Q3 2024 Methanex Corp Earnings Call
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Pam: Good morning, my name is Pam, and I will be your conference operator today. At this time, I would like to welcome everyone to the Mathenex Corporation 2024 Third Quarter Results Conference Call.
All lines have been placed on mute to prevent any background noise. After the speaker's remarks,
There will be a question and answer session. If you would like to ask a question during this time, simply press star followed by the number one on your telephone keypad. If you would like to withdraw your question, press the pound key. Thank you.
Speaker Change: I would now like to turn the conference call over to the Director of Investor Relations at Methanex, Ms. Sarah Herriott. Please go ahead, Ms. Herriott.
Speaker Change: Good morning, everyone. Welcome to our third quarter 2024 results conference call. Our 2024 third quarter news release, Management's Discussion and Analysis and Financial Statements can be accessed from the Financial Reports tab of the Investor Relations page on our website at methanx.com.
Pam: 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 the stated outcome to differ materially from the actual outcome. 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.
Pam: Please refer to our third quarter 2024 MD&A and to our 2023 Annual Report for more information.
I would also like to caution our listeners that any projections provided today regarding Methanex's future financial performance are effective as of today's date. It is our policy not to comment on or update the guidance between quarters.
Pam: For clarification, any references to revenue EBITDA, adjusted EBITDA, cash flow, adjusted income, or adjusted earnings per share made in today's remarks reflects our 63.1% economic interest in the Atlas facility, our 50% economic interest in the Egypt facility, and our 60% interest in waterfront shipping.
Pam: 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 specific identified events.
Pam: These items are non-GAAP measures and ratios that do not have any standardized meaning prescribed by GAAP and therefore unlikely to be comparable to similar measures presented by other companies.
Speaker Change: 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 Methonex's President and CEO, Mr. Rich Sumner, for his comments and a question and answer period.
Speaker Change: Thank you, Sarah, and good morning everyone. We appreciate you joining us today as we discuss our third quarter 2024 results.
Rich Sumner: Our third quarter averaged realized price of $356 per ton and produced sales of approximately 1.4 million tons, generated adjusted EBITDA of $216 million and adjusted net income of $1.21 per share.
Rich Sumner: Adjusted EBITDA was higher compared to the second quarter of 2024, primarily due to the gas sales in New Zealand, the recognition of the insurance recovery in Egypt, and a higher average realized price.
Speaker Change: I'm very pleased that G3 successfully completed its commercial and technical performance tests and has produced approximately 154,000 tons over the past 30 days, which equates to a 1.8 million tons per annum production rate.
Speaker Change: After producing first methanol in late July, we conducted two separate shutdown events during the third quarter to adjust and calibrate equipment, which I can discuss in more detail during the question and answer period.
Speaker Change: I'm proud of the team for taking a safety and reliability-based approach to ramping up G3 to operate at full rates for the long term.
Speaker Change: Now, turning to the third quarter methanol pricing and market dynamics, our third quarter global average realized price of $356 per metric ton.
Speaker Change: was $4 higher than the previous quarter. Global methanol demand was stable in the third quarter compared to the second quarter, with relatively flat demand into chemical applications and seasonally higher demand for energy applications such as MTB and fuel blending.
Speaker Change: Methanol to olefins operating rates decreased at the beginning of the quarter.
Speaker Change: due to seasonal maintenance as well as tight supply availability and operating rates increased through the quarter. As supply improved, methanol inventories gradually rebuilt. By the end of the quarter, the MTO industry was operating at around 90 percent operating rates.
Speaker Change: On the supply side, third quarter global production was similar to the second quarter production levels, with different trends between basins.
Speaker Change: In Asia and China, we saw increased supply from the Middle East, including Iran, leading to an inventory build and supply availability leading to increasing MTO rates.
Speaker Change: Methanol prices in China remain fairly stable between $280 and $300 per ton.
Speaker Change: Supply in the Atlantic Basin remained tight and further tightened through the quarter due to various issues, including feedstock constraints, seasonal maintenance,
Speaker Change: and unplanned outages leading to a meaningful inventory drawdown and significant price strengthening in the Atlantic region that has continued into the fourth quarter.
Speaker Change: Now, turning to our production, methanol production in the third quarter was lower compared to the second quarter due to the temporary idling of operations in New Zealand and gas constraints in Chile and Egypt.
Speaker Change: In New Zealand, operations were temporarily idled in August as we entered short-term commercial arrangements.
Speaker Change: to provide contracted natural gas into the New Zealand electricity market until the end of October 2024.
Speaker Change: As of November 1, we safely restarted one plant and are again producing methanol.
Speaker Change: The current gas outlook from our gas suppliers for the next few years indicates gas supply will be sufficient to operate only one plant, and therefore we've made the difficult decision to indefinitely idle one of the two Mata Nui plants.
Speaker Change: We've optimized the operating and capital costs and expect these actions will substantially offset the adjusted EBITDA and free cash flow impact from idling one plant.
Speaker Change: We remain committed to working with the government and gas suppliers to support upstream gas development and future production will be dependent on gas availability and any on-selling of gas into the electricity market to support New Zealand's energy needs.
Speaker Change: I would like to personally thank our team in New Zealand for all their hard work and dedication as we transition to a one plant operation.
Speaker Change: In Chile, I'm very happy to share that we've successfully agreed to extend two gas contracts that underpin 55% of the gas site needs until 2030 and 2027 on similar economic terms.
Speaker Change: In addition, we've secured agreements to purchase gas from Argentina to allow us to operate two plants at full rates for the non-winter months.
Speaker Change: from beginning of October this year through the end of April 2025. Combined, these contracts will allow us to continue to underpin and progressively increase our production from Chile over the coming years.
Speaker Change: In Egypt, industrial plants were impacted by gas curtailments due to increased seasonal demand for power generation due to elevated temperatures coupled with lower domestic supply. This led to various measures by the government to manage gas balances including curtailments to industrial plants.
Speaker Change: There has been stabilization of gas balances in the country as temperatures have moderated, but some continued limitations on supply to industrial plants are expected going forward, particularly during the summer months. The plant is currently operating at full rates.
Thank you.
Speaker Change: with no disruption to production. This changeover removes 1 million tons of methanol from the global market and reduces our equity production by approximately 200,000 tons.
Speaker Change: We continue to work closely with the National Gas Company of Trinidad to secure longer-term gas to ensure sustainable operations in Trinidad beyond the current gas contract that expires in September 2026.
Speaker Change: Now, turning to our current financial position and outlook, we ended the third quarter with approximately $490 million of cash and continued access to our $500 million undrawn revolving credit facility.
Speaker Change: We're on track to repay the $300 million bond due on December 1, 2024, after which our debt-to-adjusted EBITDA leverage ratio will be just under three times at a $350 per ton realized price.
Speaker Change: We recently announced we'd secured $650 million in term loan aid commitments to fund a portion of the OCI transaction.
Speaker Change: Once the OCI transaction has closed, our top priorities will be completing a safe and effective integration, realizing synergies from the transaction and across our business, and deleveraging.
Speaker Change: We plan to return to our pre-OCI deal leverage level by repaying $550 to $600 million over the next 18 months, assuming a $350 realized methanol price.
Speaker Change: Beyond this, we don't see meaningful capital over the next few years and remain committed to maintaining a strong balance sheet with a 2.5x debt-to-adjusted EBITDA target.
Speaker Change: With a strong free cash flow profile from our existing assets, which will be enhanced with the OCI transit acquisition, we believe we are well positioned to take a balanced approach including deleveraging and shareholder distributions depending on future market conditions and methanol prices.
Speaker Change: Turning to the fourth quarter, our European quarterly price was posted at €570 per tonne.
Speaker Change: and a 35 Euro per ton increase from the third quarter. Our November North American posted price was posted at $785 per metric ton, a $47 per ton increase from October.
Speaker Change: In Asia, Pacific, and China, November prices were rolled at $400 and $380 per ton, respectively.
Speaker Change: We estimate that based on these posted prices, our October and November average realized price range is between approximately $365 and $375 per metric ton.
Speaker Change: Our expected equity production guidance for Q4 2024 is approximately 1.9 million tons.
Speaker Change: which will be sold through the fourth quarter of 2024 and the first quarter of 2025 as produce sales normalize to increase production.
Speaker Change: In the fourth quarter, we expect similar adjusted EBITDA compared to the third quarter, with higher produced sales and a higher average realized price, offsetting lower New Zealand gas sales and the one-time Egypt insurance recovery in the third quarter. We would now be happy to answer questions.
Speaker Change: At this time, I would like to remind everyone in order to ask a question, press star, then the number one on your telephone keypad.
Your first question comes from Josh Spector with UBS.
Your line is open.
Speaker Change: Hey guys, this is James Cannon on for Josh. Thanks for taking my question.
Speaker Change: I just wanted to dig in on the New Zealand guy. I think the 600KT that you called out in the print reflects 4Q production less than half on that one unit.
Speaker Change: Is there, is that a matter of just ramping the unit back up or are there ongoing constraints and if there are what level do you expect to be able to run the plant kind of on a run rate?
and we're expecting that
Speaker Change: As of the end of October here, we're running one plant at full rates. That's something that we're obviously assessing as we go forward, but yeah, we've really geared the plant to a one-plant operation. Of course, we will be looking at our gas profile as we go forward, but that's the level where we expect to be at.
Speaker Change: Okay and then just kind of as I think about what what went on over the summer with
Speaker Change: going forward or was there anything one-off that contributed to the level of imbalance this year that led to the shutdown and sale of gas?
Speaker Change: Well, the shutdown in saline gas was really due to the domestic...
you know, what was happening on domestic energy balances.
Speaker Change: through that period where there was a draw for gas for power generation.
So we onsold our gas during that period.
and really for when producing methanol.
Speaker Change: Coming out of that, we had to assess where we were. We were already operating...
Speaker Change: We had it initially guided to about a 1 to 1.1 million production rate for the year and we were receiving gas lower than that.
Speaker Change: So coming out of the out of the gas sales, we had to assess in the near to medium term.
What does the gas outlook look like?
Speaker Change: and really the forecast looks like enough gas to run a one plant operation.
Speaker Change: And it didn't make sense to be gearing to a two-plant operation with the operating structure and capital programs required to run a two-plant on a sustainable basis. So we geared everything to a one-plant indefinitely at this point.
Speaker Change: And, you know, we're working on having gas supply to be able to run that plant efficiently over the near to medium term right now.
Okay, thank you.
Speaker Change: Your next question comes from Joel Jackson with BMO Capital Markets. Your line is open.
Speaker Change: Hi, good morning. Just wanted to get an update on what you've done on the OCI deal, things left to be done. We know that, and also have your team, has your team had a chance to go inspect NAC Gasoline? There was a fire there, the plant was down for about a month, and how does that incident affect your view of the deal going forward?
Speaker Change: Thanks, Joel. You know, on OCI, there's really two things happening right now for us. We're going through the regulatory approval process. As we said when we announced the deal,
Speaker Change: We would be filing in both the U.S. and Europe, and those things are progressing as planned. And we expect that that will close sometime in the first half of 2025.
Speaker Change: As it relates to Nat gasoline, you know, we we we don't own the assets today. So
Certainly that's
Speaker Change: something that we're also aware of, but it's not something where we're, you know, actively managing in any way that plant. That's a competitor plant today and...
Speaker Change: and so we're going to be listening closely on the updates on that and trying to understand.
Speaker Change: the impact of their outage and sort of what's behind that. But as of today, no, there's been no active involvement at all in the gasoline situation.
Speaker Change: Okay, and then just following up on New Zealand, can you remind us...
Speaker Change: If you go to the one plant operation, just remind us what we should expect to get full run rates. One plant in New Zealand, I'm not knew what it would look like in 25 for volume.
Speaker Change: Yeah, so it's around about 800 to 850,000 ton capacity for a one plant operation. So, you know, we are, you know, that's what we're geared towards at full rates. That's what you would.
Speaker Change: You would have, and we'll give guidance on the run rate for the one plant operation in January when we come out with our new guidance for 2025. Richard, are there some dis-energies from only running one plant?
Fixed-cost absorption? No? Okay, thanks.
Speaker Change: No, we, Joel, we took the, you know, we took the difficult decision here to, to, to, to,
Speaker Change: to, you know, revise or optimize our operating structure, which included
Speaker Change: the size of the employee base there, so we have 70 people that were restructured during the quarter, so we took that difficult decision.
Speaker Change: Those are talented and dedicated people that we lost during the quarter and we've also optimized the capital programs down to one plant.
Speaker Change: So when we look at the impact of the operating cost base as well as the capital flows, from an earnings and cash flow perspective,
Speaker Change: it's not a huge impact because we were already so low running a two plant operation with gas to only support about a million to a million 1.1 million tons.
Thank you.
Speaker Change: Your next question comes from Steve Hansen with Raymond James. Your line is open.
Steve Hansen: Yeah, good morning guys, thanks for the time. Just curious, Rich, about some of the gas procurement activity you've undertaken here recently. Has there been a shift in the market dynamics there that one made you want to go after additional gas? Is it just, you know, something that's come to fruition this quarter after a long period of effort? I mean, we just give it some backdrop in terms of, you know, why now? And anything around the posture could be helpful. Thanks.
Speaker Change: Right now, we are hedged on our full gas position in Geismar with G3 at 70% in a 1-3-3.
Herriott.
Current spot pricing is
Speaker Change: It's at the $2.75 level, so we're benefiting from that on our spot gas purchases, 30% of our purchases in Geismar right now. The forward curve, like you said, has come down, and one of the things that we do have to evaluate is the OCI transaction.
Steve Hansen: that is gonna come to us without any fixed hedges or gas procurement associated with it when on the day one of the transaction. So we are looking at that as we move closer to the...
to the close date there.
Steve Hansen: But on our current base, we like where we're at on the 70% level hedged, and then we're participating in that spot market on the 30%. It does bode well for us, maybe looking at lengthening out.
Steve Hansen: our position in Geismar beyond the three years that we have and we will look to see if we layer in more hedges in that kind of plus three year time frame as well. So but we haven't we haven't done anything yet but it's obviously come down recently and getting more attractive which is
It was just good for us.
Speaker Change: In Latin America, Rich, like in the Southern Hemisphere, it sounds like you got some additional gas out of Chile and Argentina.
Yep, on
Steve Hansen: We locked in our gas to run at full rates for the non-winter months. It's about a seven-month period here, so we're really...
Steve Hansen: Happy with that. There's a lot of gas being made available in those non-winter months and we did sign
Steve Hansen: We extended our deal with ENAP till 2030, that underpins around 30 to 35% of the total site needs.
Steve Hansen: for that five-year period at the same pricing terms. And we also signed a 20, sorry, a deal with YPF.
until 2027, which is...
Steve Hansen: about 20 to 25 percent of our total site needs as well and that's
That is on a year-round basis.
as well.
Steve Hansen: You know, that will still be subject to the imbalances that Argentina experiences in the winter months, and so we're going to work with them on getting full gas all year round under that contract, but that's something that we're...
Steve Hansen: is a really good indication of what's happening in Argentina as they continue to de-bottleneck the Bacamorta field and the domestic supply balances continue to improve in that country.
Speaker Change: Okay, that's helpful. And just one follow-up on your G3 references. I mean it sounds like the facility is running well now. It sounds like you've got plans to run it here at effectively full rate for the balance of the quarter, but is there is there anything else we should think about in terms of...
Steve Hansen: I'll call it the ramp period here. Like, are we effectively through it now and we can think about it as a regular course run? Or is there other downtime that still is planned in the short term that we should be thinking about in our model? Thanks.
Speaker Change: You should think of this as now in our manufacturing and production base fully, and we're really happy with the way it's running for what we think will be really high efficiency rates for the long term here. So yeah, there were a couple of shutdowns that we took.
Steve Hansen: during the period, but those were done mainly around an abundance of caution for safety and reliability to ensure we get to this place.
Steve Hansen: And when I say that we've completed our performance and reliability test, so there's kind of two tests.
Steve Hansen: 72-hour performance test, where you have to run at 100% rates for 72 hours. The other one is a 30-day reliability test, where you need to run at a sustained plus 90% rate.
Steve Hansen: You know, that 154,000 tonnes over 30 days is above the nameplate, you know, it's running really, really well and efficiently and we're happy with the great job the team's done.
Steve Hansen: really safely and reliably bringing us to where we are. So, you know, you should think of it as it's in the production base and we're managing it within our portfolio now as we would all of our plants.
Great. Appreciate it, Carl. Thanks, guys.
Your next question comes from Hassan Ahmed with Alembic Global
Your line is open.
Speaker Change: geographical or regional pricing? I mean it seems that the disconnect between Western and Asian sort of methanol pricing seems to get wider and wider.
Yeah
Speaker Change: Thanks, Sasan. Right now we're seeing that disconnect and it's grown quite a bit.
Speaker Change: I'll kind of explain what's happened in the Atlantic Basin that's widened that during the quarter, but...
Right now to really
in terms of
maybe balancing it between basins.
Speaker Change: You would probably look first at Middle East flows. We don't see a lot of Middle East product moving.
moving to Europe.
Speaker Change: further restrained because there's not a lot of product that wants to be sold.
Speaker Change: to move through the Red Sea Ray now. There may be traders willing to move that product, but there isn't a lot of Middle East product that's not contracted that can move and be able to arm that gap.
you know, traders will look to others to access molecules.
Speaker Change: via other spot markets and so China will be looked at as can I buy it in China and reload it to Europe?
Speaker Change: of demand built in a three-month period. So, we think things are going to get tighter in China because of that, and we're heading into the winter months. What's happened in the Atlantic Basin is that it's a...
We've had stable demand, but a continued
continued pressure on supply.
Speaker Change: And it's not just the unplanned outages in the market. There are things happening there that are...
Speaker Change: are temporary, but there's also things that look more structural. We've seen Equinor out of the market since April, we're not sure when the Norwegian plant comes back in.
Speaker Change: There's about 800,000 tonnes to a million tonnes in Europe of refinery-based methanol and a lot of that was shut during the quarter. We're not sure if that's temporary or structural.
Speaker Change: less product out of Equatorial Guinea, less gas in Trinidad this year than there has been in the past, so
Speaker Change: You know, we've seen a tightness in the Atlantic markets that's part temporary, part structural.
Speaker Change: Demand continues to stay balanced and stable there and then now there's more pull in the Pacific Basin So, you know things look look good. They look tight and and it doesn't feel like
Speaker Change: It doesn't feel like there's going to be a lot of flows from the Pacific solving that issue, and it really needs to be more production out of the Atlantic Basin to bring that back down.
Speaker Change: So, you know, how has production and export levels been? How have they been, you know, over the last couple of months out of Iran? And where do you see those things going now that we have some sort of, you know, political certainty, I guess, here in the U.S.?
Speaker Change: flows out of Iran and we haven't seen an impact. We were watching very closely as the war continues to escalate and
But thus far, Iran's been producing.
Speaker Change: They are heading into their winter months right now, so we think that they're going to...
Speaker Change: We do expect that there's going to be restrictions on gas use and last year we saw that a more extended period of gas restrictions, so we're going to watch that closely.
Speaker Change: Thus far we haven't seen the escalation really impacting production there, but it's
It's something we're going to continue to watch.
and then geopolitically and...
Speaker Change: You know, the new administration will be watching really closely on foreign policy.
It doesn't.
Speaker Change: that we don't foresee in this environment likely, you know, a lifting of sanctions. It's not going to be easy to get to any place like that. So we do continue to think Iran will be restricted on...
Speaker Change: on sanctions and will therefore be it'll be harder for them to increase capacity and and they'll be restricted on their trade flows like they are today mainly going into China with some into India so
Yeah.
Very helpful, Richard. Thank you so much.
Thank you.
Speaker Change: Your next question comes from Matthew Blair with TPH. Your line is open.
Speaker Change: Thanks and good morning. Circling back to the question and the positive developments in Chile from the new gas supply contracts, if you can run at
Speaker Change: at 55% in the winter months down there. Does that mean that the full-year production could be above 1.3 million tons in 2025?
Speaker Change: We will update the guidance in January, but if you do sort of the math on it,
The range is kind of in that 1.3 to 1.4.
Speaker Change: depending on how if you get that extra increment of gas during during the winter. So so yeah no it is about 100 to 150,000 tons of of incremental supply that we'd get with that uplift.
Rich Sumner: Sounds good. And then, Rich, could you talk about how you're thinking about capital returns to shareholders here? It seems that for the next couple of years, you know, as you pay down debt from the OCI deal, that share buybacks are probably going to be pretty limited. Is there any thought to pushing up the dividend a little bit more while we wait for the buybacks to resume?
Rich Sumner: The big thing that we are focused on is the pre-OCI deal leverage and you know where we are
Rich Sumner: You know with prior to the deal we'll get the end of this year after we pay our 300 million We'll be just below three times that to adjust EBITDA
Speaker Change: That's going to be, as of, if the deal were to be done on January 1st and we were to take all the debt in, it would be about $550 to $600 million that we would need to take off the balance sheet, and that's going to be the big focus for capital allocation.
Speaker Change: So we will we will be in a really good position with today's methanol price to continue to to generate cash with
Speaker Change: with pricing today and production where we are with the assets we have running which is we're in a really good spot so
Speaker Change: We're going to continue to build cash, and that will be the primary focus until we move past that level. We'll be in a really good position to look at capital allocation.
thereafter and
Speaker Change: You know, maintaining a strong balance sheet and shareholder distributions will be things we'll be looking at, obviously dependent on on where we are in the market, but the laser focus for us right now is the five hundred and fifty to six hundred million for for for for cash capital allocation.
Great, thank you.
Speaker Change: And your last question comes from Roger Spitz with Bank of America. Your line is open. Hello. Thanks very much. Good morning. So, you realize price increased 70%
Speaker Change: I think it's probably because we have a widening in our discount range. I would think that that's, if you're looking at reference prices to average realized prices, our reference prices would be going up higher than the average realized price. And really that is a function of what's happening in the Atlantic markets.
Speaker Change: increased competition by marketers mainly through discount competition and we've seen discounts
from Reference to Realize.
Speaker Change: the difference between our realized price and the cost curve price has grown because of that tightening in the Atlantic markets as well. So I think you've had a bit of a double impact there where we've seen not only it's the Atlantic Basin driving more of the price but also
Speaker Change: That's the regions that carry the higher reference, so that's led to higher discount levels.
Got it.
Speaker Change: And the other question is, so Nat Gasoline's $565 million in Terminal B goes current, I guess, next week, November 14th.
Speaker Change: This is probably awkward, but since you'll be taking over OCINV's city percent ownership in the first half of 2025, I mean will you have a representative participating in a likely refinancing of that facility or have any input into how NACL should be capitalized in general, even though obviously you're not there yet?
yeah we're we're we're not
Speaker Change: We're not active and nor can we be in decision-making for that asset prior to close. So that's something that we would expect that they're doing and progressing and ensuring that they get those refinancing in place.
Speaker Change: the same way you would if you were owning those assets for the long term. So, yeah, we're not involved, but we'll be watching closely on terms of ensuring that that happens.
Thank you very much.
Speaker Change: There are no further questions at this time. I will now turn the call back over to Mr. Rich Sumner.
Rich Sumner: All right, well, thank you for your questions and interest in the company. We hope you'll join us in January when we update you on our fourth quarter results.
Speaker Change: Ladies and gentlemen, that concludes today's call. Thank you all for joining. You may now disconnect.