Post by
retiredcf on Jul 30, 2021 9:54am
RBC
Their upside scenario target is US$60. GLTA
Methanex Corporation
Strong methanol prices should eventually move shares higher; reiterating Outperform
Price Target USD 50.00
Our view: We are reiterating our Outperform rating on the shares of Methanex and see healthy methanol prices i) supporting a higher share price, ii) providing most of the capital required to fund the Geismar 3 (G3) project, and iii) leading to a healthy balance sheet that has the capacity for share buybacks in 2022.
Key points:
Outlook on methanol prices remain positive. Methanol prices have remained at elevated levels since the beginning of the year, driving strong cash flow generation and a run-rate EBITDA of ~$1 billion annualized. Management estimates that methanol demand in Q2/21 was 3% higher than Q1/21, and 13% higher than Q2/20 (impacted by COVID-19). Demand remains healthy, while planned and unplanned outages globally continued to negatively impact industry supply into Q3/21. IHS forecasts methanol prices to modestly decline to ~$350/MT in 2022, which is consistent with the 10-year average.
Cash flows can fund remaining G3 costs. Management estimates that the G3 costs in 2021-23 will total ~$936 million, and we believe it can be funded from internal cash flows. We estimate that 2021-23 free cash flows (after cash taxes, debt service, lease payments and maintenance capex) will total ~$1 billion assuming a $325/MT methanol price from Q4/21 onwards (compared to ~$370/MT in Q1-Q3 in 2021). If methanol prices are $325/ MT or higher, management indicated that share buybacks could take place potentially in 2022.
Medium-term gas availability remains a headwind, but outlook improving. Despite elevated methanol prices and strong cash flow generation in 2021, the shares of Methanex have remained weak. In addition to the large capital commitment for G3, we believe medium-term gas availability remains a concern for some investors, as the company has idled facilities in Trinidad, Chile and New Zealand. The company's plant utilization in 2019 was 83%, before declining to 72% in 2020. In H1/21, the company's utilization declined further to 68%. Management is optimistic that gas availability will improve. In Chile and Argentina, management sees gas production improving, and expects both Chile facilities to operate in late Q3/21 or early Q4/21. In New Zealand, the gas fields produce wet gas, which would also benefit from high oil prices. Management indicated that drilling activity in New Zealand has picked up, which could lead to improved gas availability.
Increasing estimates. We have increased our 2021 and 2022 Adjusted EBITDA estimates to $967 million and $887 million, respectively (from $898 million and $770 million, respectively). Our revisions primarily reflect IHS' updated methanol price forecast and management's updated production guidance for the remainder of 2021.
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