Upgrading to Outperform on improved methanol price outlook; Increasing PT to $50 (from $45)
Our view: We are upgrading the shares of Methanex to Outperform as the outlook for methanol prices has continued to improve (higher for longer) since the beginning of the year. We note that IHS continues to forecast methanol prices to soften through H2/21, but at a more moderate rate. We expect Methanex to generate strong cash flows over the next two years, which is supportive of our continued expectation for the company to restart construction on the Geismar 3 (G3) project later this year. G3 would be completed in H2/23, setting up for a strong 2024.
Key points:
Higher for longer. Methanol prices were strong heading into 2021, and we expected to see methanol prices soften through the year as supply-side disruptions eased. However, methanol prices strengthened and remain at elevated levels in Q2/21 due to strong demand, tight supply and higher input prices (e.g., coal in China and gas). We now expect methanol prices to weaken more modestly over the next 18 months, giving Methanex an opportunity to generate strong cash flows through 2022.
Strong methanol prices are supportive of a G3 restart. Management plans to make a recommendation to the Board this summer on next steps for the G3 project, and we expect the company will restart and ramp-up construction activity. We estimate that the company would have spent about one-third (~$445 million) of the project cost by September 2021, so the remaining cost would be less than $1 billion. Management estimates that it would take ~24 months to complete the project from when a decision is made to restart construction, so the potential completion date is in H2/23. We view G3 as a cost effective means to add methanol production capacity in a geography with ample long-term natural gas supply.
Internally funding G3. We estimate that Methanex will generate close to $1 billion of excess cash flows in the 2021-23 period that can be allocated to fund G3, assuming 2023 methanol prices are consistent with 2022. Additionally, with $850 million of cash in its balance sheet, a $300 million undrawn credit facility, and no debt maturities until the end of 2024, we don't expect the market to have material financial concerns if the company restarts construction on G3 later this year.
Increasing estimates. We have revised our 2021 and 2022 Adjusted EBITDA estimates to $887 million and $767 million, respectively (from $818 million and $659 million, respectively). The increase to our estimates primarily reflect IHS' updated methanol price forecast.
Increasing PT to $50. We have increased our price target to $50 (up from $45), which is based on a 50% weighting on 7.0x our 2022E EBITDA (unchanged), and a 50% weighting on 6.0x (unchanged) our 2022E EBITDA using the 10-year average realized methanol price.