Our view: We reiterate our Outperform rating on Methanex shares and see them moving higher, supported by: i) strong methanol prices driving significant cash flow generation; ii) a potential acceleration in the pace of stock buybacks, supported by a healthy balance sheet; and iii) the gradual de-risking of the Geismar 3 (G3) development as the remaining $800–900 million of capex is deployed through 2023.
Key points:
Supply constraints persist, driving methanol prices higher. Management believes that industry supply constraints will persist in 2022 and doesn’t see additional supply coming into the market in the next few quarters. Some customers have curtailed production, leading to pent-up demand for methanol. Methanex recently posted North American and Asia Pacific non-discounted prices for November of $692/MT (up 14% from $609/MT in October and up 24% from Q3) and $600/MT (up 18% from $510/MT in October and up 38% from Q3), respectively, supporting what we expect to be a very strong Q4/21.
G3 development fully cash funded. Methanex ended the quarter with $932 million in cash, and a further $145 million will be received from the pending sale of the 40% interest in Waterfront Shipping to Mitsui. The remaining capital budget for the G3 development totals $800–900 million (includes contingencies), and the completion date is scheduled for late 2023 or early 2024. Management indicated that most of the equipment has been purchased and labour rates and productivity are similar to when it began the project in 2019.
Excess cash may be used to accelerate share buybacks. In addition to fully cash funding the remaining G3 construction cost, management plans to have a $200–300 million cash buffer on its balance sheet and expects that it will be reached by year-end. Management’s view is that the excess cash flows can be allocated to share buybacks. In September, the company announced a NCIB for 5% of the shares outstanding, and management believes that there could be room for an incremental share buyback of 3– 4% in 2022 if methanol prices remain healthy. We forecast that Methanex will generate ~$400 million of excess cash flows in 2022 (assumes a methanol price of ~$380/MT, which is significantly lower than our forecast of ~$470/MT in Q4/21), providing financial flexibility for additional share buybacks.
Revising our forecast and rolling out our 2023 estimates. We raise our 2021 and 2022 Adjusted EBITDA estimates to $1,153 million and $980 million (from $1,085 million and $902 million), respectively. Our revisions primarily reflect IHS’s updated methanol price forecast and Methanex’s November reference prices. We introduce our 2023 Adjusted EBITDA estimate of $934 million, reflecting a moderation in methanol prices as supply conditions improve.