spending on our Geismar three project.
Reducing our dividend by approximately a $100 million on an annual basis suspending share buybacks, reducing maintenance capital and operating costs Notating covenant relief on our credit facilities.
In addition in mid September we issued $700 million in 2027 nose to replay repay existing debt and increased our liquidity and financial flexibility limited impact on our leverage metrics.
We have repaid the $200 million drawn on our revolving credit facility and in late September we issued an early redemption notice to repay our existing $250 million bond that was originally due in March 2022.
The cash flow impact of early bond repayment will be reflected in our fourth quarter results.
The remaining $250 million is available to provide additional liquidity.
We have no other debt maturities until late 2024.
During the third quarter, we also secured an additional flexibility under our revolving credit and Geismar three construction facilities related to the minimum EBITDA to interest coverage ratio covenant through to December 30, Onest 2021.
Prior waiver have provided covenant relief until June Thirtyth 2021.
The steps that we have taken in 2020 to increase liquidity and improve our financial flexibility position us well to navigate through this uncertain time and generally generates significant long term value and market conditions further improve.
We are pleased to see recent early signs of economic recovery, including improvement in methanol demand and prices.
Nevertheless, we continue to evaluate all options to preserve liquidity remove improved financial flexibility as necessary.
I'd like to turn briefly to our Geismar three project.
As we've noted before our Geismar through project is a high quality project with substantial capital and operating cost advantages and has been significantly de risk.
In April 2020, we placed the project on temporary care and maintenance for up to 18 months given the significant uncertainty regarding the global economy due to COVID-19.
The project was in excellent shape and progress had been safely on time and on budget and ahead project had been significantly de risked we.
We deferred approximately $500 million of capital expenditures with the expected spending during the temporary care and maintenance period reduced to only the costs that we were already committed and the completion of activities that preserve the flexibility to complete a future project in the future such as certain key engineering activities and procurement of critical path.
But.
Construction on the Geismar three project remains on hold and the various factors today do not currently support restarting construction.
We want to be clear that we have a robust decision making process for evaluating the project and there are many factors that management and our board will need to consider carefully before restarting construction, including the global economic recovery and the ethanol demand outlook.
Ethanol industrys needs for new capacity.
Oil price forecast the.
The ability to fund the project and our suppliers ability to complete construction and deliver material equipment on time and on budget in light of any COVID-19 restrictions.
We will continue to review and monitor these factors as we continue to evaluate G. Three.
We continue to explore partnerships partnership arrangements for the project.
Now turning to our outlook for the fourth quarter.
We expect that the outlook over the coming months to continue to be uncertain, we cannot predict all impact of COVID-19 pandemic on the methanol market.
Based on our posted prices so far we expect average realized prices in the fourth quarter to be higher than the third quarter.
We expect that our production levels in the fourth quarter will be higher compared to the third quarter as we completed our planned maintenance activities in medicine hat in Trinidad we are in the process of restarting our Chile, four plant and we expect to receive higher gas deliveries and New Zealand compared to Q3.
We expect adjusted EBITDA to be higher in the fourth quarter compared to the third quarter.
As we look forward towards next year, we are updating our guidance on a couple of items starting in 2021.
We expect our selling general and administrative costs to be flat in 2021 compared to 2020 as we continue to focus on our low cost strategy.
We expect our maintenance capital guidance guidance in 2021 to be approximately $120 million, which is consistent with a revised maintenance capital guidance for 2020.
Before we pause for questions, we'd like to highlight a couple of points about the resiliency of our business.
While the near term outlook is uncertain, we continue to believe that the long term ethanol industry supply and demand fundamentals are strong.
Methanol as a key chemical building block that is used to produce a variety of everyday consumer and industrial items.
Methanol is also used in a growing number of clean burning and economic alternative energy applications.
We expect the demand for methanol rebound and grow as global economic activity recovers.
As a global methanol industry leader with a network of production facilities around the world, an integrated global supply chain and low cost structure, our competitive advantage of delivering secure and reliable supply to our customers around the world remains intact.
We have strong cash flow potential with significant leverage to methanol prices.
Estimated that every $10 increase in our average realized price translates into approximately 60 million dollar increase in adjusted EBITDA on an annual basis.
We remain focused on operating our plants safely and reliably delivering secure reliable supplier to our customers and strengthening our business by preserving liquidity and improving financial flexibility.
We are well positioned to navigate through this uncertain time and emerge stronger when market conditions improve we.
We would now be happy to answer any questions.
Thank you.
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The first question is from Ben Isaacson of Scotiabank. Please go ahead.
Thank you.
Good morning, John I, just wanted to understand first of all the dynamics that youre seeing between Q3 and Q4. So obviously in Q3, we had strong demand recovery MTR rates were high we had limited supply because of outages the turnarounds hurricane more et cetera, but now as we can.
Go get halfway into Q4, we're starting to see locked down to increase MTO economics are starting to move a little bit lower we're seeing seasonal slowdown in construction and supply is coming back so do you.
Do you think that Q4 could be a little bit weaker than Q3 in terms of supply and demand.
Why don't predict the future I can tell you what we see is that you know supply continues to be constrained.
ER as a plant that's being commissioned in Trinidad has not really delivered a lot of product into the market yet I understand theres another new plant in the United States that will be commissioned sometime over the next few quarters and we expect to continue to see demand recovery in Q4 based on where we are in our forecast for the quarter, but that could be impacted by.
Further shutdowns as you've mentioned, so I can't predict our competitors plants. If they are going to have unplanned outages or not but I would say is that these plants need ongoing maintenance and in the call, but 19 environment, it's very difficult.
Two regular maintenance Nevermind turnarounds, we've just experienced ourselves doing a couple of them. So I think Gil it's hard to predict but I think Q2, what we see as the bottom now, but its really depending on demand recovery and what you see for demand when we talk to our European customers today, even with low.
Lockdowns their demands still seems to be okay, but that could change very quickly. So in this environment I'm really not going to predict what might happen in one or two quarters.
And John My follow up question is on the dividend, obviously liquidity is vastly improved youre now prepaying debt a couple of years out.
When you think about the dividend.
Is it your hope that you will reinstate the dividend back to what it.
Finally was or Youre kind of assessment at the time.
How are you thinking about that.
Well hope is not a strategy.
I think what you know as we generate excess cash our first.
Use for that cash will be to repair our balance sheet and to get our debt leverage.
Leverage metrics back to investment grade credit ratings.
And that our our capital allocation strategy hasn't changed three pillars to take excess cash to grow the company in line with the market. If we have projects that meet or exceed our hurdle rate of 13% return on capital employed.
I have a meaningful sustainable growing dividend and return excess cash beyond that to shareholders through share repurchases. So nothing's changed in our strategy.
And we'll see how our cash generation develops here as a global pandemic and you should expect us to follow that strategy going forward.
Thank you very much.
Thank you.
The next question is from Joel Jackson of BMO capital markets. Please go ahead.
Hi, This is robin on for Joel Thanks for taking my questions.
My first on G. Three so for it to be we started but you need confidence that free cash flow would be positive, including pre capex during the remaining construction period.
Well I think what I've said is we have to have the ability to finance that project and without a partner or there's still quite a bit about $900 million. After what we'll spend in the care and maintenance barrier that we'll have to figure out how to finance so that theres a lot of different options on how we do that and we havent made any decisions.
Okay and for my follow up what production level of New Zealand can be supported by the higher gas deliveries in Q4 and will the upstream gas projects.
Going on in the country right now allow for more normalized production in 2021.
Yes, so I guided this time last year that we were expecting gas curtailments in New Zealand during 2020, and that's what we've seen.
Colin OCO budget. So we had guided to 1.8 million tons for 2020, and we're going to be a little lower than that probably 1.7.
As there is a bit more activity than we had been told it early or this time last year. So about 100000 less for the year and New Zealand and next year, we should get back to that 1.8, but the ongoing activity that we see gives us a pretty good certainty that we'll continue to see better gas deliveries in the future.
Sure from New Zealand, but next year I think all guide to about 1.8.
Great. Thank you.
Thank you.
The next question is from Gabelli CBC. Please go ahead.
Good morning.
Morning.
How far can you defer T three without a.
Further financial penalties.
Yes, we're looking at all options regarding GE, three and we don't have any decisions in front of US today, we put it on care and maintenance for up to 18 months. So our team are working hard to negotiate all the various contracts that we have related to GE three to give us the maximum flexibility that we could hope for in this very uncertain environment.
So we're continuing to talk to our various partners, where we've made commitments and everybody is experiencing similar you know that we are with all this uncertainty and I think our partners are being flexible about really remedy numbers to share and we're focused on the 18 month, a care and maintenance and see how markets develop between now and.
But to be clear after 18 months or if you continue to.
Delay in this project there will be some financial problems.
I wouldn't commit to that today, we're negotiating with our with our suppliers we made.
Have different options to consider.
So you know I don't think there'll be some committed.
Commitments that will have to pay for it but it's too early to tell how much that might be.
Okay and then just.
In regards to Chile for what methanol price do you need to breakeven there.
What methanol price to me should I don't get the breakeven price is a plant by plant basis Jacob for competitive reasons obviously.
I would say the gas prices that were seeing in that southern part of the world are very similar to what we are seeing in the United States.
Andy out most of the products that we'd be making it Chile four would be going to Asia. So whatever assumptions you have for conversion in freight you can.
Figure it out.
I'll leave it there thank you Joe.
Thanks, Tim.
Thank you. The next question is from Steve Hansen of Raymond James. Please go ahead.
Oh, Hey, guys.
Just a follow up one on Chile, if I may.
Curious John I think in the past you had guided towards truly being in a position to do roughly 75% utilization on two plants that was prior to Chile four shut down obviously are or are we do assume that that's going to be a similar type range were now going forward once Chile, four is up and running or how should we think about that cadence.
Yeah, assuming that the world needs the product the guidance hasn't changed I mean these are the only two plants, we had flexibility on take or pay gas was Chile, four and tightened it and that's why we decided to shut those plants down our guidance was 75% on annualized basis for two plant operation and how that was structured was think of Chile for running.
Six to eight months, a year and shut down during their winter period, which were just coming out of in Chile, one running at full rates, except for their winter period and on average that should get us to about 75%. We havent run both plants at full rates for any extended period. So we're not really sure that total nameplate capacity.
Once they're integrated so we have a bit of discovery still to do but we still believe based on our current gas contracts current gas availability throughout the year that guidance is still good but it will be smoothed, 75% throughout the year during their winter period, our summer period, you should expect Chile wanting to run it.
Lower than full rates in Chile for to be down.
Understood. That's helpful and if I May then just as a follow up on the operational side that the Atlas turned around strikes me as being quite quite extended this period that I think you suggested in the release that it was started in September and I'll be back up and running in November.
But if we look at the utilization rates that it ran at during the third quarter. It was also quite low there is there is there anything to read into that or is it just that the turnaround took longer than expected or how should we think about that.
That process.
Yeah, there's lots to read into that.
Scheduled to turn around and outlets in medicine hat early in the year and due to call. It 90, we couldn't do it I think you know Steve that you've been out these plans to catalyst aggregates overtime in the especially in an oxygen base plant. So every month that goes by you don't change that catalyst your operating rate is impacted and that's what we've seen an atlas and we're kinda crawling along.
To try and get this turnaround on the oxygen based plants, you don't need a catalyst change a little bit more frequently than the regular steam reformer plant. So we were lucky that we had a window to complete the turn around it's about 45 days give or take and we're.
Pretty well complete and will be starting it up in the coming days, So I'm really proud of our team down there and our team in medicine hat for really getting.
Getting these turnarounds done in very difficult environments, especially with the COVID-19 protocols. So.
I am glad were not having any more.
Here to do in this environment or even constructing Angie three I think would be a challenge that we've seen in that part of the world. The plants that are under construction are delayed and cost overrun because of the cove in 19 protocols et cetera. So I'm.
I'm pretty pretty happy with what we've done in medicine hat Atlas.
Okay, great appreciate the color. Thanks.
Thank you. The next question is from Cherilyn Radbourne of TD Securities. Please go ahead.
Thanks, very much and good morning.
Maybe just picking up on that discussion about the difficulty undertaking turnarounds in this environment, maybe you can give us some color on some of the major challenges and your perspective on the extent to which you think the industry maybe behind on maintenance as a result.
Well I think everybody is behind on maintenance I mean, when you're down to minimum staffing levels at plants. Instead of 150 on site you might at 55, So you're just doing the stoppage absolutely absolutely have to do to keep the plant running safely.
When you do it turnaround you're bringing between 1000 to 1800 people onto a site in a six to 10 week period. So you can imagine the COVID-19 environment with all the protocols.
Distancing testing masks a lot of these jobs during confined space environments really collaborative lot of team work and a lot of focus on safety. So you're you're having people looking at safety all the time and all of this has to be done at a distance.
And then manpower availability, we don't talk about that but you have contractors that you sign up for that guarantee or in their contracts say, we're going to have X number of bodies available for this particular job and then you got half that amount for a job so that leads to lots of complications.
As it anytime call, but are no covered our focus is on safety and accommodate environment. It's a lot more complicated it takes longer.
And you know in medicine hat, we had an outbreak so that the further complicated things.
This disease I don't think is still well understood and it seems to spread a lot quicker than we first thought. So we are always always overly cautious about keeping our our team and our contractors safe. So it adds to cost in the fact that you have you know.
Longer time to do the same amount of jobs you have less available contractors. So at that time and just the protocol that is time and people. So it's a really difficult environment. If you do it properly and you really follow the safety profile.
Protocols and guidelines that are put out by the various governments.
To get any significant maintenance never mind construction work done.
Okay, that's very helpful color.
Separately and with regard to MTO demand as I'm sure you're aware, there's been some talk about potential MTP restarts and I was just hoping you could give us methanexs perspective on that.
Well I'm not as bullish and this one is Argus is and that's usually I'm more bullish that argus, so its interesting, but obviously.
I'd be a nice surprise if it happens our team there is looking at it and following it very closely but hasn't happened yet lots of talk.
But it would be a nice little demand driver if it does happen I personally don't think it's sustainable based on the economics of just making propylene from ethanol, but that's my personal view and we'll continue to follow that market.
Thank you for the time John.
Thank you.
Thank you. The next question is from John Roberts of Yes. Please go ahead.
Thank you John back to your maintenance comments, there do you have a gut feel for how much of the industry supply is perhaps reduced by lower catalyst activity broadly and in longer downtime. When people are doing maintenance as it did take 1%, 2% out of the total global supply availability.
I'd be guessing John I don't like to guess I can tell you with Atlas you know you know as you get to end of life of catalyst It goes down pretty fast.
I think we are operating rates before we took the turnaround were 80% versus hundreds so it doesn't take long as a catalyst aggregates to produce operations quite significantly.
Anecdotally I think some of the outages we've seen in Q3 planned or unplanned have been related to maintenance, but that's that's normal and then I guess every different country has different protocols on how they do over 19.
No.
Contract or sorry, a social distancing now so I think every country is a little difficult, but in general I think maintenance is has been deferred.
And I think.
As you do plan turnarounds or unplanned maintenance is going to take longer and probably a little bit more expenses, but I don't really have a number I can share with you off the top of my head, Okay and do you have any thoughts on North American natural gas prices over the next several quarters, the financial markets, where obviously.
Preparing for higher gas prices.
Yeah, I'm not an expert on gas, but what I know, there's lots of gas and.
I'd say $4 and below there's also lots of gas for a long time, so I've seen it being very volatile and I don't know if that's a factor of deliveries or system issues I'm not sure Jon So I, it's a bit out of my area of expertise.
Thank you.
Thank you.
The next question is from Jonas Oxgaard of Bernstein. Please go ahead.
Hi, good morning, guys.
Okay.
One quick clarification, the $100 million you mentioned.
Next 12 months some of that I am assuming is onetime to finish up stuff, but how should I think about that long term. If this ends up being and care maintenance for more than 12 months.
Yes, again, we've given 18 month period up care maintenance given guidance around how much we would spend and including the commitments we've already made.
And then walk we're looking at if we have to further delay or on a.
Like a year or longer basis, what that might entail and we don't have any numbers to share with you today because we're in negotiations with all of our partners on that project and it's too early to make that call. So we have 18 months of care and maintenance for the prices that we have about a 100 million more to go for a total around three to four.
Hundred million dollars and EUR $400 million and then we'll have another $900 million to go to finish the project and that that 900 million could change depending on.
What timing, we're looking at to complete that project, we have to put it on longer hold or or temporary further hold or go forward and we haven't made any decisions around that yet and.
We want to see how methanol markets evolve and I'd give you. The five conditions were looking at to restart that project.
Okay.
No other questions in your compared.
Comparing quarter over quarter or your discounts to what.
Your realized price.
Proved whereas youre.
The benchmark price decline so the discount clearly both reduced can you talk about what the factors are the discounts.
Is that something that is.
Sort of Forecastable or is it just based on what you're doing in the quarter.
Our guidance is 15% discount on average than what we've said is when prices are increasing rapidly that discount tends to narrow and when prices are decreasing rapidly intends to expand and you would have seen that in our results in 2018, when we've had both of those events occur.
And in the quarter, we probably had fairly stable at a very low price pricing, which led to that 15, we're looking at right now renewing our contracts for next year for a good chunk of our business I would say there is a lot more intense rivalry out there today.
In placing volume because of the environment, we are and that could impact discounts and when we have something to update.
Update.
We'll do so and probably will look to update our guidance on discounts in the January call.
Oh, Thank you appreciate it.
Thank you.
Thank you. The next question is from Eric Petrie of Citi. Please go ahead.
Hi, good morning, John.
Good morning.
A fertilizer company. This morning announced a goal to have one third of the ammonia production will be low carbon.
Are your customers demanding greener ethanol, especially into the fuels market and then could you address the long term and enthusiasm for methanol into maritime transportation demand.
Yes, so some of our customers are asking us for green methanol as we call. It and obviously you want to pay the same as what we call a regular methanol from natural gas, which the economics are quite different when you make a methanol from a non carbon US you know.
Natural gas like we're doing in Iceland, I'll remind you we have a project in Iceland that we've invested in that takes.
Two off of a power plant takes water through electrolysis electrolysis makes hydrogen and oxygen the auction goes the air we use the hydrogen make methanol. That's so called Green methanol, which has no carbon so its possible very expensive and hard to scale that these bonds would be in the order of magnitude.
25 to 50000 would be a big one and a big methanol plant from gas is 1.8, so you'd have to make a lot of these are all over the world a lot of capital involved in probably the price you'd need is eight $900 a ton to make a go of it well our customers some of our customers would like to see.
Non carbon or green methanol, but they are not prepared to pay 800 to $900 a ton today on for a lot of volume maybe there's some niche applications.
That could work, where they want to take advantage of some of the government subsidies around credits et cetera, but that's not a way to build a business on government subsidies and credits. So we've been looking at this for a long time and we've been looking at the various technologies and it doesn't work.
Does it work at scale I think Thats a question Mark and our is the market prepared to pay.
Today for what the price would needed to have significant volume and I would say no.
So we'll continue to look at it and where there's lots of other things, we can do and including in Louisiana using.
Natural gas that's made from a.
Zero carbon source and using that through our through our plant. We can then have zero carbon methanol. So but these are it's a very small volumes today, but who who.
Who knows how far this could go in the future and what the willingness of customers to pay for the Green methanol is I think its early days as.
As far as onboard ships, yet we are seeing a lot of interest in onboard ships. Our competitor has ordered a couple of ships.
That will be able to run on methanol or ultra low sulfur diesel and we.
We continue to see a lot of interest, but I'd say I've always said on methanol to run ships, although we've proven out the technology from a significant demand driver, it's probably a mid decade issue not not tomorrow, not 2022, but I'd say the positives there is the technology works.
We've proven that the efficiencies are there the emissions reductions are there.
No impact on the engines and the fact that as flexible that you can switch from ultra low sulfur diesel to methanol all of that's been proven.
So I think thats exciting and and groundbreaking and Cook.
It could be a significant demand driver as we get into the second half of the decade, but still early days.
Appreciate that color and then for my follow up question, you noted bats co varied and this pandemic has eliminated 6 million tons of methanol demand. So how quickly do you see that ramping back up and for the next few years and then can you just give a breakdown of where you see the industry utilization by region.
Yeah, I'll have to get back to you on ITL industry utilization by region.
Keep a lot of my brain, but I don't keeps us so Kim will get back to you on that one.
As far as methanol demand recovery I mean, if you can tell me country by country, but governments are going to do to deal with a global pandemic I can give you a number but governments have been very inconsistent with their approach and.
In my opinion have been somewhat reactionary. So I don't know what governments are doing certainly France is now shutting down in Germany, shutting down and other governments are letting things be wide open. So I think this pandemic or this COVID-19 in virus is going to be with us for a long time.
You know vaccine will eventually be developed and it'll take some time to inoculate everybody and.
And you know well.
Well, maybe get back to somewhat of a new normal but I think this is going to be with us for a long time and that's why we've tried to build in as much liquidity and financial flexibility as we can.
To be ready for all possible scenarios, including a reduced demand again and whatever we might be seeing from a COVID-19 pandemic.
Thank you John.
Thank you.
The next question is from Nelson Ng.
Of RBC capital markets. Please go ahead.
Great. Thanks, and good morning, everyone. Just a quick question you mentioned that sad tighten that Chile four were the plants with the most flexible I guess gas supply arrangements.
Now you're restarting AAA four but I guess, when we look at various scenarios like if theres another.
Drop or material drop and the.
Methanol price.
Is there a lot of flexibility too.
I guess, a wind down Chile four.
Sometime over the next two quarters and if that methanol prices.
Continue to move higher.
Already really looking at Titan or are there other facilities, where you can where you look to buy.
Try to squeeze out more production.
Yeah, what we try to run our plants at full rates all the time, so they're not running at full rates is usually as a result of gas not not being fully available like we're seeing in New Zealand, but our goal is to run our plants at full rates. So Chile four again, we have total flexibility there. So based on our current outlook for supply demand that we're not bringing it up.
For a couple of months and we're making it up.
And we think we'll be able to run at rates through till the next time, we need to shut it down which is as they come into their their winter time, which is.
Our spring next year, so we expect to run that plant for a good six months. So we're not thinking of bringing it up to shutting it down but we would have the flexibility to do so if things got really.
Dire again, but thats not our current views. So you should expect us to run Chile, four right up till there are wintertime next year is our current thinking.
As far as title.
I think we took it down we don't have a gas contract that allows us to be cash.
Cash positive through the cycle. There is a lot of uncertainty out there with methanol demand and supply. So I would say I never want to make black and white statements, but it would be difficult for us to restart that plant without some certainty around a gas contract for the foreseeable future. Once you take the plant down for a significant.
The amount of time like we have theres quite a bit of cost involved in restarting. It so unless we had some certainty around gas because we're not that certain methanol markets and pricing.
It would be difficult for us to just to start it up but.
If we were to started off I think we'd have we get a lot of comfort Inn.
Higher methanol prices for a longer time, which means to me a demand recovery in some sort of.
Stabilization as a result of COVID-19, but I don't see that in the next one or two quarters in our current view.
I see so just sort of tighten if you were to restart. It obviously there is a bunch of startup costs and from your perspective, what you what Titan have to run for like at least a year or two to kind of make that so.
In order for that to make sense.
Yeah, I'm not going to put any lines in the sand I think we we don't want to go back to a month to month pricing arrangement as what I would say.
This is what we had from January to April when we shut it where march to when we shut it down so we're negotiating and we're still optimistic we'll get something done with the government, but until we do.
I think in our planning.
I'll be very optimistic to bring tighten up in this environment.
Okay, and then just a follow up can.
Can I just talk about the cash on the balance sheet. Obviously, there is about 1.2 billion of cash.
And your due to repay that 2022 debt mature at that the debt I guess soon but how should we think of the.
Cash on the balance sheet is this something you're looking to kind of hold on to.
Or are you kind of in the process of making some decisions on what to do with that cash in terms of whether you like repay that construction facility or.
Or like or I guess any other potential uses.
Preserving liquidity and financial flexibility our top priority right now so we'll continue to look at how markets develop I think the good news based on our current.
Forecast pricing for Q4 will be cash positive again, after you know maintenance and dividend and all the things. So we won't be eating into cash. So I think thats really good news, but is that sustainable I'm not prepared to put my hand up and say that yet but.
I think we'll leave that cash there to allow us flexibility and.
And depend.
Depending on how markets develop will be good stewards of cash like we always have we are not going to order it and if we get to a place where we see things where we can generate a lot of cash and just remind you had $300 a ton which is not too far from where we are today on a realized basis, we generate a nice amount of free cash so.
Too early to be making decisions around that and our goal is to preserve liquidity and financial flexibility.
Hi, great. Thanks, John I'll leave it there.
Thank you.
The next question is from Hassan Ahmed of.
Alembic Global Advisors. Please go ahead.
Morning, John.
Morning, John.
John wanted to revisit a comment you made earlier, you know around Argus and Argus sort of talking about.
Second MTP facilities coming online I mean, I too was quite surprised by that particularly keeping in mind some.
Some of these propane dehydrogenation facilities that are coming online in China. So so again, you know on the MTP side.
I mean, you know do you really think any of those facilities are going to come on line and then you know pardon go onto that.
What are your views about the MTO operating rates as you look into Twentytwenty, one I I completely understand demand is uncertain right now.
Because the pandemic, but just on the supply side I mean, there's just so much ethylene capacity that seems to be coming online.
In China. It came online this year continues to come on line, regardless of what the demand picture looks like so how are you thinking about you know the MTP restart and MTO operating rates in Twentytwenty one.
Yes, our view on MTO hasn't changed I mean, we said the first wave was going to get built and run and Thats whats happen indeed been running throughout the pandemic under for Threed less than 400 dollar ethylene.
90% rates unless.
Theres been a technical issue nobody that we know it's been taken down for so called economic reasons that I read about Argus all the time.
And through the pandemic it was probably the one demand source that was steady so that's pretty interesting that it and that has always been our view based on talking to them is once these get built are integrated and they'll probably run they may take maintenance at different times of the year. A these are fully integrated projects, but they.
They need the ethylene propylene to make all their derivatives and that they are selling everyday in the market and some of these sites make 10 products some make or really depends on the site. So the economics of running or not running are different for each and every site and that's what we look at we don't just look at methanol price and then what is propylene and ethylene trading and I think thats, a very simple model that.
Doesn't you don't really capture the full economic value.
All you have of the site.
Given MTO projects. So we've said that consistently and I think history has proven us right up to now that doesn't mean, we will be right in the future I don't predict the future, but we talk to them. We look at their operating rates and 90%. We think is full rates, just because they're always going to be in and turn around or some sort of technical.
And these are large demand users of methanol in on average plant might use $1.8 million on so they have a 30 or 60 day outage that really impacts the overall operating rates I think your 13 sites or something like that so there are big.
And they go down they have an impact on methanol demand. So rone 85 to 90 is what we would guide to and I.
I think thats, what we'll see if they ran at that rates at less than 400, all our ethylene then why wouldnt they in the future, but we'll see how it turns out MTP that that to me is really economic methanol to propylene and then you're competing with PDH and crackers in ethane crackers in the naphtha crackers.
Maybe short term expenses.
Makes sense to make some short term cash, but I really don't see a sustainable that's what we were told back in 2016, when the four plants went down because of the oil collapse last time, and PDH and propylene prices collapse and Thats. What we were told is there some conditions today that may make sense to make a bit of cash for.
For some time I don't know I, just don't see a sustainable but in this one I hope I'm wrong I hope they come up all four of them are they run forever that would be great, but I'm not counting on that and it.
In my forecast.
He said that he could and as a follow up John you.
Medium to longer term.
I guess, it's a struggle to even think about anything beyond the pandemic, but you know medium to long that you know with the volatility that we've seen in in methanol prices I.
I mean, what are you guys seeing incomes or.
Some of these sort of Greenfield capacity addition, announcements that have been made are you seeing sort of delays cancellations I mean, you know.
Sort of long that let's say you know four or five years out you know how are you guys thinking about call. It a you know a supply growth CAGR or however, you may think about the playbook no.
No I think it's a great point in this environment, it's very difficult to be running plants today never mind building new ones. So our current view is you know the Trinidad final get running as well and providing product at some point here in the coming quarters.
The.
Hong Kong plan will get finished and we'll run and provide methanol beyond that there's no shovels in the ground. So there is a few projects that they can Russia and some some new supply in China.
I will.
Displace existing production and then the big wildcard as Iran. If theres been plants under construction and are on for a long time and plants in according to Argus been been running which we havent. We watch the shipments out of around that so we know how much they are producing theres not a lot of demand within are on and it hasn't changed at all.
That much so that to me is the big wildcard how much production do we get out over onto the next three to five years and I don't have an answer for that but we'll continue to watch it but beyond that there's there's not going to be in my view a lot of a willingness to lend a bunch of money to this industry to build more methanol plants in this environment, especially.
Since 16, we've seen tremendous volatility in on since all nine we've had now in just over 10 years, three very volatile cycles and.
It's not a lot of fun at $214 a ton even if you are the low cost producer so I can't imagine.
Others looking to invest in this industry.
In the medium term.
Very helpful. John Thank you so much.
Thank you Denise.
The next question is from Mike <unk> of Barclays. Please go ahead.
Great. Thanks, Good morning, John.
Good morning, Mike has been wanting to go back to I think in your prepared remarks, you made a comment about for Q production being higher I was hoping just given.
The restarted Chile.
For Gee won some of the turnarounds coming back online if you could give us just a little bit more color around the order of magnitude. We should expect in terms of the Fourq you step up which I assume should also help some of your product mix as well.
I don't really guide to how to plant by plant operating rates I think I'd given enough guidance that you can come to the right the right number.
You know all we're not having any turnarounds.
Given the number for New Zealand.
Trip. So you can look at the capacity for other plants and kind of figure it out, but so I'd, rather not give a plant by plant guidance.
Fair enough and then I did want to go back to tighten and the potential restart there.
Kind of parsing between your words, but is it fair to say that getting tight and eventually back up and running is more dependent on getting the right natural gas contracts.
Structure in place versus kind of demand coming back or how should we think about what would need to happen in order to get tighten back online.
Yes, a little bit of history, probably helpful. We had a five year contract that Brent spread out. It ended December and we were always clear with the NGC that we wouldn't continue to run unless we had a gas contract.
Methanol market conditions were different than and we.
We came to short term arrangement as we are negotiating to keep the plant running on a day by day basis on a fixed price gas as were negotiating but our goal was never to run the plant without a medium term five year gas contract, but in good faith, we work to do that with the government, but as soon as call it and the demand.
Destruction happen in pricing cratered, it may no longer sense to follow that strategy and we were very open with the NGC that we'd be taking the plant down, but we would still.
Be negotiating in good faith, a contract that allowed us to generate EBITDA throughout the cycle and Thats, where we are today. So I again, I never say never about anything but would be unlikely for us to restart the plant in.
In this environment without some sort of firm gas price arrangement with the NGC that takes us out three to five years. So we're still optimistic we can get there, but until we're there we're not going to be running.
Got it appreciate it thank you.
Thank you.
The next question is from Matthew Blair of Tudor Pickering, <unk> Pickering Holt. Please go ahead. Your line is now open.
Just want to.
Circle back you meant you mentioned some cost associated with restarting Titan.
With the Chile for restart do we need to factor in any incremental costs into our Q4 modeling for that.
Well I guess I'll remind you on my guidance for Chile for our plan was always to take it down during their winter months co better know cobot because gas is not available in that part of the region to run two plants during their winter time, so that would have been baked into our plans.
For 2020 and 2021, that's our operating model so any associated costs with that would've been baked into our plans tightens different we weren't planning on shutting it down we're optimistic we would get a gas contract and so there would be some additional cost I'm not prepared to say how much or or.
But.
When we take Chile, four down we take it down in a way that we're going to start it up in three months and tight.
Alright was taken down.
And with the intent of starting it up but so there will be some additional costs. The order magnitude not really prepared to to say until we have more detail.
Okay sounds good and then you had a pretty big inventory draw in Q2 and now again in Q3 are you happy with current inventories or do you feel a need to to build those backup in the coming quarters.
Yes lots of help there.
When when we saw what happened in the markets liquidity was our number one focus working capital.
Release was our number one focus I think our marketing team and our supply chain did an outstanding job in reducing our working capital while still keeping every single customer.
And their demand on 100% satisfied even though it was very volatile so.
Again, we demonstrated our value to our customers about being flexible agile and meeting their needs whether up or down or the same. So all these out to our supply chain people to set aside and you know they try to optimize working capital while keeping our customers satisfied and that's what we'll continue to do in there.
Some fluctuations, but our guidance there's still there's still the same and some quarters will be little higher some quarters to be a little lower but.
But you know you think about it we're selling over 10 millions of tons of methanol or.
Average inventories around a million 2 million one.
Third of that is that the plan a third of that's on the waters only a third of that is servicing customers. So that three to 400000 tons servicing 10 million tons of sales our team does an outstanding job each and every day and in keeping with working capital low and servicing our customers.
Sounds good thanks.
Thank you.
Thank you.
The last question is from Laurence Alexander of Jefferies. Please go ahead.
Hello, just one quick one then given the benchmark gay for the Green hydrogen.
What would be the equivalent price of merchandise.
Methanol plus.
Methanol plus offsets either carbon credits or other offsets.
So just so people can think if a customer wants to have a green methanol pipeline.
As part of their claim what is the transition costs until the.
Your methanol technology to sort it out.
Not sure I understand your question.
The cost of producing green methanol like we do it right.
Its approximately two times, what it would be for natural gas based methanol. That's your question.
No wonder introducing.
If a customer would like to have be able to claim that they are using.
Carbon neutral methanol and.
And they went out into the markets have by your carbon offsets or.
Or fund the drug renewable electricity or some other kind of program to offset do you have any sense for what that cost would be relative to the cost of just doing green methanol with this technology.
I guess it depends on the price of the carbon offsets, which I understand trade on a market thats pretty volatile as well so.
You're probably above my pay grade there aren't so my question okay. Thanks.
Okay.
Thank you and we are encouraged by recent early signs of economic recovery, including improvement in methanol demand and an increase in methanol prices. Thanks to the dedication agility of our team members worldwide. We continue to operate our plants safely and reliably will reliably and deliver secure a reliable supplier to our customers worldwide.
In this uncertain environment, we remain focused on strengthening our business by preserving liquidity and improving financial flexibility to enhance our ability to navigate potential near term challenges and execute on our strategy to deliver value to our shareholders over the medium to long term. Thank.
Thank you for joining us today, and we'll speak with you in January and thank you for the ongoing interest in our company.
Thank you.
Brent has now ended please disconnect your lines at this time, we thank you for your participation.
This conference is no longer being recorded no he's put modest secondary home that day.
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