Methanol Pure Play ‘Attractive,’ Share Price ‘Too Punitive’

March 22, 2020

The Energy Report

Source: Streetwise Reports   03/19/2020

The leverage Methanex Corp. could use to still pay its dividend in a low price environment is discussed in a BMO Capital Markets report.

In a March 17 research note, BMO Capital Markets analyst Joel Jackson reported that Methanex Corp. (MEOH:NASDAQ; MX:TSX; METHANEX:SSE) is an attractive investment opportunity given that methanol is resilient and the company could defer completion of its G3 plant.

Jackson noted that Methanex is expected to make an announcement before or at its annual meeting in late April about a potential G3 delay. That move would ease balance sheet pressure more than a partial divestment of its Egypt stake, a logistics asset sale and leaseback, and/or a receivables sale would.


Get our Weekly Commitment of Traders Report: - See where the biggest traders (Hedge Funds and Commercial Hedgers) are positioned in the futures markets on a weekly basis.




Get Our Free Metatrader 4 Indicators - Put Our Free MetaTrader 4 Custom Indicators on your charts when you join our Weekly Newsletter






A G3 deferral for two years would result in roughly $1.2 billion left to spend after 2019, Jackson indicated. This assumes a minimal, incremental G3 capex spend as of Q2/10, about $25 million in 2021 for care and maintenance along with $125 million per year in companywide maintenance capex.

Yet, were Vancouver-based Methanex not to defer G3 but, instead, keep Titan idle until 2021 and Chile IV idle until Q4/20, Jackson indicated, the company still would have enough free cash flow to cover the 12% dividend, even in scenarios in which methanol prices recovered slowly.

Jackson provided two such low price scenarios in which Methanex could still pay its $110–115 million dividend. It could do so at a methanol price of $250 per ton over the next few quarters and increasing to $285 per ton in 2021. That would result in free cash flow of about $200 million and leverage by year-end 2021 of about 3.5x.

The company could even pay the dividend if the methanol price stayed constant at $250 per ton. In that case, the free cash flow yield would be $100–130 million, but 2020 leverage would be higher, at about 5–5.5x.

Jackson also highlighted that the methanol price is resilient and historically bounced back rapidly from lows. He cited the period following Q1/ to Q3/16 in which the price quickly rebounded to about $400 per ton from about $230 per ton.

The analyst concluded that Methanex’s “share price seems too punitive as G3 deferral is a lever the company can pull to calm leverage concerns.”

BMO maintained its Outperform rating on Methanex but reduced its target price on the company to $20 per share from $60. The current share price is about $10.47.

Sign up for our FREE newsletter at: www.streetwisereports.com/get-news

Disclosure:
1) Doresa Banning compiled this article for Streetwise Reports LLC and provides services to Streetwise Reports as an independent contractor. She or members of her household own securities of the following companies mentioned in the article: None. She or members of her household are paid by the following companies mentioned in this article: None.
2) The following companies mentioned in this article are billboard sponsors of Streetwise Reports: None. Click here for important disclosures about sponsor fees.
3) Comments and opinions expressed are those of the specific experts and not of Streetwise Reports or its officers. The information provided above is for informational purposes only and is not a recommendation to buy or sell any security.
4) The article does not constitute investment advice. Each reader is encouraged to consult with his or her individual financial professional and any action a reader takes as a result of information presented here is his or her own responsibility. By opening this page, each reader accepts and agrees to Streetwise Reports’ terms of use and full legal disclaimer. This article is not a solicitation for investment. Streetwise Reports does not render general or specific investment advice and the information on Streetwise Reports should not be considered a recommendation to buy or sell any security. Streetwise Reports does not endorse or recommend the business, products, services or securities of any company mentioned on Streetwise Reports.
5) From time to time, Streetwise Reports LLC and its directors, officers, employees or members of their families, as well as persons interviewed for articles and interviews on the site, may have a long or short position in securities mentioned. Directors, officers, employees or members of their immediate families are prohibited from making purchases and/or sales of those securities in the open market or otherwise from the time of the interview or the decision to write an article until three business days after the publication of the interview or article. The foregoing prohibition does not apply to articles that in substance only restate previously published company releases.

Disclosures from BMO Capital Markets, Methanex, March 17, 2020

IMPORTANT DISCLOSURES

Analyst’s Certification
I, Joel Jackson, hereby certify that the views expressed in this report accurately reflect my personal views about the subject securities or issuers. I also certify that no part of my compensation was, is, or will be, directly or indirectly, related to the specific recommendations or views expressed in this report.

Analysts who prepared this report are compensated based upon (among other factors) the overall profitability of BMO Capital Markets and their affiliates, which includes the overall profitability of investment banking services. Compensation for research is based on effectiveness in generating new ideas and in communication of ideas to clients, performance of recommendations, accuracy of earnings estimates, and service to clients.

Analysts employed by BMO Nesbitt Burns Inc. and/or BMO Capital Markets Limited are not registered as research analysts with FINRA. These analysts may not be associated persons of BMO Capital Markets Corp. and therefore may not be subject to the FINRA Rule 2241 restrictions on communications with a subject company, public appearances and trading securities held by a research analyst account.

Company Specific Disclosures

Disclosure 1: BMO Capital Markets has undertaken an underwriting liability with respect to Methanex within the past 12 months.

Disclosure 2: BMO Capital Markets has provided investment banking services with respect to Methanex within the past 12 months.

Disclosure 3: BMO Capital Markets has managed or co-managed a public offering of securities with respect to Methanex within the past 12 months.

Disclosure 4: BMO Capital Markets or an affiliate has received compensation for investment banking services from Methanex within the past 12 months.

Disclosure 5: BMO Capital Markets or an affiliate received compensation for products or services other than investment banking services within the past 12 months from Methanex.

Disclosure 6A: Methanex is a client (or was a client) of BMO Nesbitt Burns Inc., BMO Capital Markets Corp., BMO Capital Markets Limited or an affiliate within the past 12 months: A) Investment Banking Services

Disclosure 6C: Methanex is a client (or was a client) of BMO Nesbitt Burns Inc., BMO Capital Markets Corp., BMO Capital Markets Limited or an affiliate within the past 12 months: C) Non-Securities Related Services.

Disclosure 9B: BMO Capital Markets makes a market in Methanex in United States.

For Important Disclosures on the stocks discussed in this report, please click here.

( Companies Mentioned: MEOH:NASDAQ; MX:TSX; METHANEX:SSE,
)