Q3 2023 Methanex Corp Earnings Call
Good morning, My name is Julie Anne and I'll be your conference operator today.
At this time I would like to welcome everyone to the Methanex Corporation 2023 third quarter results Conference call.
All lines have been placed on mute to prevent any background noise.
After the Speakers' remarks, there will be a question and answer session.
If you'd like to ask a question during that time simply press star followed by the number one on your telephone keypad.
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I would now like to turn the conference call over to the director of Investor Relations at Methanex made.
Sarah Herriot. Please go ahead mature yet.
Thank you good morning, everyone welcome to our third quarter 2023 results conference call. Our 2023 third quarter in Israeli managements discussion and analysis and financial statements can be accessed from the reports tab on the Investor Relations page on our website at Methanex Dot com.
I would like to remind our listeners that our comments and answers to your questions. Today may contain forward looking information and information by its nature is subject to risks and uncertainties that may cause the stated outcome to differ materially from the actual outcome.
Sure you'll factors or assumptions were applied in drawing the conclusions or making the forecast or projections, which are included in the forward looking information.
Please refer to our third quarter 2023, MD&A and our 2022 annual report for more information.
I would also like to caution our listeners that any projections provided today regarding <unk> future financial performance are effective as of today's date and is our policy not to comment on or update this guidance between quarters.
For clarification any references to revenue EBITDA adjusted EBITDA cash flow adjusted income or adjusted earnings per share made in today's remarks reflect our 63, 1% economic interest in the Atlas facility, our 50% economic interest in the Egypt facility.
And our 60% interest in Waterford shipping.
In addition, we report our adjusted EBITDA and adjusted net income to exclude the mark to market impact on our share based compensation and the impact of certain items associated with specific identified events. These are that these items are non-GAAP measures and ratios, but do not have any standardized meaning prescribed by GAAP and therefore are unlikely to be up.
Terrible to similar measures presented by the company. We report these non-GAAP measures in this way because we believe that they are a better measure of underlying operating performance and we encourage analysts covering the company to report their estimates in this manner.
I'd now like to turn the call over to <unk>, President and CEO, Mr. Rich Sumner for his comments and a question and answer period.
Thank you Sarah and good morning, everyone. We appreciate you joining us today as we as we discuss our third quarter 2023 results.
For the third quarter, our average realized price of $303 per ton and produce sales of approximately one 5 million tons generated adjusted EBITDA of $105 million and adjusted net income to <unk> <unk> per share.
Adjusted EBITDA was lower compared to the second quarter due to a lower average realized price and lower produce sales.
Through the third quarter, we saw improving market conditions with stronger demand from certain sectors as well as moderation in global operating rates, mainly from various supply outages in North America, Middle East and Southeast Asia.
Methanol demand improvements were primarily driven by stronger demand in China with increased demand for MTBE, another fuel applications as well as improved demand for methanol to olefins with a number of MTO plants restarting operations in the third quarter.
We are currently seeing very high operating rates across the MTO sector, which we believe is driven by the completion of planned downstream expansions as well as some improvements and affordability from a higher energy and all of that is pricing during the quarter. However, we believe economic pressure remains on this sector under current market conditions.
We can continue to carefully monitor as well.
Macro economic environment and during the third quarter, we saw relatively flat demand outside of China for methanol into traditional chemical applications compared with the second quarter.
Coal pricing in China increased during the third quarter from around 800 RMB per ton.
Above 1000 RMB per ton currently which we believe was primarily driven by various industry supply disruptions. We currently estimate that global cost curve to be over $300 per ton based on current coal pricing in China.
Overall continued high energy pricing and improved supply demand fundamentals has led to slightly higher pricing throughout the third quarter and into the fourth quarter.
Our November posted prices in North America, Asia Pacific and China are posted at 549, 370 and $360 per metric ton respectively.
And our fourth quarter European price was posted at 375 euros per metric ton.
Based on our October and November posted prices, we estimate our global average realized price to be approximately 310 to $320 per metric ton for these two months.
In the third quarter, we had lower production units scheduled turnarounds in New Zealand, and Chile, and seasonal gas restrictions in Chile.
We're encouraged by the pace of gas development in Argentina, and the continued supply rates from Ian Abbott, Chile, increasing gas supply from Argentina allowed us to restart our second Chilean plant in September earlier than previous years, we expect both plants to run at full rates from the end of September through April 2024.
The southern Hemisphere summer months and are increasing our Chile production guidance for 2023 from a range of 800 to 900000 tons to a range of 900000 to 1 million tonnes based on improved gas availability from Argentina.
Earlier in October we also announced that we signed a two year natural gas agreement with the National gas company of Trinidad and Tobago to restart our fully owned tightened plant and simultaneously idled the outlets plant in September 2024, I want to thank our team for their hard work to ensure that we maintained operations in Trinidad which is it.
Strategic part of our global portfolio.
Situation in Trinidad in the near term is challenging which is reflected in the short term of the new gas contract. We remain committed to working with the NGC and the government to secure long term economic gas supply.
We entered the third quarter in a strong financial position with approximately $500 million of cash and $300 million of Undrawn backup liquidity, our capital priorities are to complete the geismar three project and allocate any excess cash to repay rather than refinanced $300 million bond due at the end.
End of 2024.
Construction of our G. III project is progressing safely to plan construction is nearly complete and the team is in the final handover testing and commissioning phases, we expect to achieve commercial production around the end of the year and within our budget range of one to $5 to $1 3 billion. The remaining 140 to one.
Hundred $90 million of cash expenditures, including approximately $50 million and accounts payable is fully funded with cash on hand.
Looking ahead to the fourth quarter of 2023, we're expecting higher adjusted EBITDA with a higher realized methanol price and higher produce sales we remain focused on delivering strong operational results from our existing assets and completing the <unk> III project, we are well positioned during this period of economic uncertainty with growing <unk>.
Cash flow generation capability from G III and our portfolio of assets that can generate cash flow across a wide range of methanol prices, we would now be happy to answer questions.
Thank you at this time I would like to remind everyone in order to ask a question. Please press Star then the number one on your telephone keypad.
We ask that you please limit yourself to one question and one follow up for additional questions. Please rejoin the queue.
Our next our first question comes from Ben Isaacson from Scotiabank. Please go ahead. Your line is open.
Thank you very much and good morning, everyone.
Rich a question on that.
You said that the gas situation Alan.
<unk>, which was the reason for the short term.
Good deal.
Does that mean that you don't have confidence that it'll get better.
That why I mean, if it's challenging presumably it's challenging in the short term.
And then as part of that.
That same question what was the rationale to idle a plant that was running and then bring on.
And capex to restart tightened is that because there was going to be a major turnaround for outlets that you wanted to avoid just trying to understand the whole Trinidad story and then just maybe as my follow up can you just talk about any risk to E. Methanex due to the shutdown of the tomorrow platform off of its Raul. Thank you okay. Thanks Pat.
On Trinidad and then ill talk about that.
In the near term and there is we call it challenging as I think.
So previously that.
The gas markets tightened in Trinidad and then in the near term what we see today is theres about when you look across LNG ammonia and methanol that's about four five bcf of demand per day.
Current production is in the range of two and a half to three Bcf and the government no we haven't.
Given up on the fact that that situation is going to get better because there's a lot of things happening in Trinidad and we believe theres a lot of incentives today to restart capacity that is there.
Across the estate and these are long assets that Brian really reliably over time.
So it's certainly not.
We are.
We are working to understand all of the analysis.
Hey, Ken.
We remain really committed to working with Ed.
And the government of Trinidad as they worked with the upstream on improving that situation.
The reason we started up.
Read the decision around tightened versus Atlas is because of the.
Near term situations they were offering a fairly short contra.
Contract.
When you look at the economics under that contract in the short term it made sense around tightening and as you said, we don't have a turnaround in front of us like we do in Atlas.
That plant had gone through a major maintenance just before we would idle that.
I think that was back in 2019, so it made sense from an economic perspective, and also I would call. It an organization perspective, we want to keep our team.
Our team in place our global manufacturing team as part of our huge part of our organization.
And we're really pleased that we've got that well have the Titan asset running at the end of next year and we will.
We will shift and create a tightened restart team now that will be focused on getting that plant up and running safely and reliably.
You asked about Egypt.
I'll answer that.
Yeah.
As of right now what we've seen is there has been a shutdown of the so Israel as a as an exporter of gas to both Jordan and Egypt.
Israel has shut in the <unk>.
<unk> field.
Chaz has impacted the flow of gas into Egypt.
That is not affecting the available of gas to the industrial producers. There. We do understand there may have the impact to the LNG producers. So as of right now that's not impacting our operations our other industrial producers.
In Egypt.
Appreciate it rich thanks, so much.
Yes.
Our next question comes from Joel Jackson from BMO Capital markets. Please go ahead. Your line is open.
Oh good morning, a couple of questions short term and then I'll do a long term all these short term first just looking at some of your guidance for Q4 can you say if you expect Q4 EBITDA to be higher you said everything will be higher will be higher than Q4 of 'twenty two and when you gave your price guidance of $3 10 to 320, I think you're using a higher discount rate in Q3.
<unk>.
And then would you be having some inventory builds.
In Q4 like it normally do.
Okay.
So for Q4 I haven't done that comparison.
Reference was in comparison to Q3 jewel for higher higher pricing and higher higher produce sales.
As it relates to the discount rate, we don't expect a big.
Difference in the discount rate. So maybe we can take that one offline.
And then inventory build yes, we do we have seen a number of.
Quarters here with inventory build on our <unk> sales, so we probably.
Accounting is accounting, but we would expect that that at.
At some point, we'll also be seeing a.
A benefit of <unk>.
Pulling through reduced sales as well so.
So hopefully that answers a bit of better context to the quarter.
Sure.
Right.
Okay, and then my longer term question with yes.
Yes, I was wondering so 24, but that's a longer term now.
Yes, if you look at the production profile for 'twenty for 'twenty four.
Can we talk about like off a base of a little more than $6. Five can you talk about what you expect for 24. So I would imagine you expect GE three could ramp across Q1 you'd have almost near production. There next year I would imagine you switchover.
From Atlas to tightened, but there might be a hiccup there would you lose some tons would you be running both plants overlapping for a month or would you be lose some tons on a ramp down in a ramp up.
Any other changes in New Zealand or anywhere else, maybe better gas in Chile should we expect.
2 million tonnes more in production next year a million and half with can you just give us some ideas.
We will update our guidance formally towards the end of this year, but I will maybe I'll give you kind of some preliminary thoughts there.
We are we will for Chile.
Said, we'll be we'll be operating two plants at full rates until at least until April of next year. So.
<unk> already.
Those gas contracts.
Place today, and we've been working on this similar contracts for next year. This is the first time in a very long time that we've operated two plants at full rates. So we're really excited about about that and we'll be working on.
On on replicating that out in the.
For the summer months period for next year, So I would expect.
At 800 to 900 this year that number will be higher for Chile four.
Trinidad.
We will we're going to be working.
The gas contracts are working simultaneously, so we will be trying to.
I don't expect a lot of overlap there.
But we will it will be kind of a.
No.
And idling and then a startup of Titan. So you can kind of do the numbers on how that change happens and then.
I think the big one will be also G III.
Switching gears, obviously the start up around the end of the year, but it will take for G. III actually works through our inventory flows. So you probably got a 45 to 70 day inventory build before <unk> starts.
Coming through the earnings.
Egypt, we would expect similar results to what we've been operating at high rates and <unk>.
Zealand, we'll update our guidance today is at one three to $1 4 million tonnes.
And will will be.
That's probably a similar level, we would be up.
We'll update it more formally and we also have to factor in as scheduled.
Scheduled turnarounds as well so more.
More to come there.
Okay.
Thank you.
Our next question comes from Steve Hansen from Raymond James. Please go ahead. Your line is open.
Yes, thanks, guys.
Rich can you go back to the Chilean gas situation, just a little bit more detail it sounds like on the back of the recent success.
There is an opportunity to secure some more gas going forward just trying to understand what that means for the production profile next year against through the summer months in particular down there and how we should think about maybe even the medium longer term.
File for the recovery.
Yes, Thanks, Steve.
So a bit of a background on what's happening in <unk> and <unk>.
Chile and a lot of this is what's happening in Argentina.
Argentina is developing vaca <unk>.
Field in Illinois Basin, and this is quite a prolific field.
What they what they are trying to do is theyre investing in pipeline infrastructure. So gas development is a lot of success or oil and gas development and what they have done is they are working on connecting that field into the major grid in Argentina, Argentina consumes about 120.
Cubic meters a day in gas.
They did is they they commissioned a pipeline.
That is now delivering in the third quarter, that's now delivering 10 million cubic meters into the grid. They are working on adding.
Adding compression to the pipeline, which would.
Which would add.
Another 10 million cubic meters per day.
The grid as well, so and that will happen sometime in the first half of 2024.
And then what they are also working on is another pipeline connection, which would double that capacity that would come on in the 2025 timeframe.
In addition to that there is a development that's happening in the Austral Basin basin by hotel and Wintershall in a consortium there called the Phoenix project and Thats really located really close to our plants. So all of these these developments are significantly.
Proving the domestic gas balances and in Argentina.
As well that supports export markets, which we are very well positioned there with with our assets.
So we're really pleased to say that we're going to be operating two plants at full rates during these.
Sort of an eight month period.
Like I said, the first time in a very long time.
<unk> been doing that and we're going to work on on.
Longer term gas, we think that focusing on the non winter months is the right thing now and over time, we can also be hoping to improve our our gas position during the winter months, but these are things we will continue to update on as we progress through.
Yeah.
Very good thank you and just.
One follow up on the <unk> in terms of the commissioning and the inventory build that you described.
I know, it's early but can you give us a sense for whether the 45 to 60 or 70. When do you describe will all take place in Q1 from your standpoint today or will that start to build through the later part of Q4.
Yes, I think right now the way to do is starting in Q1.
That would be probably the rate.
Way to think of it.
Around starting in around.
Beginning of the first quarter.
Yeah.
Okay very helpful. Thank you.
Our next question comes from Hassan Ahmed from Alembic Global. Please go ahead. Your line is open.
Good morning Rich.
You guys saw a nice uptake across all your regions obviously.
Europe pricing wise Europe, so obviously for the quarter. So no no reflection data as yet I'm just trying to understand the delta.
Between sort of North American pricing in China, Slash Asian pricing I mean, even if I were to discount.
North American pricing there is still call it as much as a 70 to $80 a ton delta between those pricing levels in the regions. So just just trying to get a better sense of why that exists.
I mean, it seems to me that will often be on shipping.
[laughter].
Yes, Sean Thanks.
Thanks for the question I think I think.
Hopefully I'll answer your question the right way here for you to make sense of it I think if you were to look at discount levels across the regions rather than our global discount because you can't really apply the average discount to all the prices.
It's really that each region does have its own kind of market discount levels, which do vary quite widely depending on which region you're looking at so our arpus you are to look at our AARP by region.
That would probably make more more SaaS and probably more reflective of.
End of <unk>.
Okay.
Reasonable.
Pricing differentials between between those so it's hard to look at the global discount and apply that and try to make sense of those prices relative to say.
Spots or other other markers.
Understood understood and just.
Just coming back to sort of broader question I know, it's all sort of recent occurrences in the like in the Middle East.
Are you guys seeing any meaningful shifts.
As a result of that and trade shows.
More specifically.
What are you guys hearing.
Iranian product.
Yeah. So.
So as of right now we're not we're not hearing any disruptions as of today.
First we are monitoring this situation very closely and really hoping for a peaceful and sustainable resolution here for everyone, but we.
We haven't seen any disruption.
Israel doesn't have any meaningful really methanol demand nor is there any supply and in the area. There theres no methanol trade routes that are impacted now.
In the region, a lot of things can be impacted and including methanol. So.
But we haven't seen any of those disruptions, yet, but that could impact crude impact LNG trade flows methanol trade flows.
And so those could have really meaningful impacts on the industry, but we haven't seen any of that yet, but we are really closely monitoring.
To see.
Obviously, what what's going to how this is going to unfold.
Very helpful. Thanks, so much.
Our next question comes from Matthew Blair from Tudor Pickering Holt. Please go ahead. Your line is open.
Hey, good afternoon.
Good morning, sorry could you talk about any opportunities you are looking at for your underutilized assets is there a chance that you could.
Take take apart Atlas move it to the U S. Like you did with some of your Chile plants long time ago or is there an opportunity for converting those assets into an E methanol plant.
Yeah.
Yes.
Yeah. So so.
<unk>.
In terms of relocation and Trinidad at this point, we remain committed to Trinidad and we are.
We think there is a lot of incentives today to get assets underutilized assets.
Operating in place, where they where they are today in that assets operated really well for us in Trinidad. So we our focus there now we have we do have experienced relocating plants, we moved Chile, two and three to Geismar our experience on plant relocation is that the capital call.
Savings are really not that meaningful it's really about speed.
The construction timeframe can probably be.
We could probably save a year in terms of the Kentucky construction Timeframes versus building new so so it has advantages there.
We're not considering that today.
For Atlas as we want to work on on getting longer term sustainable gas in Trinidad, but that is something that we've done before we have a lot of experience with and there is that speed advantage in the in the event that you wanted to move quickly on a on a project.
Sounds good and then.
Could you talk a little bit about the moving parts on cash flows in 2024 should we think of your Capex moving down to the I don't know 150 to $200 or $200 million range.
I think you mentioned the debt pay down of about $300 million next year.
Also the dividend the dividend of $50 million plus potentially a working capital build as you ramp up Q3 with the remainder of any any remaining cash flow.
Buybacks in that scenario.
So I think the right number to use.
On the Capex is at the lower of your range to around $150 million.
But I think you have.
You've got all the numbers in terms of the other.
Cash outlays. So yes, we're focused on the $300 million bond and I think as of today today's pricing.
We're probably that's the main focus.
We <unk>.
<unk> generate.
A little over $200 million in free cash flow with G. III at $300 methanol price above that then.
You're probably getting above the bond if you get closer to 350, we still see the market environment. Today is supportive of what we need to repay the bond, but we're really focused on that if we were to have a really stronger methanol market. Then you start looking at free cash flow beyond beyond the.
Debt repayment, we don't have any major capital ahead of us and so it would be looking at returning excess cash and likely some balanced approach between looking at the balance sheet further on deleverage.
But we're really focused on the 300 million bond today.
Great. Thank you.
Our next question comes from Josh Spector from UBS. Please go ahead. Your line is open.
Yeah, Hi, Thanks for taking my question I guess first I actually wanted to ask a follow up on the cash flow side. So when you think about the working capital build next year with the G. III startup I mean, youre already purchasing and reselling. Some tons. So is there a way to size kind of the net impact that you expect that to be in terms of cash used to build that.
Inventory.
Okay.
Yes.
We're not really concerned with.
Working capital buildup here I don't think that Theres any strategies, we're having in terms of managing that.
Downward were you will see we are buying a lot of product today, which we will significantly reduce with G. III coming online because we're not going to be growing our sales by one 8 million tons next year, we've already grown our sales so you'll see a lot of purchase product being displaced by produced product which would be.
As supportive of lower inventory values anyways.
Yes, I appreciate that I guess, that's where I was kind of going into the two kind of net offset each other so it's not really a major kashi is that kind of what you are saying or should we be thinking about it as a somewhat of the cashiers.
Yes.
Okay and then the other question I had was just more on cost curve. It is methanol price supportive if I heard your comment correctly.
Talked about $300 a ton methanol price support you posted pricing in China is higher I guess, what do you view as the pricing driver here or is it the fuel value is at coal and then how does that evolve into next year in your view.
Our posted prices higher but after discount were probably in kind of closer to that those levels. What's driving the price. Today is is really it's going to be the marginal producer cost, which is a co producer cost in China and then the other factor that we look very closely at is the affordability of methanol.
Into.
Primarily into the olefins.
Industry and I think right now we would say that both of those factors are kind of pointing to the levels, where we are today in China and around 200 spot pricings and around $280 to $300.
We have seen some improvement in the olefins market and I would say that that sector relative to oil pricing today is pricing well under.
Where would it be on a kind of mid cycle basis. So we've seen tons of pressure on on that sector that we would in a normal and a kind of mid cycle energy pricing at $90 oil.
Oil, we would expect much much higher pricing and especially when.
<unk> is operating at the highest rates I think we've we've ever seen today as a as an example that sector's operating at 90% operating rates over a very high base because we've added MTO plants last year. So so if we had a better market there I would expect that.
It would be driving methanol prices higher than where we are today.
Okay. Thank you very much.
Okay.
Again, if you would like to ask a question Press Star then the number one on your telephone keypad.
Our next question comes from Laurence Alexander from Jefferies. Please go ahead. Your line is open.
Hi, Good morning, this is actually Kevin Estok on for Laurence Alexander.
So it looks like most of my questions have been asked but I guess I was wondering if you could maybe any updates since the last calls around your strategy Green Green and Blue Rhino and I guess, maybe how current interest rates and that impact future investments I guess, you can kind of get a sense of your rate sensitivity.
As it relates to your strategy. Thank you.
Yeah. Thanks.
Maybe when you think about the low carbon space. The strategy is really looking at both sides, both both the demand and the supply side.
You didn't mention it in the opening comments, but there continues to be a lot of momentum in marine fuels.
Right now over 200 ships planned to be in the water and the 2728 timeframe. It represents around 7 million tons of demand if those ships to run on methanol, 100% of the time. So we are working with major international shipping companies. This is a container shipping segments leading.
And the way, but there is interest in dry bulk tankers.
And so at cruise ships. So we're working with with that actually we've got a number of Mou signed working closely with the shipping industry on their desire for.
Green Blue conventional methanol say green it looks like for Green methanol, it's mainly being driven by the European market for in shipping and that a lot is on the back of what's happening on the.
Emissions trading scheme as well as EU maritime regulations around around carbon emissions.
We're having a lot of other discussions around blue and conventional methanol as well so and then on the supply side, we're working on a number of projects.
Projects.
I would say first and foremost we've been certified to be able to.
<unk>, our renewable natural gas in North America, and produce green methanol at our Geismar plants in our marketing regions are certified to be able to sell that product through to customers certified product through to customers and then we're looking at the feasibility of projects at our sites and that would be used.
Renewable hydrogen and Cotwo.
Sort of green the assets that we're looking at multiple feasibility within our existing existing sites were also in discussions with other projects that are out there that would like to work with us on off takes in.
So we're trying to understand.
How we can open up as many.
Economically efficient supply alternatives for the marine industry around Green method all in all if theres a lot of lot of discussions happening in.
Okay.
Great. Thank you very much.
There are no further questions at this time I will now turn the call back over to Mr. Rich Sumner.
Yeah.
Alright, well. Thank you. Thank you for your questions and interest in our company, we hope you'll join US in February when we update you on our fourth quarter results.
This concludes today's conference call you may now disconnect.
Okay.
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