Methanex Corp.
(MEOH-Q, MX-T) US$43.76 | C$54.77
Methanol Prices Off Peak, but Still High; NCIB Could Grow
Event
We have tweaked our estimates/target price.
Impact: NEUTRAL
Methanol Prices Off Peak, but Still High: Methanol prices have corrected from the extremes reached in mid-October, but remain historically high, largely supported by supply-side dynamics. The correction was mainly prompted by China's decision to cap coal prices and encourage maximum domestic coal output in response to an energy shortage resulting from earlier policy efforts to curb energy use/carbon emissions. Coal-based methanol production in China has since recovered to some extent, but natural-gas-based production is coping with seasonal feedstock diversions to residential heating requirements, and Chinese methanol imports from Iran are being negatively affected by plant outages due to technical issues and/or seasonally reduced natural-gas feedstock availability.
Estimate Revisions: We are forecasting an average realized price of $369/ tonne in 2022 vs. $363/tonne previously, which assumes that methanol prices progressively decline vs. the Q4/21E peak of $468/tonne. Although Omicron creates uncertainty, we believe that our forecast could prove conservative, as Methanex's January posted contract prices are at multi-year highs, deferred maintenance during the pandemic is likely to continue to aggravate the usual industry supply volatility, and higher energy prices put upward pressure on the industry cost-curve.
Potential for Larger NCIB: Methanex ended Q3/21 with ~$900mm of cash, which should be supplemented by a $145mm inflow related to a shipping partnership with MOL. The company generates $400mm-$600mm of annual free-cash-flow at an average realized price of $350-$400/tonne, which we see as more than enough to fund the remaining Geismar 3 capex, and potentially accelerate/increase the 5% NCIB announced in September (Exhibit 2).
TD Investment Conclusion
Methanex is the methanol market leader and has a cost structure that supports very attractive free-cash-flow, in our view. The stock is trading at a low-double-digit free-cash-flow yield at a mid-cycle methanol price of $350/tonne, which we see as attractive, particularly given that Geismar 3 should increase the company's free- cash-flow at $350/tonne by ~50% when it comes online in late-2023/early-2024.