Methanex Corporation (NASDAQ:MEOH) Q4 2022 Earnings Call Transcript

Methanex Corporation (NASDAQ:MEOH) Q4 2022 Earnings Call Transcript February 3, 2023

Operator: Good morning, my name is Regina and I will be your conference operator today. At this time, I would like to welcome everyone to the Methanex Corporation 2022 Fourth 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. . I would now like to turn the conference over to the Director of Investor Relations at Methanex, Ms. Sarah Herriott. Please go ahead.

Sarah Herriott: Thank you. Good morning, everyone. Welcome to our fourth quarter 2022 results conference call. Our 2022 fourth quarter news release, management’s discussion and analysis and financial statements can be accessed from the reports tab of the Investor Relations page on our website at methanex.com. I would like to remind our listeners that our comments and answers to your questions today may contain forward-looking information. This information, by its nature, is subject to risks and uncertainties that may cause the stated outcome to differ materially from the actual outcome. Certain 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 fourth quarter of 2022 MD&A and our 2021 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 this guidance between quarters. For clarification, any references to revenue, average realized price, 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. In addition, we report 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.

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. 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 matter. I would now like to turn the call over to Methanex’s President and CEO, Mr. Rich Sumner for his comments and a question-and-answer period.

Rich Sumner: Thank you, Sarah and welcome to all of you. We appreciate you joining us today as we discuss our fourth quarter and full-year 2022 results. I’m excited to be leading the Company and to be having my first earnings call since becoming CEO of Methanex on January 1. In December, we announced changes to the executive leadership team or ELT with a few longstanding ELT members retiring. I want to thank them for their significant contributions to the Company. The new members of the ELT, all have extensive industry experience and as a team, we all share a passion for safety and value creation. Now let’s turn to a review of our fourth quarter and full-year 2022 financial results. For the fourth quarter, our average realized price of $373 per ton, generated adjusted EBITDA of $160 million and adjusted net income of $0.73 per share.

Adjusted EBITDA was lower in the fourth quarter, primarily due to lower proceeds from the redirection and sale of natural gas in Egypt, partially offset by the benefit of a decline in gas and logistics costs. In 2022, we recorded annual adjusted EBITDA of $932 million and robust adjusted net income of $343 million or $4.79 per share. Combined 2021 and 2022 are the highest adjusted EBITDA and operating cash flows in the Company’s history. I’m proud of the team for delivering another year of strong financial results and I’m very excited for the Geismar 3 plant coming online this year, as it will further enhance our cash generation capability. We estimate that global methanol demand increased slightly in 2022 to 88 million tons. Methanol demand in the fourth quarter was down approximately 5% compared to the third quarter of 2022, primarily driven by lower MTO operating rates.

Photo by Hans Reniers on Unsplash

MTO affordability was under pressure from low olefins prices leading to lower operating rates and some plant outages. Demand from traditional chemical applications was also slightly lower due to lower consumer spending, year-end destocking in Europe and Asia and continued lackluster demand in China due to COVID-19 restrictions. Demand from energy-related applications was relatively stable in the fourth quarter. Industry operating rates in the fourth quarter were similar to the third quarter with lower operating rates in China and Iran due to the seasonal diversion of natural gas to meet power demand offset by stronger operating rates from the Atlantic region. High coal pricing in China continues to provide support to the methanol cost curve.

We estimate the industry cost curve based on the marginal coal producer costs in China to be approximately $330 to $350 per ton, with coal pricing continuing to remain well above RMB1,000 per ton levels. Based on these industry supply and demand fundamentals, we’re seeing relatively balanced markets in the Atlantic and tight markets across Asia and China, underpinned by high energy pricing globally. Our February posted prices remained stable in North America and increased in Asia and China. Less volatile spot prices in the fourth quarter, primarily in China led to a lower discount rate of 20.5% compared to 21.5% in the third quarter. In 2022, we had an average discount rate of 21% and in 2023, we had a similar discount rate. We continue to monitor the macroeconomic and energy price environment, we see potential demand upside from the reopening in China, following the Lunar New Year given the significant methanol demand in China, as well as in Asian countries with strong economic ties to China.

We continue to see a high global energy price environment, which enhances methanol’s cost competitiveness against alternative fuels, supporting demand growth. Interest from the green industry and orders for dual fuel vessels able to run on methanol continue to grow. Based on existing dual fuel ships and orders to date, demand potential grows from approximately 300,000 tons today to 3 million tons over the next few years. On the supply side, we do not anticipate any capacity additions outside of China in 2023, besides our Geismar 3 project, which is expected to start production in the fourth quarter. Turning to operations, our production levels were higher in the fourth quarter compared to the third quarter as the Egypt plant restarted after an extended turnaround.

We had higher gas availability in Chile and New Zealand and no plan turnarounds. We did experience unplanned outages in Geismar, Chile and Trinidad that impacted the fourth quarter production. In 2023, we have three planned turnarounds, which will be undertaken sequentially and complete by September. Our forecasted production for 2023 is approximately 6.5 million equity tons, excluding production from G3. Although actual production may vary by quarter based on timing of these turnarounds, gas availability, unplanned outages and unanticipated events. We ended the fourth quarter in a strong financial position with approximately $806 million of cash, excluding non-controlling interests and including our share of cash in the Atlas joint venture and with $600 million of undrawn backup liquidity.

Construction on our Advantage G3 project is progressing safely on time and on budget with production expected in the fourth quarter of this year. The expected G3 capital spend remains unchanged at $1.25 billion to $1.3 billion and we spent approximately $910 million before capitalized interest to the end of the fourth quarter. The remaining $415 million to $465 million of capital expenditures and including approximately $75 million in accounts payable is fully funded with cash on hand. We are looking forward to adding G3 to our asset portfolio as it will enhance our cash flow generation capability and lowered the CO2 intensity of our portfolio. Looking ahead to the first quarter of 2023, we continue to see a strong methanol pricing environment and we expect slightly higher production in the first quarter compared to the fourth quarter.

I’d also mention that our sales of produced product were meaningfully lower than our production for the fourth quarter. As a result, we’re expecting much higher sales of produced product and higher adjusted EBITDA in the first quarter of 2023 compared with the fourth quarter of 2022. In the medium term, the methanol market outlook is positive and we have growing cash flow generation capability with G3 production expected in the fourth quarter of this year. At $375 per ton realized methanol price and $4 per MMBtu gas, we expect G3 to generate approximately $250 million of EBITDA per year. With our G3 projects being fully funded with cash on hand and our ability to generate meaningful cash flows across a wide range of methanol prices, we are well positioned during this period of economic uncertainty to maintain a strong balance sheet, pursue economic value-added growth opportunities and continue returning excess cash to shareholders.

We would now be happy to answer questions.

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Q&A Session

Operator: . Our first question comes from the line of Joel Jackson with BMO Capital Markets. Please go ahead.

Joel Jackson: Hi, good morning, Rich. Congrats on your first quarter as CEO.

Rich Sumner: Thanks, Joel.

Joel Jackson: If I look at what’s going on in the market. Pricing is about similar in Q1 as Q4, gas prices are lower, you have a lot more sales. Would you not say that Q1 earnings should be significantly higher than Q4? Is there anything you can do to kind of quantify a bit more?

Rich Sumner: I think you probably can put it together, I think the much higher on produced sales do that, if you kind of look at production and then think about our inventory balance, you can probably project what that means in terms of produce sales. And you’re right Joel, in this environment where margins are strong and so we’re expecting much higher earnings along with that.

Joel Jackson: And then New Zealand production is starting to come back, but it seems like a slide here, and maybe some of the Chile production in ’23 looks a bit, like not growth there. I’m wondering if there is one of the turnaround is happening in Chile this year, and then more generally like I know we’re in ’23, but can you maybe talk about as you get into ’24, how might Chile and New Zealand volumes look better, like what’s on the table, considering all the things going on those countries and Argentina?

Rich Sumner: Sure. Yes, maybe I’ll start with New Zealand. So in New Zealand, as you know we’ve got gas contracts that go out to the end of the decade. We’re a big gas consumer there, so we work closely with our gas suppliers, on their drilling campaigns to support our contracts and our 2023 forecast is based on what we see relatively tight market in 2023. We continue to be optimistic with their drilling campaigns, as well as their well maintenance activities that are going to happen this year on the outlook for more an incremental gas to the two plants for at Motunui. Long-term or medium to longer term, we think it’s favorable dynamics in New Zealand. The Taranaki Basin is a well-developed basin that reserves are there, its economic gas and in the high energy price, there is associated gas that comes with that.

We also think we’re a big consumer in the region and the other consumption isn’t power and increasingly, I think New Zealand’s recognizing the importance of gas for power generation. So we’re cautiously optimistic there and we’re going to continue to work really closely with the gas suppliers. So that’s kind of New Zealand. When we talk about Chile, we’ve got gas coming — into Chile coming from suppliers in Chile. But that gas happening all year round, and then we have gas coming from Argentina which happens outside of the winter months there. We are forecasting similar gas supply as 2022 and 2023. We continue to work with in particular with suppliers in both Chile and Argentina. Argentina, there’s a quite positive things happening within Argentina that we think can be significantly change the balance there.

One is that, there is a lot of development happening in the Neuquen Basin and the Vaca Muerta Field and there’s pipeline connections being made which likely would supply domestic markets there and reduced need for imports of LNG. And it also depends on gas in the South, where our plants are and there’s investments happening in the South. There is an investment by Total and Wintershall $700 million project, where they’re developing gas. It’s meant to come online in the next year and a half or so. So we’re continuing discussions there and remain again optimistic of future gas, but things have to happen in Argentina for that to come unfold.