Q1 2022 Methanex Corp Earnings Call
Okay.
Okay.
Okay.
Yeah.
Okay.
Yeah.
Hmm.
Yes.
[music].
Okay.
Mhm.
[music].
This conference is being recorded so it goes to the house at all or as you see.
Ladies and gentlemen, thank you for standing by welcome to the Methanex Corporation Q1, 2022 earnings call.
Now I'd like to turn the conference call over to MS. Sarah Please.
Please go ahead.
Good morning, everyone. Welcome to our first quarter 2022 result conference call. Our 2022 first quarter news really managements discussion and analysis.
And financial statements can be accessed from the reports tab of the Investor Relations page on our website at <unk> Dot com I'd like to remind our listeners that our comments and answers to your questions. Today may contain forward looking information. This information by its nature is subject to risks and uncertainties that may cause.
To differ materially from the actual outcome.
Material factors or assumptions were applied in drawing the conclusions or making the forecast or projections, which are included in the forward looking information.
Please refer to our first quarter 2022, MD&A and our 2020 one annual report for more information.
I would also like to caution our listeners that any projections provided today regarding <unk> future financial performance are effective as of today's date. It is our policy not to comment comment on or update this guidance between quarter.
For clarification any references to revenue average realized price EBITDA adjusted EBITDA cash flow adjusted income adjusted earnings per share made in today's remarks reflect our 63, 1% economic interest in the Atlas facility, our 50% economic interest in Egypt facility and our 60 per cent.
Economic interest and waterfront shipping. In addition, we report our adjusted EBITDA and adjusted net income excluding the mark to market impact on share based compensation and the impact of certain items associated with specific identified events. These items, our non-GAAP measures and ratios that do not have any standardized meaning prescribed by GAAP and there.
Therefore unlikely to be comparable to similar measures presented by other companies.
We report these non-GAAP measures in this way because we believe they are a better measure of underlying operating performance and we encourage analysts covering the company to report their estimates in this manner.
I would now like to turn the call over to Matt <unk>, President and CEO , Mr. John flooring for his comments and a question and answer period. Good morning, I hope that everyone is continuing to stay safe and healthy today.
Today, We will review our strong first quarter 2022 financial results provide an overview of the methanol markets discuss our operational results and share our near term outlook.
And then we will open up the call for questions.
Turning to our financial results methanol posted prices were supported in the first quarter of 2022 by favorable supply demand fundamentals.
Average realized price of $425 per ton and higher produce product sales volume drove adjusted EBITDA of $337 million and adjusted net income.
100 <unk>.
$9 million or $2 16 per share.
Now turning to the methanol market global methanol demand in the first quarter of 2022 increased slightly compared to the fourth quarter of 2021.
Increase was driven by an increase in operating rates for methanol to olefins or MTO plants.
The impact from the dual control policy in China, and turnarounds in the fourth quarter.
MTO operating rates increased by approximately 20% from 65% during the fourth quarter of 2021% to 85% in the first quarter of 2022.
Demand from traditional chemical applications was lower in the first quarter compared to the fourth quarter due to the seasonal slowdown in manufacturing activity during the lunar new year in China combined with some downstream turnarounds in the United States traditional demand has recovered from the seasonal lows in February .
Industry industry operating rates remain challenged during the first quarter due to ongoing operating rate constraints related to winter conditions in the middle East and feedstock availability and cost in Europe .
Methanol prices in the first quarter was supported by tight industry conditions and the impact of continued high global energy.
<unk> prices on a producer call.
Increased production from Iran is expected in the second quarter, and we expect market conditions to continue as plants in Trinidad Europe and Asia have planned turnarounds.
We estimate the industry cost curve, which is set in China is 380 to $400 per ton based on coal price range of 1000 1100 RMB per ton.
Yeah.
Our main posted prices were slightly lower in all regions North American prices decreased by $21 per ton to $638 per ton.
Asia Pacific and China prices decreased by $20 and $30 per ton to $520 and $470 per ton respectively.
Our European contract price is set quarterly and we increased our second quarter 2022 price by 65 euros per tonne to 570 euros per tonne.
Our first quarter, just kind of run rate was in line with our guidance.
2022 at 20%.
The methanol market fundamentals remain solid to date, we have not seen significant evidence of demand destruction because of sustained elevated methanol prices COVID-19 related lockdowns in China, the conflict between Russia, and Ukraine or inflationary pressures.
Industry operating rates remained challenged and high energy prices and deal of geopolitical events could further constrained production I global energy prices. It has nothing at all to cost competitiveness against alternative fuels and we continue to see firm demand from traditional chemical applications.
Turning to our operation results, our production levels were lower in the first quarter compared to the fourth quarter due to lower gas availability and New Zealand minor unplanned outages in Geismar in Trinidad and a 20 day planned outage in Egypt.
Chile production levels in the first quarter were comparable to the fourth quarter as our Chile for Fiat ran continuously in both quarters. We expect to continue operating Bocelli plans through the end of April 2022.
In medicine hat.
Production in the first quarter was slightly higher compared to the fourth quarter and our fad Mad at nearly a full operating rates.
We continue to forecast our 2022 production to be approximately 7 million equity tonnes, although actual production may vary quarter by quarter based on gas availability and maintenance extended planned outages or anticipated events.
Now turning to our balance sheet and cash.
Capital allocation in February we closed the previously announced strategic partnership with Mitsui O S. K limited or M O L involving waterfront shipping and received proceeds of approximately $145 million.
We ended the first quarter in a strong financial position with approximately $1 $1 billion in cash.
$600 million Undrawn back up liquidity, which meets our goal of having cash on hand to fund the remaining Q3 capital cost spend as well as having 300 million for operational flexibility.
Our disciplined approach to capital allocation has not changed in our priorities remain the same we use the cash we generate to maintain our business pursue accretive growth opportunities and continue our consistent track record of returning excess cash to shareholders.
Construction on our advantaged G. Geismar three project is progressing well and is on schedule on budget and is expected to reach commercial production by late 2023 or early 2024 at a time, we believe the industry will need new supply to meet growing demand.
<unk> will enhance our current asset portfolio and significant significantly increase our cash flow generation capability.
At a 400 dollar metric ton average realized price G. III generates approximately $325 million of adjusted EBITDA per year. It is a world class C. O. Two emissions intensity profile will help us meet our recently published a commitment to reduce our greenhouse gas emissions intensity.
Our capital cost estimate for the G. Three project is $1.25 billion to $135 billion and we spent approximately $620 million to the end of the first quarter.
We expect approximately $625 million to $725 million of remaining capital cost before capitalized interest we continue to anticipate spending approximately $100 million per quarter, although the timing of expenditures may fluctuate period to period.
Our consistent track record and commitment of returning cash to shareholders is highlighted in the board's decision to approve both a 16% increase in the quarterly dividend to <unk> 14, and a half cents per share as well as an increase to our share buyback program for two or.
3.810464 shares two 6.094 million 171000 shares representing 10% of the public float.
Max I'm allowed in the 12 month period under Canadian regulations. This buyback program will expire in September of 2022.
I would also like to highlight that earlier. This month, we released our 2021 sustainability report, where we outlined achievable and solutions focused environmental social and governance commitments.
Continuing to deepen our understanding of the opportunities and the risks from the transition to a low carbon economy. They believe that we're well positioned to continue to deliver long term shareholder value as the world transitions.
Turning to the outlook for the second quarter.
Just on our current posted prices for April and May we expect Q2 to be another excellent quarter for EBITDA generation and earnings looking forward. The methanol market fundamentals are solid our cash generation is strong our G. III project is fully funded and we are well positioned to continue with our commitment to return excess cash to our shareholders.
We remain focused on progressing our advantaged G three projects safely and on budget.
Operating our plants safely and reliably security long term economic Jasper idled plants in Trinidad in New Zealand, and delivering secure and reliable supply to our customers and delivering on our capital allocation priorities.
We would now be happy to answer any questions.
Okay.
Thank you as a reminder, you May press star one if you have a question.
The first question is from.
Ben Isaacson from Scotiabank. Please go ahead.
Thank you very much and good morning, and congratulations on the good numbers.
Two questions for you number one with respect to China and the Lockdowns that we're seeing from Covid are you seeing any pivots in methanol demand and in methanol production. There can you just frame what what youre seeing in China right now.
Yeah as of today, we're not seeing any impact on on demand. We're also obviously a headwind and were watching certainly the lockdowns arent as severe as they were in the spring.
Of 2020, but it's something we're watching.
On the supply side again, we you know most of the plants are outside the lockdown areas. So we're not seeing our customers or even our competitors having to shut down at this time, having said that if you look at pricing in China. Today is around 365 equivalent U S. Dollar per ton that's below the cost curve that we see in China based.
On coal and natural gas. So if they were to shut down it's probably more as a result of cost curve then COVID-19 at this point.
Thank you for that and then just my follow up.
If we leave the price for the moment can you talk about the value of methanol, where we're seeing a lot of swings in commodities oil at 100, we're also hearing about recession fears so.
What is the most secure right now in terms of downstream value from ethanol and what's at risk.
Well I think the one that we always watch is the M. T O N E.
That's the one that you know, but on the affordability of the curve as we call. It that was the one that gets impacted first most of the chemical derivatives methanol is not a very large component of the cost of their product, but MTO is the one we watch Oh, we're being we're fortunate in a high energy environment like we're seeing today. That's also very good for olefins.
Because the naphtha crackers, obviously are paying a lot more for naphtha today than they would have been this time last year, so that slipped at the cost curve quite nicely. So the MTO producers are running like I said, 95% today. So you know unless you saw a huge correction in olefins prices, but that would mean energy prices.
All I can quite a lot from where they are today I think we're gonna be fine on the demand side.
Great. Thanks.
Thanks Ben.
Thank you. The next question is from Joel Jackson from BMO capital markets. Please go ahead.
Hi, good morning, John .
Hey, Joel.
John .
I I missed the last question I Hope I don't I think question.
What do you think of studying and ethanol price right now is it cost curve isn't affordability since like some more of the cost curve.
And then what are you sort of seeing into April here in terms of the market, maybe a little more supply coming out for somewhat different region.
Maybe a little bit of demand restrictions locked down and things like that in China GDP concerns.
On the ground kind of anymore right now.
Yeah, I think there's a lot of negative sentiment out there Joel and I think that's driving some of what we're seeing in the short term.
When we looked at our supply demand balances demand is holding up as bounce back with traditional demand for Chinese new year, MTR was running well high energy makes the other energy applications very very attractive for for methanol. So we expect demand to continue to grow and we're watching it very closely obviously, we have visibility throughout the globe.
Through our network of supply chain and marketing teams on we're not seeing like I said any impact on demand and I think we're expecting quite a few are planned outages coming up here in the May June period, which and argue are going to continue that.
A favorable supply demand balance, which will lead to strong pricing cost curve hasn't been setting the pricing. If you look at the last two quarters, we've been well above the cost curve.
Didn't really supply issues.
Led to the higher pricing that cost curve and we'll continue to watch it but when we look at all the all the puts and takes we think conditions are still pretty tight and inventories are pretty low throughout the system. So we'll continue to follow it.
One caveat and I said it in my opening remarks, we are expecting a bit more supply from Iran. As they come out of their winter and we're seeing that as we speak but we're also seeing like I said other planned and unplanned outages.
Okay, and then if I recall.
That you would kind of have a really really good view on where costs are going for Q3 I think.
Junior sometime this summer so when you when you're going to have a real good handle on the remaining class a G. Three if you have any.
The material inflation, maybe you can give an update on how much of the remaining costs are fixed versus variable what are the biggest deltas or costs are good or bad that that could happen.
There's a lot.
One six quarters of that project.
Yeah, we're really the only the only cost that we're facing going forward as labor you know all the equipment on site. The engineering is done we've actually completed most of the civil works, where we're starting to come out of ground. We've got a video that we just produced that will.
Throw off with it on the website for you to see and if you come to our Investor day in June you'll be able to see it first firsthand and the progress. We've made so it's really around labor and you know as of today.
It's quite a bit through the construction of the civil like I said in the labor rates that we forecasted and the productivity numbers. We forecasted are bang on so we're not having to compete with labor in the ear, there's not any other large projects being constructed during this time, we've got a wonderful site. There. So safe side. We've got you know parking for everybody it's easy.
To get in and out so it's a preferred site for people to work out so as of today, we are not seeing any any press.
Pressure on labor or productivity and that's the one thing that will continue to monitor I'll remind you.
This project, we have quite a bit larger owners team than we did on G. One G tube and so we're much more involved in the scheduling and the workflows et cetera than we were in the previous projects and it really helps when productivity you've got about 100 people on site today. So coordinating all of that activity is really important to make sure your productivity doesn't fall off.
I'm, just maybe one follow up on that.
Way to think about it back and you've talked with us before than when you're asking me if the budget a longtime ago, you're putting so much contingencies, if you're seeing inflation, if not worse than your contemporaries is that fair.
Yeah, we havent barely touched the contingency and it's you know it's a very large contingency based on let's say compared to previous projects that we've had so I think we'd have to see you know rates and productivity increased significantly on rates or to the decreased significantly before we.
Use up all of that contingency and even if we did use up all the contingency we'd still be in line with the guidance that we've given you for completing the projects. So I feel really good at where we are in the project and first priority as always safety and if you have a safe site then you've got a you know a high quality project and a good productive site and that's that's our focus.
Thanks, a lot.
Thanks Joel.
Thank you. The next question is from definitely something from RBC capital markets. Please go ahead.
Great Thanks, and congrats on a strong quarter.
First question. Our first question is on Egypt, So the 20 day outage.
Should we think of that as a full turnaround so that would be one of the two to three turnarounds, we expect each year.
I think I would think of as a partial turnaround Nelson.
There were some things that we had to take the plant off to address from a safety perspective, we couldn't continue on so we address those when you plan to turnaround as you had.
Playing a bunch of people you're buying a bunch of catalyst and equipment and that's you know years in the making so you should think of that as we did a lot of some of the work that we would do in a normal turnaround during that outage. So if we did have a turnaround there at sometime in the near future.
Some of that work, we'd already been done.
Okay. Thanks for that and then just on that topic, you mentioned that you expect multiple plants to be shut down for turnarounds.
And the sector can you mention any particular regions that are going to get hit harder on the supply side.
Yeah, maybe I'll ask rich Sumner, our VP of marketing like CWC marketing logistics to answer that yes. So the plants that we see adding him to turn around and we know that and and Russia.
There's a few plants that would be paid regularly scheduled in Europe , Norway and plant in Norway.
We know in Trinidad there was already a plant down and then in Southeast Asia, Malaysia, and Brunei and all of that planned plant turnarounds and and as of today as well we know that there are some ongoing issues in a rabbit happening today is volatile.
Okay. Thanks.
And then just moving on to the dividend so.
The dividend increase can you talk about what you see long term for the dividend like can you see it.
Getting back up to the pre pandemic levels in 2019 or should we expect that to be much further on the horizon.
Well I think we've mentioned previous times that we've seen a lot of volatility in the last 10 years.
We've seen prices ranging from 200 to 500 so.
It's really been volatile for a number of black Swan events that happened and you know them as well as I do so I think after the last one the Covid lockdowns.
You kind of came to the conclusion that having flexibility in how we return money to shareholders has got a lot of value. So I think there is room to continue to increase our dividend as we bring on <unk> three and <unk>.
Pricing continues to be strong and our you know what.
We'll look at that but I think our preferred.
At this point in time is to use the share buyback and the flexibility. It allows us to return cash to shareholders. So you.
Getting back to pre pandemic levels of the dividend.
No I don't see that in the in the near term.
Okay got it thanks I'll leave it there.
Thank you. The next question is from Jacob bout from CIBC. Please go ahead.
Good morning.
Yeah.
I don't know of any pickup.
Yeah I had another question on <unk> three so.
So we talked a bit about inflation.
Ply chain procurement is that having any issues of fresenius user from a strong Q3.
Yeah like I said, we've got all the major equipment on site. So you know the biggest issues would've been major pieces of equipment and getting the made because they take a lot of parts and stuff from other people as well, but having those on site. It gives us a lot of a lot of comfort you know took.
Typically with a small things like nuts, and bolts and you know that's something that we would have a you know a few weeks supply chain, but what our team has done down there as they anticipated potential issues in supply chain and ordering those types of equipment or small parts way in advance. So we've seen the odd thing here or there, but really hasn't delayed the project or better.
Huge impact on like I said, the productivity of the completion at this time, so I know the teams on top of it and it's one of their key risk factors there, they're managing and we certainly haven't seen any significant impact on the project because of supply chain issues at this time.
Okay, and then maybe a bigger picture.
Question.
Just as you think about the fallout of the Russia, Ukraine more.
What do you think of the long term implications from the methanol industry.
Do you think there's going to be more of a focus on stable methanol supply you know industry moving away from Russian gas based methanol supply.
What do you think is your opportunity for methanex.
I guess it depends on how significant the word continues and what happens does it get wound up and what happens with the energy complex as a result, it seems to me Europe is set on moving away from Russian energy.
So that means that they're going to have to be replaced from elsewhere, which is good in my view lead to higher prices, if there's higher gas prices in Europe . That's good it means less production of methanol certainly the Norwegians might decide to maybe syngas instead of making methanol that could be an option for them as well.
Russia itself continues to make methanol and they consume ethanol in the country and they export about one five to 1.8 million tons.
Almost from day, one of the war.
<unk> told us they did not want to get a rush in material and I think that's pretty much.
Much across the board and in the European customers. So they were looking to get product from other places, which are displacing supply chains.
Which is leading to higher costs. So you don't.
You don't like to see these disruptions and and wars, but you know we're we're certainly not benefiting to the same extent that some of the agricultural businesses are but certainly it's been.
It's something that's been disruptive for our customers and I think theyre going to be reluctant to sign up for Russian material.
In the near term so that I think that'll mean, you know companies.
Companies like us will be in more favor for for contracts as we go through the process. This year.
Thank you Joe.
Thanks Stuart.
Thank you. The next question is from Steve Hansen from Raymond James. Please go ahead.
Oh, Yeah. Good morning, guys. Thanks.
John just a question on gas prices we've seen.
Pretty extraordinary when you said the domestic gas market through spring. This year I think broke $7 at the hub now I know you were extremely well positioned domestically with your various contracts in place, but you do have some open exposure as it stands maybe just give us an update on your on your gas thinking here today.
Yeah, So we're continuing to want to hedge gas out.
In front of <unk> and for our expiring hedges in contracts with G. One and G. Two and we've done that in the last six months and certainly at the right now the prices a little out of where our range, where we'd like to hedge gas, but we're looking at it every day, but you know right now 65% of our needs in North America or are they fixed priced or hedged.
Yeah, you know relatively really low prices compared to what we're seeing in April and had a Henry hub. So.
You know I think.
We've done this since we started do you wanted to and you know we were on the other side of that hedge for for some time and in here. We are and you know with $78 gas. So we're really well positioned versus our competitors. So we don't believe have hedged much of their gas at all for any length of time. So you know I always thought.
That was a natural hedge for us as well because theyre going to be much higher on the cost curve than we are because they're not hedged on gas. So I think we're extremely well positioned and are you know we chose that rate of 65, because you know things get really out of whack on gas and when we get above the cost curve than we could.
Lower operating rates to those levels, but we don't anticipate getting there.
You know what.
We look at the gas market fundamentals in North America, we still have that kind of $4 range in our mind lots of gas in that range and it doesn't mean, we won't see times like we're seeing today.
Outside that range, we'll probably see lower than for it as well the commodity and.
That doesn't take much having said that to you it hasn't been a lot of exploration and development in the last two or three years because of Covid and now because of ESG issues. So you know what happens where there's no development exploration. There's you know, there's less supply which leads to higher prices, so, but we'll see how things go forward, but certainly it today.
As prices anybody that's got reserves would we'd want to be the developing them and selling them.
Okay. That's helpful.
And just one follow up for me on <unk> Zealand the gap to play there continues to be challenged because we know that we've seen from the history. There recently, how long do you think it will take to get some better visibility on you know your feedstock needs there or do you think we're talking a year from now two years from now I know there's been talks about development exercises in the offshore.
But the government has also got a pretty hard or kill time on how they view that sort of broader complex. So just you know where are we at in that broader development.
Your perspective, and obviously your assets that are sitting there. Thanks.
Yeah, there's lots of drilling going on as we speak so there's been success and there's more deals.
Her field that had the upset is being drilled and we'll know in the next quarter I would say what what what the results are.
So you know I think high energy prices together are really good for us because the suppliers, which are all private and in New Zealand.
That add reserves will want to develop they're getting a great price for their gas at current methanol prices and obviously the liquids that theyre getting worth of gas. There is very very rich in liquids and a $100 oil they are getting a lot of money for the liquid. So I think you know.
Do Zealand is a country that had been running a lot of coal fired electricity generation as well and certainly.
Certainly that's not good for their directions on on going to zero carbon. So we've always said you know to go from where we are to zero overnight as it's physically impossible, but you can make steps along the way like using natural gas sold.
I think these higher energy prices and whats gone on in the world with the boards and the displacements are God's government is thinking a little differently about some.
Some of their aspirations in the short term and keeping the aspiration to play the long term for low carbon economies.
Okay, great looking forward to see guys learned couple months. Thanks.
Right.
Thank you. The next question is from Mike.
From Barclays. Please go ahead.
Great. Thanks, Good morning, John Excuse me My one question for me on that.
Good morning, just one question from me today, it's on the cash and I don't say, it's a very high class problem to have but back of the envelope you'd have about 1 billion one of cash today about 675 of that's earmarked for three years.
Generating about 300 million or so of operating cash each of the last three quarters and just trying to think about potential uses maintenance capex isn't that much new dividend is I don't know 50 ish million a year and you can only buy back call. It another hundred hundred and $50 million or so shares through September under the current bid so.
If you're projecting conditions are expected to stay strong near term how are you thinking about the deploying the excess cash or keeping it on the balance sheet and would you consider a special dividend in the interim.
Yeah. So you know.
We were looking at all those options and including retiring debt. So we have debt that's coming due in 2024.
And we could do a make whole on that and retire that as well. So we said we wanted to delever from from where we were and we've done that by paying off the construction loans about just under $200 million $75 million.
Last year.
So we want to continue to Delever, we want to have that three to one.
At a 275 methanol to 300 methanol EBITDA to death, so I think by retiring those those bonds will be well within that range of where we want to be so we do have that as a as another potential use of cash. So I think I'd be doing that before I'd be doing a special dividend, but you know I'll, let let's see how things.
Turn out here in the next quarter or so in September is not a heck of a long time away and we've just announced another share buyback and.
We'll complete that.
Based on the pricing that we're seeing today and then we'll roll into another Oh in CIB in September provided you know the conditions of the methanol market remained strong. So I think we've got lots of options I don't particularly like special dividends myself you know.
I think there cause tax problems for our shareholders and.
I think that where our stock price is you know I'm trailing EBITDA were trading at three or four multiple so I think the best use of cash today is by far to buyback our shares and that's what we'll be focused on.
Great and again as I said, a high class problem to have.
Thanks.
<unk>.
Thank you.
The next question is from Hassan Ahmed from Alembic Global Advisors. Please go ahead.
Good morning, John .
Hi.
John a question around European methanol capacity, you know if my numbers are correct, it's roughly call it 10%.
Or a global capacity I'm, just wondering you know with gas prices, where they are right. Now are you already seeing some curtailments there.
And if not if.
The current sort of geopolitical conditions continue would you expect to see sort of a curtailment shutdowns and the like.
Yeah, I I don't know, how you compare to the European gas price today to make methanol and it didn't create any cash. So you know I think we've seen OCI shut down last fall right not stuck with before the war.
When gas prices got I think $7 or whatever I can't remember exactly but they were underwater certainly the norwegians have the ability to sell gas and not make methanol, but they have contracts they've got to honor. So I think that's more of a medium term decision for them if they wanted to do that.
There's a couple of refineries there that are making methanol in Germany, and we've seen them take time as well.
And then obviously the impact on our customers with high energy prices to do you know what does that impact their ability to compete and would we see shifted the demand for our products go to other regions. So there's a lot of moving parts here, but you know if the LNG market today is at 17 $20 in the M. N V to you in Europe's going to wean itself off of Russian gas.
It's going to come from LNG and you just can't make methanol at that price unless you got $1000 plus a ton for the product. So I think unless something was to change with the directions of both Russia and Europe is going to be tough for not only methanol, but for ammonia and nitrogen in a lot.
Things that rely on natural gas.
Makes sense makes sense, thanks for that and as a follow up.
How could you comment a little bit about what youre seeing in terms of inventory levels. I know, maybe there are a couple of moving parts because you talked about up.
<unk> hired a sort of levels of turnarounds happening, so maybe that sort of bloated inventory levels, a bit like sort of cutting through this noise, where where do you see inventory levels sitting right now.
Our experience is when you're in you know so called high prices and that's what people are calling the current situation for methanol pricing people don't want to have a lot of inventory because they are anticipating the price to go down. So I think people are running their supply chains as skinny as they as they can and that's been the case for probably the last 12 18 months. So you know we have quite a good.
Visibility on the East coast of China, and those inventories are really low. So you know certainly we don't see an excess amount of inventory through the through the system.
That'd be helpful. John Thank you so much.
Thank you. The next question is from Roland <unk> from Crown investments. Please go ahead.
Hey, John how are you.
Good rollout how are you.
Alright.
Well I looked at.
I have to tag on that one question and and spare with me Oh, the total of which.
Sure enough capital issue right. So.
You know you've always had crossed it ought to.
Roughly six filling she answered 10% she has probably changed you bought.
And as of two days ago, a 3.8 million that leaves $2 2 million chance to be changed.
You've bought $1 9 million in the first quarter, you bought a half a million chats just in that first 26 days in April .
You're sitting on $1 1 billion of cash you wouldnt raise dividends significantly so by my math by June July you must have bought back the shares I've got one technical question for you and Sarah why you can only start with the need for change. So amazed second why you couldn't do it immediately.
Hey.
So long long story short charm.
What do you do if you bought the rest of the shafts backfire.
July .
Are you sitting on you know biomass $1 4 billion of cash I'm sure you cannot accelerate the capex with G suite.
You know the pieces are coming in.
And you said it takes them to and not a six quarters.
What do you do with the massive cash buildup.
Yes. So the reason we couldn't start the button the second buyback until may 2nd it was because of the blackout because of quarter end. So that that's the reason I got rolling.
So we both started up on on May 2nd and and you know churn through it.
Like we have been.
I mentioned already we have the ability to look at retiring the debt early if we do have that much excess cash.
Through a make whole arrangements. So that's something we could consider or we could look at what the market fundamentals that they continue the way. They are today that would probably be a good option for US also there's you know.
A substantial issuer bid that could be considered but at that for the for something like that it would be more like a three.
$300 million kind of you know substantial issuer bid so we'd like to build the cash on the balance sheet before we did that so if we had that that could be another option for us and then it would only be another couple of months before we do another in CIB, which is our preferred way to do buybacks. So I think we do have options and if we're seeing.
The prices like we see today in cash generation like we see today and the continued great progress on T. Three we'll look at all those options to return cash to shareholders.
Okay. So allow me one more.
But if you worked on before.
And a sustained but could you launch another 10% or 5%, what's the way you would do with the shaft reaches well.
Right.
Yeah.
Yeah for a normal course issuer bid we'd have we can only do 10% of the public float and 12 months periods. So that means we couldnt do a normal course until this September periods comes but we could do a substantial issuer bid, but what I'd say, they're the nice thing about normal course, as you don't have to make a lot.
Commitment you can just like so many shares per day or so much money per day and if market conditions change then you can adjust.
On a substantial issuer bid before we'd want to have the cash on the balance sheet to do that and you know you'd have to do like I said $2 million to $300 million, but at current cash generation you know and if that continues for the next few quarters, we could consider that as well. So I think we have options and we're committed to getting to those.
The leverage targets that we've I've already mentioned and returning all excess cash to shareholders. So we got lots of things we can consider and we just hope that the current market and the current pricing continues then everybody will be benefiting.
Okay. Thank you.
Thanks, Paul.
Thank you. The next question is from Laurence Alexander from Jefferies. Please go ahead.
Good morning, I have two questions. One is with the discussion earlier about customers wanting reliability of supply.
That have any impact without help you narrow the discount between the posted prices and our realized prices or is the dynamic completely separate there.
No I definitely could sorry.
Sorry go ahead.
Yes, I think that's a good point I mean, you know if you have customers have less choice. Then you know the powered ships all of it to the supplier. So we won't know until we get into renegotiation, but if they have less choice and theres less liquidity and with Europe . As example than certainly the suppliers will have a bit more our.
Ability to think about it would be calling back some of the discounts. So that that is something that could happen, we'll just see how things evolve here with the Russian supply in the war so.
But even if it gets all tomorrow, I think theres still going to be a reluctance of customers in Europe to be using Russian product, but we'll see how things evolve.
Okay, Great and secondly, can you give an update on your thinking about both green methanol and the order backlog for marine fuel.
Your fuel flexible ships in particular are you seeing sleep.
Becoming more comfortable with larger orders or ordering several ships at a time, where larger ships or be more comfortable with the transition. So can you just help with our back upon both of those.
Sure so what's on order or on the water today are 65 ocean going vessels and there is more and more interest everyday it seems if those 65 vessels that have the capability to run on methanol ran on methanol, 100% of the time that would be one 5 million tons of demand. So that's what's on the water what's.
Coming in the next couple of years obviously.
It's been very public about wanting green methanol to run their ships.
And we are obviously in discussion with Maersk about supplying read methanol, we have the ability to do this in geismar plants, where we're certified to make green methanol using renewable natural gas.
Challenge is the economics.
One thing to want to use green methanol, it's another thing to paper Green methanol and if you look at renewable natural gas or if you look at the other pathways to making green methanol.
You need around a $1000 of time in the selling price to.
To make it work. So you know we have that ability we're in discussions with Maersk and I know they are in discussions with a number of different parties and they're gonna be facing those same economics, but our view has always been as a shipping industry converts the methanol they'll use.
Natural gas based methanol it with the intention as the economics get better or the ability to to afford breed methanol. It gets through the system that they'll want to slowly convert but they can do it uses a combination as well I think what's going to happen as they get to the Nazi methanol, we're gonna make geismar.
<unk> is going to have our lowest carbon footprint of any of our plants and maybe customer will start saying I want the geismar three molecules because they have point for every ton of C O two versus others that have.
Six or Chinese call you know that has five times four so it's evolving I think the willingness to pay is not there yet I'll remind you that we were the early investors in Cri in Iceland.
Make methanol green methanol from C O two off a power plant and a hydrogen through electrolysis using cheap energy and.
It's a small pilot plant at 4000 tonnes, then we could barely sell that out so I think the market will develop but it's kind of a chicken and the egg now, but we have a team.
Internal team that's looking at all the possible avenues to green methanol and when it makes sense for us to invest you should expect us to invest.
And I guess also can you can you just one clarification. If I may is you had the comments earlier that the kind of breakeven for someone making methanol in Europe at current LNG prices would be around a thousand which is also around where you peg the green methanol kind of economics.
As you look at kind of a European policy around carbon adjustments at the border and how they're talking about dealing with those.
You're putting taxes on imports is there should we be thinking about sort of the possibility that the green methanol when Europe gets pulled forward that methanex might participate in that or how are you thinking about the moving pieces on the regulatory side.
Yeah. Those are all under discussion with how things end up with governments I'm not a good predictor of how governments behavior, what they decide but certainly aware of all of those discussions.
It's kind of before we make significant investments we want to have a place to sell the product where we can make a dollar right, we're not going to do it.
It for $1000 in seller for 500 that we're not going to have a company very long if we do those things. So we're certainly willing to make investments in the green methanol space. The challenge is there's no market for it today, that's willing to pay so that may change and if that changes, we'll be making investments. So like I said, it's a bit of a chicken and egg.
But.
We're looking at all the different technologies out there that are thinking of doing green methanol and the other challenge with the technologies are not very scalable and they're not very reliable, especially those electrolyze. It so lots of issues with the with the technologies, but you'd have to have some certainty that if you're going to invest some millions of dollars in our plan.
That you can sell it and make a profit so you'd have to have a contract signed for the you know the offtake of that of that plant that allows the economics to work. So certainly up to now we haven't been able to secure a contract.
That allows us even to make a renewable methanol from natural gas and in Geismar.
Okay, great. Thank you.
Thank you.
Yeah.
Thank you. The next question is from Josh Spector from UBS. Please go ahead.
Yeah, Hi, Thanks for taking my question, just coming back to the U S gas hedging strategy and just thinking in the context of Europe and everything that's been discussed earlier and if the U S. As part of the solution in terms of exporting LNG over to Europe to solve that problem.
Does that change your thoughts around the hedging strategy at masonite, two or three years from now and to the extent coupling that with the excess cash comment.
You ever think about co investing in some of the upstream supplier development as a way to get you a cough take gas contract as a part of that is that something you'd think about it now.
Been there done that wasn't very successful. So we're methanol producer were not an exploration and development companies. So I never say never but highly unlikely under under my watch, but the next deal might have a different view. So I never say never but you know you can take that is no. We don't we couldn't invest upstream.
In oil and gas.
As far as our hedging strategy.
Will remain the same we want to be hedged.
For about 65% of our requirements for do you Wanna G. Two and slightly less for G. III. So and then we include Madison AD in the hedge profile because it's all one market in North America. So we're out there we have a strategy in place we're executing over the last 12 months for further hedges for G. G three and for the ones that are expiring in <unk>.
And when we get to the range that we think makes sense. We will continue to do so so theres really no change in our hedging strategy at this time.
Okay. Thanks, and then just on the Mitsui partnership that you guys. Now closed I was just wondering if you could talk about some of the benefits to both parties in that transaction I guess for you. It's clear you unlock some cash I assume you're thinking was there kind of scale that can maybe improve or get some better operations that help reduce the cost of the entire.
Your fleet.
But from there and I'm not exactly sure are there specific economics for them that drive methanol people adoption or anything else. That's a reason for them to want to enter this with you that drives the fuel adoption benefit that you cited in the release. Thanks.
Yeah. So we you know the benefits for US are obviously unlocked value for an asset that we didn't get any value for.
Our waterfront shipping, which is a fantastic organization and will continue to be a stand alone organization will continue to be able to manage that and send the ships, where we want et cetera, what M. O. L. Got obviously is a great customer novel locked in customer.
For a long time, because they have an ownership position and waterfront shipping methanex contracts, it's shipping to waterfront. So they got methanex is a it's a long term customers so that really helps with their.
Ideas around replacement shifts et cetera, we've been partnering with them on.
Methanol based carriers for a long time anyway. So they have already been in that game and they understand that game and they've been a good partner and we also get a great shipping partner, that's you know way larger than us and the shipping industry and you know we do a lot of backhaul cargoes.
Third of what we carry today, it's not an ethanol on a backhaul basis than sort of if you have an owner that has a lot more shifts and you do it gives you a lot more options to think about doing more backhaul or other bad calls with their ships. So that's it.
It's early days, but we're really excited about the potential there and I think it was a win win deal for both companies and that's usually the ones that do the best in that survives the longest so we're very happy with it.
Got it thank you.
Thank you.
The next question from Jason Crawshaw from Polaris Capital Management. Please go ahead.
Great Hey, John Good morning.
Just.
Just maybe two quick questions here, just one on Russia, I mean, obviously I assume that that that that tonnage is making its way into the market somehow any idea how much of that is selling at a discount I mean have your marketing people kind of kind of heard through the grapevine or can they sell that at market price I guess just out of curiosity is the first question.
Yeah. So we're seeing some of it not all of it is getting out like I said, it's about 1.5 to one eight so we are seeing cargoes out of Finland.
More than normal, let's say larger cargoes and they were making their way to mainly India.
And China and right now those markets are open for the Russians.
They are the lowest priced markets in the world So de facto versus what they would have gotten Europe , they're getting less not to mention the freight penalty that there.
Absorbing because of the extra freight to get it from Russia, all the way to India and China. So their.
<unk> would be.
Not as attractive as before they were.
No longer wanting to buy rush it in Europe . So yeah. Some of it's getting out but like rich mentioned earlier. This is usually the turnaround season for the Russian plants as they come out of their winter.
So there'd be less production at this time of the year into the summer anyway. So we are monitoring it we do have really great visibility.
Because of the ports that we monitor where the product is coming out of it but we certainly wouldn't say all of that one five to one eight has been placed in other markets.
Got it no that's great. Thank you and then I guess.
The other question is I mean, I think he mentioned on Geismar three I think I think the number you said appointed all on methanol and might be last at 325 EBITDA number.
Correct me, if I'm wrong in that but if that's the case, what's the gas price assumption on that is that a I mean, you referenced kind of $4 gas is your kind of.
Medium or long term assumption is is it also a photo of a gas price assumption that gets us to that number or maybe just give me some color on the economics there.
$3 25 is the number for the gas that based on that EBITDA generation. So if you have a higher gas in your model you can you know.
Do the conversion so that's based on 345.
325 gas, Okay, and then for that so the 65% hedged just remind me kind of whats the duration of the hedge and you know when do those start to roll off and you have to hedge at high prices.
Yeah. So it's different like G. One was a 10 year fixed price contract G. Two with rolling hedges for 10 years as well for 40%. So that's for the cider was about 65% between the two and then medicine hat is through 2031 on a fixed price for most of the gas there.
Got it so I mean, it sounds like I mean, I'm going to have to I think in my calendar out but by and large.
It doesn't sound like you're going to have a substantially unhedged position are less hedge position next year. The year out I mean is that a fair assumption.
A very good assumption and like I said earlier, we've been putting further hedges in for G. III right. So yeah.
Yeah. So yeah, we're not exposed beyond the spot component that we've been buying.
Which is around 35% of our needs for the next few years.
Got it that's great and then I guess the last question is I mean, you you had commented that you think a lot of fan out either competitors or don't have the same hedge position in the U S I'm assuming.
And so I mean, do you think the kind of the U S and ethanol prices, reflecting the reality of the current spot gas price or do you think you know if some of your peers have kind of shorter duration hedges.
As those roll off you know, maybe the U S methanol price needs to reflect the gas price reality, and who knows what the gas prices, but I mean I guess.
In your assessment.
Current U S. Methanol price is reflective of what do you. What do you think kind of the blended gas price gas cost price kind of producers and that was sort of kind of a.
A long winded.
A question, but I mean, how do I think of that.
Today's methanol prices in the U S. If you're paying seven $8 for gas you are still cash positive. So even if they aren't buying spot gas, but obviously the margins are really slim. It at those prices. So you'd have to have a view that the seven to $8 gas prices are shorter term and but if you got a view of their longer term are higher than they were going to be.
Under pressure, which will either lead to shutdowns or higher prices and you haven't shut downs, you're going to get higher prices. So that's why we never wanted to be exposed we always wanted to be able to run our plants with a $200 delivered cash cost to China.
Through our hedging and fixed price contracts, obviously when prices were 250.
What wasn't as attractive for us as it is today, but I think our strategy of having certainty and being able to run our plants and service our customers is proving out to be the right ones. So I'm really glad we're not 100% exposed to in North America to spot gas today.
Got it no that's great. Thanks for the color and good luck appreciate it. Thank you. Thank you.
Yeah.
Thank you.
We ask that you please limit yourself to one question and one follow up. The next question is from Cherilyn Radbourne from TD Securities. Please go ahead.
Thank you very much and good morning, most of my questions have been answered, but in terms of their discussion on clean up at all we're just hoping you could talk about how that influences your thinking about the next project beyond Geismar three mm in terms of location and so forth if at all.
And whether there are things that you can do to lower the carbon intensity of here.
It can plant network.
Yes. So it does it would let's let's say Q3 is going to buy us. Some time, we want to grow in line with the market. If you look at the market today. The demand is probably similar to pre COVID-19 levels. So we haven't seen any real significant demand growth in the last few years. So at G. III comes on and things normalize.
Well that will satisfy our growth needs for quite some time as well our focus will be on getting our idle plant in New Zealand in Trinidad restarted so that'll tactically be growth for us today, because they are idle today, so that'll be our focus.
As far as the Green methanol like I said earlier, it's small scale. So I think the largest that you could do that we are aware of for a cri.
Plan is 100000 tons. So that's 18 geismar three so and the capital cost versus Geismar three will be substantially substantially higher. So you know I think the other issue you know carbon intensity and admitting carbon and you're making 25 year investments, what's the world going to look.
From a carbon tax point of view et cetera. So all of those things are going to go into our decision making.
You know and its certainly the locations that we would choose maybe impacted by carbon tax regimes.
But you know our view is probably the world will always end up being a you know.
Somewhat bath.
Having the same carbon price, whether it's through import duties or or whatever so.
Other option, we have to really lower our carbon footprint is carbon capture and storage and we're looking at both Geismar and medicine hat, where there are reservoirs available to do carbon capture and storage. Obviously there is capital involved in operating costs, but we have a team looking at those this year and that would reduce our carbon footprint.
Significantly 80, 90%. So those those are possibilities in North America, we don't have the same kind of structure in some of the other regions because there's not.
Not as plentiful reservoir reservoirs today, but we'll look at it for North America, but it makes sense there.
Think about expanding it and our teams are looking at other things we can do to.
To lower our carbon footprint and intensity and but you know.
Chemistry as the chemistry for our existing plants. So there's only so much you can do with the biggest bang, we would make with cap carbon capture and storage. We're also going to be testing out some new equipment.
We think even with <unk>.
Q3 is down a point for a ton of C O two per ton of methanol by changing some equipment and.
We think we can get it down to a point to for any new builds but we got to prove out that equipment over the next coming years and then if you buy renewable energy in the area you can almost get to zero.
Zero carbon footprint using natural gas. So there's many pathways were looking at here.
Obviously, we were going to look at everything and consider everything and look at the economics and make decisions around what makes sense for the 20 years from now when we will have to make some guesses around what the regime might look like.
Great and then since no one has asked about heightened.
That's a quick update on the gas situation in Trinidad and.
And that's the PON telecom to restart that plant at some point.
Yeah, So let's break now.
The upstream and the government are negotiating their contracts are coming up this year and you know until that negotiation that gets finalized I would say it's unlikely you should expect is tightened to for us to secure a gas contract to allow that to restart but those contracts will be negotiated this year and you know the government has told us they want to keep it all.
The downstream alive and they just need to have a.
Their contracts renegotiated with the upstream, but that's that's ongoing so we're continuing to dialogue with the government and our intent is to get gas at an economic price allows us to operate tightened through the cycle and that's what we're focused on.
Thank you for the time.
Okay.
Thank you. The last question will be from Matthew Blair from Tudor Pickering Holt. Please go ahead.
Hey, Yeah, good morning, John .
Thinking about your Q2 outlook do you think it's reasonable to assume that your sales of methanol will be up quarter over quarter. Just as he is as you roll off some of the outages and planned maintenance from Q1 I think he also tend to have an inventory release in Q2.
Or do you think that would all be offset by you know probably lower production in Chile, just due to seasonal factors.
Yeah, So you're talking about are produced molecules.
Really hard to guess, even this far into the quarter because of the way the FIFO layers work around the world. So.
If we do have less of a produced molecules in our sales traditionally there is a product release from our produced inventory I'd say going into this quarter. If I look at the makeup of our inventory is we have much higher produced inventory today than we normally without entering into a quarter. So I'm not sure how it's all going to work out.
And I don't really pay close attention to it because I think more longer term.
And you know to me every every molecule we produce today, we're making $200 a ton in EBITDA. So that's what I focus on how it get wet accorded against in and how it flows.
That's above my pay grade so I'm really focused on making sure we run the plants reliably and safely and get that product to our customers.
Sounds good I'll leave it there thanks.
Thank you.
Okay. Thanks for all the questions.
We are pleased to share our excellent financial results with you today, we've continued to demonstrate the strength of our business model.
Saturday advantage of delivering secure and reliable supply to our customers.
We believe that the long term outlook for methanol as robust methanol is an essential building block for hundreds of consumer and industrial products as well as a cleaner burning fuel that can help improve air quality by reducing emissions compared to traditional fuels such as diesel or coal.
Our asset portfolio generates meaningful cash flow across a wide range of methanol prices our capital allocation priorities remain the same we.
We used cash that we generate to maintain our business pursue value accretive growth opportunities and continue our strong track record of returning excess cash to shareholders. We will continue to execute on our strategy to deliver significant value to our shareholders. Thank you for joining us today and we'll speak with you in July and thank you for the interest in our company.
Thank you the conference has now ended.
Please disconnect your lines at this time and thank you for your participation.