Our view: Methanex posted higher North American and Asian reference prices for September (+9% and +10%, respectively), and IHS also revised its North American methanol price forecast for the remainder of 2021 to reflect tighter market conditions. We are reiterating our Outperform rating as we forecast Methanex to generate strong cash flows in 2021/22, providing funding for the G3 expansion and a potential share buyback in 2022.
Key points:
Geismar facilities offline due to Hurricane. Hurricane Ida made landfall near New Orleans on August 29th, coming close to two major production sites in the U.S., including Methanex's Geismar 1 and 2 facilities and the Koch Methanol plant (still in commissioning phase). According to IHS, both sites were taken offline just prior to the hurricane's arrival, and remain offline. The production outage from the two sites is equivalent to ~37% of North American methanol capacity, increasing to 60% after including two other U.S. Gulf Coast methanol outages that occurred prior to the hurricane (not directly impacted by Ida). The hurricane disrupted methanol production much more than demand, so the impact to regional supply and pricing could be significant depending on the duration of the outages.
Methanex posts higher reference prices for September. Methanex recently released its North American and Asian non-discounted contract prices for September at $592/MT (+9%) and $460/MT (+10%), respectively (from $542/MT and $420/MT, respectively). The posted methanol prices are at their highest levels year-to-date. The recent tightening of regional supply led IHS to revise its North American price forecast higher for the remainder of the year. IHS believes that the production limitations currently affecting the Americas, along with the sustained robust demand, will likely draw methanol inventories and keep levels low through the end of 2021.
Robust cash flows support G3 expansion and share buybacks in 2022. As at the end of Q2/21, the company had spent $406 million on G3, leaving roughly $900 million of capital spend with commissioning at the end of 2023 or early 2024. We estimate Methanex will generate free cash flow (after cash taxes, interest expense, lease payments, maintenance capex, and dividends) upwards of ~$1.2 billion assuming IHS' current methanol price forecast. Management also indicated that if prices remain above $325/MT (compares to our average realized price estimate of $360/MT), share buybacks could take place potentially in 2022.
Increasing estimates. We have increased our 2021 and 2022 Adjusted EBITDA estimates to $1,036 million and $902 million, respectively (from $967 million and $887 million, respectively). The increase to our estimates primarily reflects IHS' updated methanol price forecast and Methanex's updated September non-discounted reference prices, partially offset by our forecast of lower production from the Geismar facilities in Q3/21 due to Hurricane Ida.