Q3 2020 Methanex Corp Earnings Call
[music].
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 web site and Methanex dotcom.
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 outcomes to differ materially from the actual outcome certain.
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 third quarter, 2020, and DNA and to our 2019 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's date.
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.
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 of it.
We report these non-GAAP measures are 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'd 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, Hope that everyone is continuing to stay safe and healthy.
In the third quarter, we continued to demonstrate the resilience of our business through this difficult time.
Our manufacturing operations and supply chain of runs safely and effectively throughout the pandemic, which has enabled us to deliver on our commitment.
Secure reliable supplier to our customers around the world.
We'd like to express our appreciation to our team members across the globe.
Understood and 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 preserve financial flexibility through this uncertain time and emerge stronger when Merck market conditions further improved.
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, which was partially offset by lower sales of methanex produce product.
And higher 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 of our $250 million.
Secured notes that were due in March 2022.
Excluding this onetime finance charge, we would have recorded an adjusted net loss of $68 million or 88 cents 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.
It 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 in 2019 and below pre cobot expectations for 3% to 4% growth.
On an annual basis, we estimated the forecast demand in 2020 will be lower than the 2019 by 3 million tons versus peak cobot expectations for 3 million tons of growth.
As a result, we estimate that 2020 global demand will be 6 million tons lower than previous cobot 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 plant 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 onest is in the process of restarting.
Overall, the combination of increased ethanol demand and lower industry supply has tightened global inventory levels and moved methanol prices higher.
We estimate that the industry cost curve, 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 and our office facility in Trinidad.
In New Zealand, our production levels were lower in the third quarter as a result of yours.
Seat floor got deliveries as previously forecast.
We expect to receive higher gas deliveries in the fourth quarter.
In Geismar, both for our plants ran at full operating rates during the third quarter.
We completed our low capital cost Geismar, one de bottlenecking projects as we 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 type of facility remains idle negotiations with the national gas company or Trinidad and Tobago for 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 within natural gas supplies are needed for residential heating.
As global methanol demand is improving we are in the process of restarting or 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 in the current unprecedented environment impacted by both COVID-19 and challenging commodity prices the path and pace 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 projects.
Reducing our dividend by approximately a $100 million on an annual basis suspending share buybacks, reducing maintenance capital and operating costs.
Operating covenant relief on our credit facilities.
In addition in mid September we issued $700 million in 2027 notes to replay repay existing debt and increase our liquidity and financial flexibility with limited impact on our leverage metrics.
We have repaid the $200 million drawn on our revolving credit facility and in late September.
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.
No other debt maturities until late 2024.
During the third quarter, we also secured additional flexibility under our revolving credit and Geismar three construction facilities related to the minimum EBITDA to interest coverage ratio covenants through to December 30, Onest 2021.
A prior waiver have provided covenant relief until June Thirtyth 2021.
The steps that we've taken in 2020 to increase liquidity and improve our financial flexibility positions us well to navigate through this uncertain time and generate generate significant long term value and market conditions further improve.
We are pleased to see a recent early signs of economic recovery, including improvement in methanol demand and prices.
Nevertheless, we continue to evaluate all options to preserve liquidity and improve improve financial flexibility as necessary.
Now I'd like to turn briefly to our Geismar three project.
As we've noted before our Geismar three project there 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 safe on time and on budget and ahead project had been significantly de risks 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 the future project in the future.
Such as certain key engineering activities and procurement of critical path equipment.
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 methanol demand outlook.
Methanol industrys needs for new capacity.
The methanol price forecast.
The ability to fund the project and our suppliers ability to complete construction and deliver material and 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 full 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.
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.
We're 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 cost to be flat in 2021 compared to 2020 as we continue to focus on our low cost strategy and we expect our maintenance capital 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 methanol 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 the 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 supply to our customers.
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 would now be happy to answer any questions.
Thank you please.
Please press star one if you have a question if.
If you are using a speakerphone. Please whats your handset before making your selection. Please.
Please limit your inquiries to one question plus a follow up question.
After that if you have further questions. Please rejoin the queue.
There will be a brief pause for the participants register thank you for your patience.
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 in Q4. So obviously in Q3, we had strong demand recovery MTR rates were high we had limited supply because of outages to turnarounds hurricane lore et cetera, but now as we can.
Of goal 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 supplies coming back so.
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 as supply continues to be constrained.
Or it's a plant that is being commissioned in Trinidad that 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 some time over the next few quarters and.
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 as these plants need ongoing maintenance and in the call. Good night.
Teen environment, it's very difficult.
Two regular maintenance nevermind turnarounds as we've just experienced ourselves doing a couple of them. So I think it's hard to predict but I think Q2, what we see as the bottom now but that is really depending on demand recovery and what you see for demand when we talk to our European customers today, even with law.
Downs their demands so 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 with them.
John My follow up question is on the dividend obviously liquidity is.
Vastly improved youre now prepaying debt to couple of years out.
When you think about the dividend.
Is it your hope that you will reinstate the dividend back to what it.
Secondly 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 metrics back to investment grade credit ratings beyond that our our capital allocation strategy Hasnt changed three pillars to take excess cash to grow the company in line with the market.
We have projects that meet or exceed our hurdle rate of 13% return on capital employed.
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. So.
My first on G. Three so for it to be we started with unique confidence that free cash flow would be positive, including DTC 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 period that will have to figure out how to finance. So that there is a lot of different options on how we do that but we havent made any decisions.
Okay and for my follow up what production level and 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.
Cold or no cove. It. 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.
Yes deliveries in the future from New Zealand, but next year I think all guide to about 1.8.
Great. Thank you.
Thank you.
The next question is from Jacob bout of CIBC. Please go ahead.
Good morning.
Great.
How far can you defer T three without.
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 in our team are working hard to negotiate all the various contracts that we have related GG three to give us the maximum flexibility that we could hope for in this very uncertain environment.
Carbon so we're continuing to talk to our various partners, where we have made commitments and everybody is experiencing similar you know that we are with all this uncertainty and I think our partners are being flexible, but really remedy numbers to share and we're focused on the 18 month care and maintenance and see how markets develop between now.
And then the.
But to be clear after 18 months, if you continue to.
Delay this project there will be some financial targets.
I wouldnt commit to that today, we're negotiating with our with our suppliers we made.
We have different options to consider.
So I don't think there'll be some costs.
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 four.
What methanol price you need to get to breakeven there.
What methanol price to make sure I don't yet breakeven prices 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.
And 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.
Okay.
I'll leave it there thank you Jeremy.
Thanks, Tim.
Thank you. The next question is from Steve Hansen of Raymond James. Please go ahead.
Oh, Hey, guys.
Just a follow up on until the if I may.
Curious John I think in the past you had guided towards Chile being in a position to do roughly 75% utilization on two plants that was prior to Chile four shut down obviously or are we do assume that thats going to be a similar type range right now going forward once Chile, four is up and running or how should we think about that cadence.
Yes, I mean, the world needs the product the guidance hasn't changed I mean, the only two plants, we had flexibility on take or pay gas was chilly forward tightened and that's why we decided to shut those close plants down our guidance was 75% on annualized basis for two plant operation and how that was structured was think of Chile for running.
Being 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.
I'd.
Once theyre integrated so we have a bit of discovery's 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 at lower than full.
It's 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 we 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. So 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 not less 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 at these plants the catalyst aggregates over time and especially in an oxygen based plant. So every month that goes by you don't change of 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 auction based plants, you know deep catalyst change a little bit more frequently than the regular steam reformer plants. So.
You know we were lucky that we had a window to complete the turnaround. It's about 45 days give or take and we're pretty well complete and will be starting 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 protocol. So.
Im glad were not having any more at this time.
Year to do in this environment or even constructing Angie three I think would be a challenge that we have seen in that part of the world. The plants that are under construction are delayed and cost overruns because of the cove in 19 protocols et cetera, So Dan.
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.
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.
Set of 150 onsite you might add 55, so you're just doing the stuff that you absolutely absolutely have to do to keep the plant running safely.
When you do a turnaround you're bringing between 1000 to 1800 people onto a site in a six to 10 week period. So you can imagine in a COVID-19 environment with all the protocols.
Distancing testing masks a lot of these jobs and confined space environments really collaborative lot of team work and you know 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 contract say, we're going to have X number of bodies available for this particular job and then you get half that amount for a job so that leads to lots of complications.
As in any time call, but are no call, but 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 protocols as 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 down.
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 in this fund is Argus is and Thats, usually I'm more bullish that Argus, so its interesting but.
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 GBS. 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.
In longer downtime when people are doing maintenance as it did take 1%, 2% now does 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 the light 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 reduce operations quite significantly.
Anecdotally I think some of the outage as we've seen in Q3 planned or unplanned have been related to maintenance, but that's that's normal then I guess every different country has different protocols on how they do open 19.
Yeah.
Contract or Im sorry, us 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 expensive, but I don't really have a number I can share with you off the top of my head.
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 theres lots of gas and.
I'd say $4 and below there is 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 took that 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 this one time to finish up stuff, but how should I think about that long term. If this ends up being in care maintenance for more than 12 months.
Yes, again, we've given 18 month period of care maintenance that 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 100 million more to go for a total.
Around 3% to $400 million and EUR $400 million and then we'll have another 900 million to go.
To finish the project and that that 900 million you could change depending on.
What timing, we're looking at to complete that project, if we have to put it on longer hold or or temporary further hold or go forward and we havent 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 nickel.
Comparing quarter over quarter or your discounts to.
So your realized price.
Improved whereas youre.
Go benchmark price decline so the discount clearly most reduced can you talk about what the factors are the discount.
Is that something that is.
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 tends to expand and you would have seen that in our results. Since 2018, when we've had both of those events occur and in the quarter, we probably had fairly state.
Well 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 we'll.
We will do so and probably will look to update our guidance on discounts in the January call.
Oh, thank you.
Good.
Thank you.
Okay.
Next question is from Eric Petrie of Citi. Please go ahead.
Hi, good morning, gentlemen.
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 in 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.
Hello.
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 Seo to off of a power plant takes water through electrolysis electrolysis based hydrogen and oxygen. The auction goes the air we use the hydrogen to make methanol. That's so called Green methanol, which has no carbon so it's fine.
Possible very expensive and hard to scale at least these plants would be in the order of magnitude of 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 all over the world a lot of capital involved in probably the price you'd need is eight nine.
$100 a ton to to make a goal 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 is some each applications.
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 the business and 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 downturn.
Natural gas that's made from a.
Zero carbon source and using not through our through our plant. We can then have zero carbon methanol. So but these are I'd say very small volumes today, but.
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 far as onboard ships. Yet we are seeing a lot of interest in onboard ships. Our competitor has ordered a couple of ships that.
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.
Could you know 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 beds Kobe than the 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 it 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 is 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.
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 the reduced demand again, and whatever we might be seeing from 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 that tighten then 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 Andy.
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 will look to 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. It's 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 look for supply demand and we're not bringing it up.
For a couple of months, we're basing it on.
And we think we'll be able to run at rates through until the next time, we need to shut it down which is as they become into their their winter time, which is just.
The spring 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 die.
Dire again, but thats not our current view so you should expect us to run Chile, four right up till their their winter time next year is our current thinking.
As far as tight.
You know I think we took it down we don't have a gas contract that allows us to be.
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.
Amount of time like we have there's 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.
Be difficult for us to start it up but if.
If we were to started up 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 lots of startup costs and from your perspective, which it with Titan have to run for like at least a year or two to kind of make that.
In order for that to make sense.
Yes, I'm not going to put any lines in the sand I think we you know we don't want to go back to a month to month pricing arrangement is what I would say, which 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 where the government, but until we do.
I think in our planning.
Be very optimistic to bring tightened 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's about 1.2 billion of cash.
And your due to repay that 2022 debt mature 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 in 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 hoarded 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.
Limbic Global Advisors. Please go ahead.
Morning, John.
Morning, John.
John wanted to revisit a comment you made earlier you know around.
Around Argus, and Argus sort of talking about up selling.
Second MTP facilities coming online I mean, I do was quite surprised by that particularly keeping in mind.
Some of these propane dehydrogenation facilities that are coming online in China. So so again.
On the MTP side.
I mean.
Do you really think any of those facilities are going to come online and then you know pardon go onto that.
What are your views about the MTO operating rates as you look into Twentytwenty, one I completely understand demand is uncertain right now because.
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's came online this year continues to come online regardless of what the demand picture looks like so how are you thinking about.
The MTP lease dog 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 that's what's happened I mean, they've been running throughout the pandemic under form threed less than 400 dollar ethylene at 90% rates unless theres been a technical issue nobody that we know it's been taken down for so called economic ROI.
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 as 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 there.
You know they need the ethylene propylene to make all their derivatives and that they are selling every day on the market in 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.
All you have of the site.
Any 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 a 90%. We think is full rates just because they're always going to be in a turnaround 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 we're own 85 to 90 is what we would guide to and I.
I think thats, what we will see if they ran at that rates at less than 400, all our ethylene then why wouldn't 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, one crackers in ethane crackers in the naphtha crackers.
Maybe short term it 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.
Make a bit of cash for some 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.
Okay, and as a follow up John.
Medium to longer term.
I guess, it's a struggle to even think about.
Anything beyond the pandemic, but medium to long that you know with the volatility that we've seen in methanol prices.
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.
Supply growth CAGR or however, you may think about the playbook.
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 it here and then in the coming quarters.
The.
Hong Kong plan will get finished and we will run and provides methanol beyond that there's no shovels in the ground. So there is a few projects that they can Russian some some new supply in China.
Total.
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 that have according to Argus been been running which we havent, we watched the shipments out of around and Thats. How we know how much they are producing so theres not a lot of demand within are on and it hasn't changed at all.
That much so.
To me is the big wildcard how much production do we get out of around over 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.
This volatility in on since all nine we've had now in just over 10 years, three very volatile cycles and is.
There's not a lot of fun at $214 a ton even if you are the low cost producer so I can imagine.
Others looking to invest in this industry in the medium term.
Very helpful. John Thank you so much.
Q Dan.
Next question is from Mike You said.
Please go ahead.
Great. Thanks, Good morning, John.
Good morning, Mike.
Wanted to go back to I think in your prepared remarks, you made a comment about for Q production be higher I was hoping just given the.
The restarted Chile four.
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've 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, a bit is it fair to say that getting tight and eventually back up and running is more dependent on getting the right natural gas contract structure.
The 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. When we had a five year contract that Brent read out at ended December and we were always clear with the NDC that we wouldn't continue to run unless we had a gas contract.
Methanol market conditions were different than and.
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 is 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 hasn't the demand.
Yeah.
Destruction happened in pricing cratered. It may no longer sends 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 arranged 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 Pickering Holt. Please go ahead. Your line is now open.
I just want to.
Go 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 time was always to take it down during their winter months co better know cobot because gas is not available in that part of the reason to run two plants during their winter time, so that would've been baked into our plans.
For 2020 and 2021, that's our operating model so any associated costs with that would have 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.
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 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.
[laughter].
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 decide and.
Try to optimize working capital, while keeping our customers satisfied and that's what we'll continue to do and there'll be 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 when you think about it we're selling over 10 millions of tons of methanol.
Average inventories around a millions and millions won a third of that is that the plan a third of that is 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 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, okay for the green hydrogen.
What would be the equivalent price.
Price of merchant.
Methanol plus.
Methanol plus offsets either carbon credits or other offsets.
So just so people can think if a customer wants to have.
Hey, Green methanol pipeline.
As part of their claim.
What is the transition costs until.
Green methanol technology to sort it out.
I'm sure I understand your question.
The cost are producing green methanol like we do at sea. Our eye is approximately two times, what it would be for natural gas based methanol. That's your question.
No wonder introducing.
If the customer would like to have be able to claim that they are using carbon.
Carbon neutral methanol and.
And they went out into the markets have by your carbon offsets or.
Or funded 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 between green methanol with this technology.
I guess it depends on the price of the carbon offsets, which I understand trade on market and thats pretty volatile as well so.
You're probably above my pay grade there aren't some questions. 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 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 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.
Conference has now ended please disconnect your lines at this time, we thank you for your participation.