Methanex Corp.
(MEOH-Q, MX-T) US$37.32 | C$46.88
Industry Supply Issues Support Ongoing Methanol Price Strength Event
We have updated our estimates to reflect Methanex's actual Q1/21 posted prices and Argus' latest methanol outlook.
Impact: POSITIVE
Methanol Prices: Methanol demand has continued to recover, but pricing remains driven by supply-side factors, and although methanol supply has improved in China, it has further tightened in the Atlantic Basin, which we attribute largely to delayed plant restarts on the U.S. Gulf Coast following Winter Storm Uri and the prospect of planned Q2/21 maintenance activity in Europe. Methanex's April posted contract price in North America increased by $27/tonne to $519/ tonne, a price level not seen since late-2018, and the posted contract price in Europe increased to €410/tonne in Q2/21 vs. €390/tonne in Q1/21, while the April posted contract price in Asia was stable at $430/tonne.
Estimate Revisions: Industry forecaster Argus still expects methanol prices to moderate based on improving methanol supply and the start-up of the new Yuhang/Koch plant in the U.S., as well as the impact of softer olefin/olefin derivative pricing on MTO demand, although the timing of that moderation has likely been pushed out to early-Q3/21. Our revised 2021 forecast reflects an average realized price of $358/tonne vs. $331/tonne previously.
Capital Allocation: Methanex's financial flexibility has the potential to meaningfully improve at current methanol prices, as it should generate ~$500mm of annual free-cash-flow at our Q1/21E average realized price of $380/tonne. We anticipate that Methanex will be prudent about restarting the Geismar 3 project and see the Street as more likely to be supportive of Geismar 3 against the current macro backdrop, particularly if Methanex is able to bring in a partner, which the current macro backdrop may also be more conducive to.
TD Investment Conclusion
We are attracted to Methanex's market leadership in methanol and its unique position as the only methanol supplier with well-established production and sales in all major regions. Although methanol prices are at cyclically strong levels currently, we estimate that Methanex's share-price is already anticipating lower prices and is discounting an average realized price in the low-$300s/tonne, which we characterize as the low-end of the normal range and consistent with what we are modelling for 2022/2023.