Methanex Corporation (MX) Earnings Call Transcript & Summary

Good morning. My name is John, and I'll be your conference operator today. At this time, I would like to welcome everyone to the Methanex Corporation Fourth Quarter 2024 Results Conference Call. [Operator Instructions]. 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.

Good morning, everyone. Welcome to our fourth quarter 2024 results conference call. Our 2024 fourth 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 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 forecasts or projections, which are included in the forward-looking information. Please refer to our fourth 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 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 Waterfront Shipping. 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. 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 that 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.

Thank you, Sarah, and good morning, everyone. We appreciate you joining us today as we discuss our fourth quarter 2024 results. I'd like to start the call by thanking our global team for their ongoing dedication to safety. We achieved the best safety performance on record for the company in 2024 and a year of meaningful changes in our operating assets, and these results are a demonstration of the team's commitment to responsible care across the globe. Now turning to the financial and operational review of the company for the fourth quarter. Our fourth quarter average realized price of $370 per tonne and produced sales of approximately 1.5 million tonnes generated adjusted EBITDA of $224 million and adjusted net income of $1.24 per share. Adjusted EBITDA was higher compared to the third quarter of 2024, primarily due to a higher average realized price and higher produced sales. For the full year of 2024, we had an average realized price of $355, produced sales of just over 6 million tonnes and generated adjusted EBITDA of $764 million and adjusted net income of $252 million or $3.72 per share. Now turning to short-term methanol pricing and market dynamics. We entered the fourth quarter with very tight market conditions in the Atlantic Basin underpinned by stable demand and low operating rates from several key supply sources with these conditions remaining through the quarter. In the Pacific Basin, we entered the fourth quarter in a more balanced market with stable production and healthy inventories from lower methanol to olefins operating rates in the third quarter. Through the fourth quarter, conditions in the Pacific tightened because of increased operating rates from MTO producers, combined with increasing supply constraints, particularly from Iran. Consequently, MTO operating rates decreased late in the fourth quarter with this trend continuing into the first quarter. Overall, tight market conditions globally led to an increased methanol pricing environment in the fourth quarter and into 2025. Our global average realized price of $370 per metric tonne was $14 higher than the previous quarter. Methanol pricing strength continued into the first quarter of 2025 with our European quarterly price posted at EUR 700 per tonne, representing a EUR 130 per tonne increase from the fourth quarter. Our posted prices for North America and China increased in January and rolled in February. And in Asia Pacific, we increased posted prices in January and February. Comparing methanol demand in 2024 to 2023, we estimate global methanol demand increased by approximately 3 million tonnes, which included relatively flat year-over-year demand for methanol to olefins given supply constraints in the industry. In 2025, we expect methanol demand to grow at a similar rate to 2024, driven by demand from traditional chemical applications as well as energy applications with operating rates in methanol to olefins, again playing a critical role in balancing the market. We expect incremental supply will come from full year production of G3 and from the Malaysian Sarawak plant, which we understand recently started producing methanol. Looking beyond 2025, we continue to see favorable supply and demand dynamics with traditional chemical and energy applications demand expected to outpace supply, given limited capacity additions projected in the industry. Now turning to our operations. Methanex production in the fourth quarter was higher compared to the third quarter with higher production from Geismar, Chile, New Zealand and Egypt. Our production was higher than our produced sales in the fourth quarter of 2024 due to an inventory build that produced methanol from these higher production levels. In Geismar, production was higher during the fourth quarter with G3 operating at full rates in October and December. In mid-November, we took a proactive shutdown of G3 to inspect some of the newly commissioned equipment to ensure reliability. The plant successfully restarted and resumed full operating rates in December and has been operating at high rates since the restart. In Chile, I'm very happy to share that both plants have been operating at full rates and that after a brief maintenance outage in November, we produced 150,000 tonnes of methanol in December which is the highest monthly level of production we've reached in Chile since 2007. We have gas contracts in place with Chilean and Argentina gas producers until 2030 and '27, respectively which underpin approximately 55% of the site's gas requirements year-round. We continue to expect seasonality in production but are seeing positive developments making full gas supply for a 2-plant operation available for longer periods. Based on contracted gas, 2020 production is expected to be between 1.3 million and 1.4 million tonnes, which would result in the fourth consecutive annual increase in production from Chile. In Egypt, production increased compared to the third quarter as temperatures moderated, the gas balances in the country stabilized, and we operated at close to full rates based on improved gas availability. We're monitoring the gas market closely and would expect to experience some curtailments in 2025, particularly in the summer months, depending on gas supply and demand dynamics. In New Zealand, production in the fourth quarter was higher compared to the third quarter with the restart of our Motunui 2 plant in November. In August, operations were temporarily idled as we entered short-term commercial arrangements to provide contractual natural gas into the New Zealand electricity market until the end of October 2024. Based on the current outlook from gas suppliers, we expect 500,000 to 700,000 tonnes of production from New Zealand in 2025, which will be dependent on gas availability and any on selling of gas into the electricity market to support New Zealand's energy needs. In 2025, we have 3 turnaround schedules that will impact our production in the first 3 quarters. Our expected equity production guidance for 2025 is approximately 7.5 million equity tonnes, which includes the impact of these turnarounds and forecast for gas feedstock availability outside of North America but excludes any incremental production from OCI assets post acquisition closing dates. Actual production may vary by quarter based on timing of turnarounds, gas availability, unplanned outages and unanticipated events. Now turning to our current financial position and outlook. We ended the fourth quarter with $879 million of our share of cash and continued access to our $500 million undrawn revolving credit facility. During the fourth quarter, we repaid the $300 million bond with cash generated from operations and executed our OCI Acquisition financing plan, including issuing a $600 million bond and securing a $650 million Term Loan A commitment from our banking partners. The completion of these arrangements gives us the financial capacity and flexibility to complete the OCI Acquisition and our targeted deleveraging plan. We're continuing to progress the regulatory process as planned. Looking forward to 2025, our priorities are focused on closing the OCI transaction, safely and efficiently integrating the assets, achieving the identified synergies and reducing leverage by repaying $550 million to $600 million in debt over the next 18 months, assuming a $350 realized methanol price. Beyond this, we do not anticipate significant growth capital over the next few years and remain focused on maintaining a strong balance sheet and financial flexibility. With strong free cash flow capability from our existing assets, which we expect to be strengthened by the OCI Acquisition, we're positioned to execute a balanced approach that includes deleveraging and shareholder distributions, depending on future market conditions and methanol pricing. Based on our first quarter European posted price, along with our January and February posted prices in North America, China and Asia Pacific, our January and February average realized price range is forecasted to be between approximately $395 and $405 per metric tonne. Based on this higher forecasted average realized price, coupled with our produced sales expected to normalize closer to fourth quarter production levels, we expect significant higher -- significantly higher adjusted EBITDA in the first quarter of 2025 compared to fourth quarter. We'd now be happy to answer questions.

[Operator Instructions] Your first question comes from the line of Hamir Patel with CIBC Capital Markets.

Rich, are you able to give us an update on how the regulatory approvals for the OCI deal are progressing and should we still assume a close sometime in the first half?

Yes. It's -- thanks, Hamir. We're progressing things well as planned, and we're going through the process in both Europe and the U.S. as we discussed previously. And right now, the expectation is to close in the first half. It's looking like it's going to be -- looking like it's more Q2 close sometime in the first half of the year, but Q2 close right now. So we're getting things all prepared for that and starting to plan integration as we get ready for regulatory approvals.

Okay. Great, Rich. And last question I had was, could you speak to what you're hearing about output levels from the Iranian methanol industry? It seems like from some of the trade reports that they were barely running in December. If you have any insights into how much has come back and potential for further supply disruptions there this year?

Yes. Well, we don't have direct insight but what we do is track a lot of the flows and import statistics into the -- mainly into China, and we've seen a significant reduction in imports into China which is impacting inventory levels there. It would indicate that -- you're right, there is not a lot of production coming through in December and likely into January. And I think the energy crisis that Iran is going through is pretty well publicized. So they're having quite a difficult time just from keeping the residential demand supplied and that's significantly impacting industry and methanol production. So we think that, that probably leads to constrained supply particularly through the winter here, but likely as we saw last year, maybe a more prolonged impact of that through the first quarter and possibly into the second quarter, but we're going to continue to monitor it.

Your next question comes from the line of Joel Jackson with BMO Capital Markets.

Just following up on a question, I think you just said. So you said -- I think you said that you expect sales of [increased] methanol in Q1 to be similar to production levels in Q4. Is that right?

That's correct, yes.

Now it seemed like it would be higher in Q1 because if I take your guidance and I factor and turn around, like it seems like production should be similar in Q1 versus Q4 and you add 400,000 tonnes of inventory build in Q4. So can you tell us what would production look like in Q1 versus Q4? And then aren't you drawing down the inventory?

Well, we're -- I don't think we're going to be drawing. It's an inventory build of produced product because there's a bit of a change in our system. When we bring in -- our overall inventory levels are the same, but we're bringing in more produced with more production, which means a change from produced methanol to our own produced methanol, which is a good thing for us. So we've got an inventory build of produce, not an overall inventory build. And so where we are in production should be similar, where we're operating is consistent with the fourth quarter. Right now, the assets are running really well. So we would expect a similar production level at this point. But we'll have to -- our focus is making sure we're delivering and performing on the assets. So we expect that kind of production level would be more kind of our run rate that we would see coming through, assuming we keep production levels at really high levels they are today. Hopefully, that answers the question.

Sure. And then I'll follow up. So your mid-cycle methanol, $350 methanol, you talked about before what you want to do as you close the OCI deal and pay down debt before we start buybacks?

Yes.

I'm sure you saw the sensitivity here. We're not at $350 methanol, we're at $400. I mean, can you just give a sense of if it's $400 methanol and not $350, like how many months quicker do you get through that debt repayment? Or how do you think about it? What is $400 methanol versus $350 methanol mean and how fast you could start buybacks?

Yes. So I think if we look at where we are in Q1, we would be at this methanol price with our assets performing the way they are. We would expect free cash flow in the $150 million or more range. So if you just kind of do the math, this is pre-OCI deal with our existing asset base producing or it is, that would be a 12-month time frame. But of course, we're going to plan for a lower methanol price environment, and we've got all the financing in place that we have. And right now, I think this is right because assuming on Q2 close, we're going to be bringing more cash to the table on close and are starting incremental leverage, it's going to be a lot lower than when we first came out with the deal announcement. So we're already making our way on our deleveraging as we operate every day in a tight methanol market, and that's what we're going to continue to focus on.

Your next question comes from the line of Ben Isaacson with Scotiabank.

I have 2 questions. First one is on New Zealand. Rich, last quarter on the call, you said to start modeling one-plant in New Zealand going forward, and that's certainly consistent with your guidance. But the question is, when you said that, were you thinking 500,000 to 700,000 tonnes for the year? Or is this actually a step worse than you were thinking? And the reason why I'm asking is what is the risk that we completely lose methanol production in New Zealand in 2 or 3 years?

Yes. So. At the time when we were gearing to one-plant operation, we were looking at -- working with our gas suppliers on the future deliveries of gas. And what we were seeing was enough gas to run a one-plant operation, the actual rate is going to be determined on really looking closely at production for the year. And the range we've given also does include potentially some downside of methanol production, where we may be on selling some gas into the market. But Ben, you're right, we do need to see production and investment going into the upstream in New Zealand from where we are today to continue to support the one-plant operation into the future. And that's something that we're going to be working on with gas suppliers as well as with the government who we believe is looking at a lot of the policies that have not been incentivizing right things for the upstream in the country, and we're 50% of the market. So we're going to be working through that, and we'll be giving guidance as we progress. So it's hard to say beyond this year what is it going to look like and is there a risk? Yes, there's risk, and it's something that we're going to be working to preserve the long-term sustainability of our supply into New Zealand. So -- but we'll continue to give updates. And right now, we do think it's one-plant at less than full rates with the potential that some gas gets diverted depending on what happens in the country. And what's happening in the country when there's -- with the energy crisis partly because the lack of upstream and the government today recognizes that. So that's something we think there is a focus on, and that's something we'll be working towards.

Perfect. That's helpful. And then my second question is -- and I may have missed this when the OCI deal was announced. But does the regional mix shift of sales volume post OCI mean that you'll have a higher ASP, all else equal on $350 methanol? And if so, does that also mean you'll have a higher margin all else equal?

So just on the ASP, I think the answer is, in today's pricing environment where we're seeing premiums in -- outside of China, I think the answer is yes, a lot of the markets that we expect to be selling to will probably be mainly Atlantic based. So yes, on the higher realized price, in terms of translating into higher profits, we would have modeled all this into our forecast of earnings, and we used everything at a $350 price. So we would expect there to be a higher uplift in ARP. How that models back to our average realized price sort of remains to be seen on how differentials work in the industry. And one of the things that you'll see this year is we've reduced down our sales, and that will probably be showing up mainly in China, but we'll also be reducing down purchases in the region. So net-net, it's not a -- it wasn't a big margin driving part of our business. And so you should expect a higher uplift in price but not necessarily tracking back to margin because that wasn't where we were earning a lot of the margins in our business.

Your next question comes from the line of Josh Spector with UBS.

This is James Cannon on for Josh. I just wanted to double-click on one of the earlier questions on gas availability in New Zealand. You said that the guidance there reflects potential for some on-selling of gas. But could you just frame for us based on your pure gas supply, what the implied production would look like?

I think right now on gas, we're probably in the middle of that range or somewhere between $600,000 and $700,000 without any gas on selling, and that's going to be dependent on production out of the gas fields. And then if it goes lower than that, it's likely -- we would be selling into the gas market. I will remind that from a business perspective, when we've given our future forecast on earnings that we do have a few sites Trinidad and New Zealand, these from a volume perspective are still in our numbers, but from an overall earnings perspective, and our run rate earnings are now representing a lot smaller proportion. And so right now, we do see a shift with G3 and now the OCI acquisition, where we are seeing a lot of the value uplift mainly in North America as well as upside around Chile today.

Yes. That makes sense. And then just one more on the MTO affordability. I don't know if you mentioned that earlier. Could you just remind us where that sits right now?

Yes, today, we see ethylene and propylene prices at around $850 to $900 per tonne, and that translates into around $300, somewhere between $280, $300 MTO affordability, but that's at a C2, C3 level. They also have integrated downstream and when you factor in the integrated downstream, it's slightly higher or slightly -- could be slightly lower depending on where they're going. So we do think that we've seen pricing above that level in China, which is indicating that markets are tight and that we're -- we've seen it pushing to above right up to their highest kind of affordability for coastal MTO producers at $310, $320 level.

Your next question comes from the line of Hassan Ahmed with Alembic Global.

Question on pricing. Obviously, there's been a fair degree of buoyancy across all the regions, but there continue to be sort of variances particularly in terms of North American pricing and Asian pricing. So how should we think about the delta between those 2?

Thanks, Hassan. I think right now, we see there are some more and more, what we'd say, on the existing supply. There's more and more -- well, there's temporal constraints on supply, and then there's more structural constraints on supply. And so we saw the Atlantic markets getting a lot firmer because of European pressure on European producers. We've also seen Venezuela operating at low rates. Trinidad -- ourselves reduced production in Trinidad by 1 million tonnes. There's a plant in Equatorial Guinea that we don't think is operating methanol today. And so you've seen that those being somewhat -- some of that is temporary, but a lot of that is structural. So we've seen imports particularly into Europe being under pressure. And there isn't a lot of free flows that are from maybe the Middle East that might balance the market because there's pressure on the trade. Firstly, there's a lot of uncontracted volume. And secondly, the trade routes through the Red Sea is effectively, no one wants to take the risk to move product there. So we do think that these forces are in place for at least now, and we're going to have to see how balance comes back into the markets as some of these temporal things change. But there are structural forces that we think are in place that aren't going to ease in any kind of short time frame. So we do think that these premiums that we're seeing in Atlantic is likely to be there for at least into the near to medium term here. And then I think the -- we have seen premiums in Asia Pacific outside of China as well. The Asia market is probably trading at a $20 to $30 premium above China. So today, that's sort of what we've seen and that those -- that tightness in the market sort of remains. And as we look forward, demand continues to grow and the supply constraints, we'll have to see how much actually gets in the market and then also geopolitical forces could put increased pressure on some of the supply into the industry as we see what impact the new U.S. administration is going to have in certain jurisdictions as well.