Methanex Corporation (MX) Earnings Call Transcript & Summary

Good morning. My name is Trevor, and I will be your conference operator today. At this time, I would like to welcome everyone to the Methanex Corporation Third Quarter 2026 Results Conference Call. [Operator Instructions] Thank you. I would now like to turn the conference call over to the Vice President of Investor Relations at Methanex, Mr. Robert Winslow. Please go ahead.

Good morning, everyone. Welcome to Methanex's Third Quarter 2026 Results Conference Call. Our 2026 third quarter news release, management's discussion and analysis and financial statements can be accessed through our website at methanex.com. I would like to remind listeners that our comments today may contain forward-looking information, which by its nature, is subject to risks and uncertainties that may cause the stated outcome to differ materially from actual results. We may also refer to non-GAAP financial measures and ratios that do not have any standardized meaning prescribed by GAAP and are, therefore, unlikely to be comparable to similar measures presented by other companies. Any references made on today's call reflect our 63.1% economic interest in the Atlas facility, our 50% economic interest in the Egypt facility, our 50% interest in the Natgasoline facility and our 60% interest in Waterfront Shipping. To review the cautionary language regarding forward-looking statements and to find definitions and reconciliations of the non-GAAP measures, please refer to our most recent news release, MD&A, annual report and investor presentation, all of which are posted on our website under the Investor Relations tab. I will now turn the call over to Methanex's President and CEO, Mr. Rich Sumner, for his comments, followed by a question-and-answer period.

Thank you, Robert, and good morning, everyone. We appreciate you joining us today to discuss our third quarter 2026 results. With the third quarter average realized price of $510 per tonne and produced methanol sales of 2.3 million tonnes, our third quarter adjusted EBITDA was $543 million and adjusted net income was $284 million. The third quarter adjusted EBITDA, which includes a $10 million accrual for restructuring activities at our New Zealand operations, decreased the second quarter of 2026, primarily due to a lower average realized price, partially offset by increased sales volumes of produced methanol. These outstanding operating results drove record levels of cash flow generation for our business, and I will speak more about our capital allocation priorities in a moment. Starting with the methanol market. The ongoing Middle East conflict continues to have an unprecedented impact on the industry given the region would normally supply 15 million to 20 million tonnes, representing 30% to 35% of the internationally traded methanol in the market. The ongoing conflict continues to significantly restrict this supply and has resulted in elevated industry pricing, inventory drawdowns and ultimately, demand destruction required to balance the market. This pressure continued and became more severe as we moved through the third quarter. After absorbing the short-term release of supply during the temporary ceasefire in mid-June to early July, we've seen very little supply able to reach the market. And as a result, there was increasing pressure on methanol prices, particularly in Asia and China regions with a significant fly up in September, resulting in spot price increases of $100 to $150 per tonne in these regions. As a result, we saw increasing pressure on downstream demand, particularly in Asia Pacific, through the third and into the fourth quarter to balance the market. We estimate that the Middle East supply into the market is currently at approximately 5% to 10% of normalized annual levels, and this has been balanced with the shutdown of all coastal methanol-to-olefins demand in China and the reduction in demand in other regions, including the Middle East, Southeast Asia and India. We estimate current annualized industry demand to be approximately 90 million tonnes or a reduction of 10 million to 15 million tonnes as a result of these supply pressures. We are currently seeing methanol spot pricing in the Atlantic region at $500 to $550 per tonne, Asia ex-China at $550 to $650 per tonne, and China at approximately $500 per tonne. Looking ahead, there remains significant uncertainty as to how long the industry dynamics and pricing environment could last. We're carefully monitoring the factors and related time frames required for a normalization in the methanol industry as well as macroeconomic impacts from an elevated global energy environment. We're unaware of any specific material damage to methanol production facilities in the Gulf region and the full impact of potential disruptions to regional natural gas and related infrastructure remains unclear. Turning to our operations. We continue to deliver strong production results in the third quarter with total equity methanol production of 2.1 million tonnes. Starting in North America, we produced another record volume of methanol this quarter, reaching 1.6 million tonnes across Canada and the United States. Geismar and Medicine Hat continued to run at full rates, producing 1,007,000 tonnes and 140,000 tonnes, respectively. At Beaumont, after completing cooling tower repairs early in the quarter, we produced 199,000 tonnes of methanol and 83,000 tonnes of ammonia. Our equity share of production at the Natgasoline joint venture was 221,000 tonnes. In Chile, we produced 221,000 tonnes in the third quarter. As expected, production was lower in the third quarter as we undertook single-plant operation through most of the period, reflecting the seasonal reduction in natural gas availability from Argentina during the Southern Hemisphere winter. Late in the quarter, we restarted two-plant operations as planned. In Egypt, our third quarter production was similar to that of the second quarter with plant operating at full rates through the Egyptian summer. In New Zealand, we produced 156,000 tonnes in the third quarter, following a planned winter outage in the second quarter to supply gas to the New Zealand electricity sector. The plant was restarted in July. As previously disclosed, we've entered into an agreement commencing in the first quarter of 2027 to sell our remaining gas entitlements through the end of the decade and are planning to indefinitely idle the New Zealand operations at that time. For 2026, our expected equity production continues to be approximately 9 million tonnes of methanol. Actual production may vary depending on timing of turnarounds, gas availability, unplanned outages and unanticipated events. As previously discussed, we continue to operate under significant industry supply pressures, resulting in an elevated pricing environment. And based on October and November contract price postings and current spot pricing, we expect our average realized price range for these two months to be approximately $525 to $550 per tonne. Assuming current pricing levels are sustained through December and produced sales volumes are similar to those of the third quarter, we expect adjusted EBITDA to be higher in the fourth quarter than the third quarter. Continued strong methanol production, underpinned by attractive natural gas feedstock in the current methanol price environment, is driving very strong cash flow generation for our business, and we ended the third quarter with over $900 million in cash. In this strong pricing but uncertain industry and macroeconomic environment, we're continuing to focus the majority of free cash flow towards our deleveraging targets while also allocating a modest proportion to shareholder returns. Subsequent to the third quarter, we repaid $300 million of our 2027 senior notes, and we expect to redeem the remaining $400 million in the fourth quarter. In addition, yesterday, we announced Board approval to initiate a normal course issuer bid under which we may purchase and cancel up to 5% of our shares outstanding. These actions reflect our disciplined approach to capital allocation as we move towards our balance sheet leverage target of 2.0 to 2.5x adjusted debt to adjusted EBITDA while also providing returns to shareholders. Our priorities remain unchanged: safely and reliably operate our assets, cost effectively operate our global supply chain to provide unmatched security of supply to our customers, complete the integration plan and capture the planned synergies, and focus on conversion to cash through the business to deliver value for shareholders. We'd now be happy to answer your questions.

[Operator Instructions] Our first question comes from the line of Hassan Ahmed with Alembic Global Advisors.

Rich, a question around -- obviously, fairly elevated methanol prices, and I know you touched on this in your prepared remarks as well. But just wanted to get a better sense of at these pricing levels, what you guys are seeing potentially in terms of demand destruction, potentially also in terms of a supply response. Are there any talks about incremental capacity? How we should think about that as well?

Yes. Thanks, Hassan. In terms of supply response, like I said, I think where we are today is that the demand has effectively absorbed this level of Middle East supply. We said on the Q2 call, we were working through that temporary ceasefire. There was volume in the market, and we actually saw pricing in China in the $300, low-$300 levels during that period. Our view is that after the ceasefire ended that unless something changed, we were going to run up against demand pressures, and that was going to become more severe through the quarter. And we've seen now all coastal MTO operations shut down. That's the first time we've seen that since the MTO sector started up. So that's 9 million to 10 million tonnes of demand right there in a normalized annualized that's out of the market today. And about 3 million to 4 million tonnes in Asia Pacific, that would be Middle East, Southeast Asia, India, operating at lower operating rates. So as of today, pricing levels are already above MTO affordability, well above marginal cost of production. And we're watching it really closely as to where that demand pressure is. We think that it's largely into other applications in China, fuel applications may be under pressure. Acetic acid was under pressure. We think that, that's had a little bump here recently as well. So we're watching it really closely. We have found this balance today of, I think, 12 million to 14 million tonnes effectively being absorbed under demand. Of course, there's still risk in the 5% to 10% getting out of the strait. October was one of the -- we saw a tax on ships being the highest through October, and there could be even more pressure on that supply. But as of today, we've found this balance, and that's where pricing is at. So we saw that lift up into September and our forecast for -- our guidance for the months of October and November are more reflective of that September being rolled through Q4.

And as a follow-up on the buyback obviously, the balance sheet is improving extremely rapidly. How should we think about the balance between further deleveraging and further returning cash to shareholders? Is there a specific leverage threshold at which you start getting a little more aggressive with the buybacks?

Yes. I think a few points there. I think, first and foremost, the earnings levels are driving great free cash flow in our business. I just want to recognize that having G3 running sustainably, having the OCI assets smoothly integrated and then having all of our other assets running reliably on the basis for such good free cash flow generation. As it relates to leverage, we've set the leverage target at 2.0 to 2.5x on an adjusted debt to adjusted EBITDA level. We're progressing really well there. As it relates to the buyback, when we think about buybacks, we're really pleased to have announced that. We think that gives us a lot of flexibility. We do think that buybacks represent the most attractive return when we can say we're buying back at conservative mid-cycle types of valuations or below. So I think we'll be looking at that. We'll likely enter into the buyback with flexibility to go up if we see the share prices come off and also pull back if the share price has also really good performance. So we've got a lot of flexibility right now. The focus of the majority of it is to deleveraging, and we think that provides a lot of downside protection to our business as well as more optionality on other ways of deploying capital.

Our next question comes from the line of Laurence Alexander with Jefferies.

Curious about what you're seeing in terms of the impact of the current methanol price surge on long-term decision-making. And I guess the areas that might be most visible would be the cadence of orders for new fuel flexible ships. But curious if you're seeing -- like are you seeing any of the end markets where longer-term decisions that would affect the structural trend in methanol demand are being delayed in a significant way because of what's going on and how long the war has gone on?

Thanks, Laurence. I would say not yet. The commitments to ships are still happening. And in fact, there's a decent amount of ships already in the water that aren't burning methanol today and really haven't been because the economics of methanol to conventional bunker fuels like VLSFO and heavy fuel oil have really not been there. And so we haven't seen an uptick in the use of methanol for those dual fuel vessels. The vessel commitments remain. Other downstream sectors, the MTO sector is obviously one that is now effectively phased out of this current market and the wave of those capacities had already come off. So it's interesting like what's happening in this market is we're starting to see some downstream producers in Europe who we thought would be phased out operating because of constraints around the Middle East. So there's definitely a lot of short-term dynamics happening. I don't think it's resulting in yet a change in long-term downstream capital deployment, but it's something we'll certainly watch.

And then secondly, can you give a sense for how much of -- or maybe at what levels or how quickly -- let's put it this way, how quickly does the areas of demand destruction likely flex back if methanol prices come down. So I guess thinking there's like the MTO, there's the DME, there's some of the other markets that have curtailed a little bit. There's the marine fuel. Can you just give a sense for what chunks of capacity might have a lag response to lower prices as opposed to a quick response?

Yes. I think in a lot of ways, we've seen the coastal MTO sector be almost a big buffer against the Iranian supply. Iran usually imports about 9 million to 10 million tonnes into coastal markets, and that's the downstream demand from coastal MTO. So there's almost like a balance there, and we would expect that if supply gets released that segment is there to start up, and it would largely be based -- have to be a lower methanol price to be competitive today. And then on the other sectors, it will be mainly into traditional chemical applications, acetic acid operations, potentially localized formaldehyde demand that would pick up. And so there might be a little bit of stickiness just because of the volumes there aren't typically as big, and we need to get that absorbed. So we could see volatility. Whereas we've seen pricing run up, we could see supply come on, pricing lag, demand pick up. So we are watching things very closely and obviously carefully managing through this environment, which is part of the reason why we think our focus on the balance sheet makes a lot of sense right now and then obviously really focused on continuing to deliver such great results from our business.

Our next question comes from the line of Matthew Blair with TPH.

Some of the natural gas production trends in Argentina have been pretty promising. And just wondering if you expect your Chile methanol production to be higher in 2027 and 2028 as a result of this? Are there any pipeline constraints or any other bottlenecks that would prevent you from capitalizing on that?

Thanks, Matthew. No, there's not constraints on our side. We've got more than enough pipeline capacity to bring gas into our plants for full rates year-round. As it relates to Argentina, we would agree about the positive developments there. the Vaca Muerta continues to be -- developed production continues to increase and pipeline infrastructure is being progressed to continue to improve the natural gas balances in that country. And in fact, if you saw that Total came out with a commitment of $10 billion into Argentina. Part of that's in the Vaca Muerta; part of that is also in the Tierra del Fuego Basin offshore gas close to our plant. So a lot of positive developments. I think time frames to bring both the infrastructure in line with the production as well as get other things happening in the country is over the next few years. That also aligns to the current planned gas regime that covers exports in the country. And so we think it's probably going to take that time until we start to see the opportunity to have year-round gas, and that's what we're working towards. And we're really optimistic about that. But right now, we're going to continue to guide. When we come out with our numbers and we'll give guidance for next year in the coming quarter here, it will likely be at the more 1.4 million tonne level for Chile for '27.

Sounds good. And then the Q3 realized methanol pricing in your system seemed better than expected. Was there a onetime boost from selling the New Zealand natural gas commitments? Or any other factors that we should be thinking about?

No. Certainly, nothing to do with our gas. Really, when we look at the pricing, we saw through the second -- sorry, the third quarter, a significant boost up in -- especially in the Asia Pacific regions where China lifted up and Asia Pacific ex-China lifted up by $100 to $150 a tonne. What you'll see is that, that September pricing a bit of uplift around the world as well. So that September environment is carrying forward into the fourth quarter. September really lifted us up. If you look at our ARP from July, August, September was the highest, and that's what's continuing into the fourth quarter.

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

Two questions for me. Rich, first one on capital allocation. If your cash flow strength continues, you'll achieve your balance sheet targets very, very quickly. And beyond the 5% buyback, which I estimate you can achieve every few weeks if you wanted to, is there any focus or consideration on deploying growth capital? And is there any consideration on revisiting the dividend?

Yes. Thanks, Ben. Right now, obviously, as I said, our focus is around deleveraging. And you're right, we're making really good progress there. When it comes to growth capital, of course, we're always interested, can we find value-accretive growth for shareholders. When it comes to organic growth, our position still remains the same, notwithstanding the current methanol price environment, we'd have a lot of hesitation thinking that we're at a price that we need over a 20-year time frame at the mid-$400s or maybe slightly below to make long-term investment economics work for organic growth. And that's largely because we've still seen a very hot EPC market out there. And so the cost to build are still very high. As it relates to M&A activity, we know that, that's very opportunistic and assets don't trade. We would look -- obviously look at something, but we're going to be very disciplined about the way we would look at anything, and we would measure that return over other capital deployment like buying back our own production through share repurchases. So our focus continues to be on debt. We've got lots of flexibility, like I said, which is great. We think that as we're deleveraging, we're creating a more resilient and giving ourselves downcycle protection for the company, and we're creating more flexibility to buy -- to step in and do buybacks at a bigger level if it makes sense. So I think right now, we've got our head down, and we're running the business safely, reliably, continuing to produce results, and then we'll deploy capital and make those decisions when we get there. You did ask about the dividend. We do -- we think a dividend is an important piece of our capital allocation. We want it to be meaningful. Our primary return of capital we want to deploy is through the flexible buyback. We remain committed to the dividend level. And as we're buying back shares, we would look to maintain that level by increasing the dividend to shareholders.

And my follow-up question. CF Industries recently gave some very compelling arguments as to why midcycle nitrogen prices should be higher for longer. And all of its arguments had nothing to do with nitrogen, but they were based on capital costs, logistics, inflation, et cetera. So Rich, you've talked about $350 midcycle for several years. Do you still believe that's the right midcycle going forward? And if not, what should it be?

Yes. So thanks, Ben. I think, obviously, in our industry, where we want to be is getting pricing to support growth. The challenge for us is the -- and we would have seen this actually prewar -- is the general petrochemical markets. This is not methanol, in particular. It's the markets around methanol. Our market, we've got very good supply-demand balances on prewar levels, very tight industry market. But we have downstream consumption around us that is it has a lot of excess capacity combined with a slower growth demand environment. So for us, we have to see where we are long term, but certainly, the olefins sector was pointing to balance not until the end of the decade or beyond. What happens out of this remains to be seen, and we're going to continue to evaluate that. But I think the hard part for us lifting above that is seeing some healthier markets downstream. Of course, this dynamic is bringing new fundamentals into that industry that we have to better understand. So I think the big thing for us is the health of our downstream markets that support reinvestment. And our view is that, that would get progressively better over time. And as we -- as that gets better, we think that lifts our midcycle pricing. And so that's the way we're looking at it. We're monitoring things very closely.

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

Not to beat the dead horse, Rich, but you amazingly are paying back $700 million of debt as you know in the second half of this year. If this second half year methanol price -- if your earnings in the second half of the year repeat again in the first half of next year, you would have another, what, $700 million to deploy. Would we assume that the full buyback here that would be about [ $300 million ] and the rest deleveraging, would you look to upsize the buyback, the NCIB? Like I know you're talking about you'll make the decisions when you come to it. But what if in the next six months, earnings levels stay the same, you have another $700 million to deploy. How does that look buyback versus deleveraging?

Thanks, Joel. I appreciate the question. We're thinking ahead, obviously, but we're also monitoring things very closely. Things can change very quickly, and we think the other side of this can have a lot of volatility, and there's also risks, right? So we're managing things very carefully. The good problem or the good challenge you pose is for us will be a look at what do we think provides the best return. And we do think that the buyback will be a part of that. We also think that as we look, if we're deleveraging into the low end of our range or even slightly beyond that, that provides downside protection and it also provides more optionality for capital deployment. So we've got a lot of flexibility in our choices, and we're managing things really closely. The buybacks will certainly be a part of that. And we just have to make decisions about the proportion of that as we progress here. But let's get there, and we'll make those decisions as we continue to produce great results for shareholders.

Just a couple of housekeeping questions. Just I wanted to ask you, in some of the trade journals every week, there are a couple of discussions about Beaumont over September, October, a couple of multiday outages that then seemed to restart. So I wanted a comment on that, if there's anything at Beaumont we should be thinking about it? You had some comments about Beaumont earlier. And then also, I'm sure you saw the news today or yesterday that bunch of nitrogen producers are getting cut gas maybe 20% in November. Would your operation in Egypt be facing similar constraints? Could you talk about that?

Yes. So first on Beaumont, really nothing to report there. The big challenge that we worked through and the team did a great job bringing us back online with the cooling tower repairs that were executed in Beaumont, but nothing major to report there at all. As it relates to Egypt, we continue to run our plants at full rates. We continue to monitor the gas grid balances and are in communication with our gas suppliers, but we're continuing to run at full rates today, and you'll see our results as we move into our fourth quarter reports.

Our next question comes from the line of Steve Hansen with Raymond James.

I recognize that you've got this leverage target threshold or range. But is there any reason you wouldn't just drive your leverage down much lower in the current environment? Just again, recognizing that the broader macroenvironment is pretty unique right now and the cash flow is so strong, why not just take leverage closer to 0?