Post by
retiredcf on Jul 19, 2021 9:09am
RBC
Current and upside scenario targets are US$50 and US$60. GLTA
July 18, 2021
Methanex Corporation Full steam ahead on G3
Our view: We are reiterating our Outperform rating on Methanex and believe the construction restart of the Geismar 3 (G3) project should generate strong cash flows from 2024 onwards, while the dividend increase would provide patient investors with near-term income. We fully expected the G3 construction restart, but the dividend increase was a positive surprise. We believe that if methanol prices remain healthy over the next two years (>$300/MT), there could be an additional dividend increase or even a share buy-back.
Key points:
Restarting G3 as expected. Methanex announced the restart of construction on the Geismar 3 project. The company's revised cost for the project is $1.25-1.35 billion, a $50 million reduction from the previous estimate, after incorporating a significant reduction in the project's execution risk profile. The company estimates that ~$435 million would have been incurred by the project at the end of Q3/21, and expects to spend the remaining $800-900 million when full construction resumes in October 2021, with commercial operations targeted for the end of 2023 or early 2024. Management forecasts the EBITDA contribution for G3 to be $200-350 million at methanol prices of $300-400/MT (10-year average of $350/MT).
No incremental debt required to fund project at methanol prices of ~ $275/MT or higher. The company's share of cash on its balance sheet was $827 million as at March 31, 2021. Based on management expectations, at current methanol prices in Q2/21 to Q3/21 and an assumed methanol price of $275/MT from Q4/21 onwards, the company would generate cumulative free cash flows of ~$500 million ($900 million at $325/MT), and would result in ~$286 million of cash at the end of the construction period (after taking into consideration items including growth and maintenance capex, lease payments, the partial sale of Waterfront Shipping for $145 million, repayment of the G3 credit facility outstanding of $173 million, and dividend distributions).
Expecting strong methanol demand growth and limited supply additions post 2022. Management highlighted that IHS expects methanol demand growth of ~16 million tonnes or 20% (~4% CAGR) over the next five years, compared with 14 million tonnes of new identified industry capacity additions over the same period (including G3). Management believes that with limited project commitments beyond 2022, industry operating rates will need to increase to meet the growing demand for methanol, which will be supportive of future methanol prices.
Resetting the quarterly dividend and increasing emphasis on financial flexibility. Methanex announced the reset of the quarterly dividend to $0.125/share from $0.0375/share. Management is increasing the emphasis on financial flexibility and plans to keep at least $300 million of cash on the balance sheet on top of the capital cost required for G3, while also targeting a Net Debt to EBITDA ratio of 3x at methanol prices of $275-300/MT.
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