Methanex Corp T.MX

Scotia comments

[incomedreamer11]

Q2 EBITDA Miss; We Were Wrong on Our Discount Rate Thesis (This Time)

OUR TAKE: Negative. We expect to see near-term weakness in MEOH / MX, as the EBITDA miss was sizable ($243M vs. $293M), and in this environment, the market can be unforgiving, especially for commodity cyclicals like Methanex. The realized price of $422/mt fell short of the Street’s $428, and represented a 23% discount rate. While other analysts will call this a negative, we actually think of it as a positive! Based on our analysis below, the discount rate could (should?) have been closer to 30%. In other words, we think Methanex managed its Q2 book exceptionally well during a quarter of significant volatility. Produced volume was light due to temporary gas availability issues in NZ, although Methanex mostly made up for it, likely due to an inventory draw. Buybacks continued, the divvy was raised by 20%, and G3 capex was slightly lowered! Conference call at 11:00 a.m. ET.

First, we must admit when we’re wrong! Based on our recent downgrade report, Deep Dive: Methanol Outlook Weakening; Take Profits on Methanex, we had modeled that MEOH would realize an unprecedented ~30% discount to its weighted average contract price vs. guidance of ~20%. Our thesis was simple, if we go back to 2015 (see Exhibit 1 below), the data suggests that Methanex actually realizes, often perfectly, the spot price, weighted by its regional exposure, rather than simply a 20% discount to the contract price. In Q2, the discount rate was 23%, so while we were directionally correct, we were wrong on the end result. That said, the chart suggests that we should have been right – this was the first quarter in years where we saw a deviation from Methanex realizing spot. Oh well. We still like our analysis for the long-term, but perhaps not during a period of signficant volatility like we saw in Q2.Positive Surprises

• G3 remaining capex lowered by $50M to $525M to $575M, with start-up set for Q4/23 vs. late ‘23 to early ‘24 previously. How often do you see lower capex in this environment? Find out why here.
• Through Q2, MEOH has repurchased 5.3M shares out of 6.1M permitted, and for an average price of $47.60/sh. In Q2 specifically, MEOH repurchased $99M of shares, and subsequently completed the NCIB in July.
• August contract prices were released (here) and all point to the Street’s $393/mt looking good for Q3.

Negative Surprises

• Production of 1.55M mt vs. Street/Scotia at 1.63M / 1.67M mt. New Zealand was the disappointment, with 244k mt produced vs. Street/Scotia at 356k / 383k mt. This was due to extended maintenance of the Maui gas field, which restricted gas availability in Q2. As a result, Methanex has reduced its ‘22 NZ volume guide to 1.3M mt from 1.5M, which implies Q3 may fall short of Street expectations by 80k to 90k mt.

Additional Highlights

• OQ Chemicals announced it will invest in the construction of a 250K mt MMA plant, to be located in the U.S. Gufl. Assuming the plant runs at 100% of capacity, we expect this to consume ~62.5K mt of methanol annually – a positive for NA demand.
• As a reminder, MEOH recently bumped its annual dividend by 20% to $0.70/sh, implying a 1.8% yield, which is the second-lowest (behind WLK) among our chemical coverage (ex fertilizers).