Methanex Corporation (USA) (NASDAQ:MEOH) (TSE:MX) is a company that possess attractive investment features including a strong internally funded near-term free cash flow growth profile, low leverage and history of returning cash flow to investors.
Methanex is the world's largest supplier of methanol to major international markets in North America, Asia Pacific, Europe and Latin America. Methanol can be found in everything from windshield washer fluid to recyclable plastic bottles, plywood floors to paint, silicone sealants to synthetic fibers.
The fastest growing markets for the use of methanol are in the energy sector including direct gasoline blending, dimethyl ether and biodiesels. Robust demand for methanol led by energy applications, particularly in the areas of fuel blending and methanol-to-olefins, continues to support healthy market conditions.
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Methanex posted about 6 percent increase to its December non-discounted methanol contract prices for North America (N.A.) and Asia. The December N.A. contract was posted at $632/MT, $33/MT higher than the November contract; similarly the $550/MT Asia December contract was $30/MT higher month over month.
BMO Capital Markets analyst Alexandra Syrnyk expects a cooling for pricing sentiment in the first half of 2014 as supply-side issues are resolved. The prevailing ultra-tight supply sentiment supporting higher and higher contract pricing are expected to moderate through the first half as production outages are resolved and new capacity hit the market.
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From a long-term perspective, a modest near-term softening in methanol prices is a net positive as elevated levels have left the market increasingly concerned over the potential impact on future energy derivative demand growth and the potential for elevated prices to continue to incentivize new capacity announcements.
The key foc! us will be on Methanex's relocation of two methanol plants from its Chile site to Geismar, Louisiana. The first plant, Geismar I, is expected to be operational by the end of 2014. The second plant, Geismar II, is expected to be operational by early 2016. Methanex spent $67 million on the Geismar projects during the third quarter and is estimated to spend $780 million to complete the plant relocations.
With start-up for Geismar I and II targeted for late 2014 and early 2016, investors should note that MEOH's plants are scheduled to be up and running ahead of the pack. The plants will each be capable of producing 1.1 million tons of methanol a year.
Syrnyk noted that of interest would be whether schedule creep starts to emerge for the 2017 projects, given the degree to which new construction activity is expected to pick up in the Gulf Coast region over the next several years.
The recent developments (the OCI build announcement and the Iran nuclear agreement) have started to soften previous expectations of continued tight methanol market conditions in the 2017/18 time frame.
OCI plans to build a new ~1.75Mtpy Greenfield methanol facility in Beaumont, Texas, with start-up scheduled for late 2016. Methanex has a deal with OCI. The interim agreement announced by global leaders on Nov. 25 appears to lift 'certain' sanctions on Iran petrochemical exports.
Syrnyk expects Iran could be incentivized to revive plans for new facilities given the initial nuclear deal providing some sanction relief to the country's petrochemical sector.
However, in the near-term, MEOH's story is based on the investment features of cash flow growth and shareholder returns. Investors will look for progress on Geismar I execution and/or a near-term share price pullback to provide a more attractive entry point into MEOH share.
The stock has cooled after 81 percent run-up this year. In the past five days, shares have dropped 5 percent to $57.36, and it needs to pull down further to $55 levels to ! provide a! n attractive buying opportunity.
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