Pat McKeough recently replied to an Inner Circlemember looking for an opinion on Methanex Corp., the largest producer and distributor of methanol. Sales of the chemical as a fuel support the stock’s 3.7 dividend yield, says Pat.
Q: Pat: I have Methanex in my portfolio. How do you see the stock? Is it worth keeping?
A: METHANEX CORP. (symbol MX on Toronto; www.methanex.com) is a Vancouver-based methanol producer and distributor. It is, in fact, the world’s largest supplier, with an estimated market share of 15%.
The company produces 55% of its methanol in New Zealand and Trinidad (where it holds a 63.1% stake in Atlas Methanol). It makes a further 25% in the U.S., 8% in Egypt, 7% in Medicine Hat, Alberta, and 5% in Chile. In addition, Methanex resells methanol produced by others.
Also known as wood alcohol, methanol is usually made by mixing natural gas with steam to create a liquid. That then gets distilled to create pure methanol. It is a clear, liquid hydrocarbon that is water-soluble and biodegradable.
Methanex buys most of the natural gas it needs under contracts that tie its cost to the selling price of methanol. That helps cut its risk.
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Many products contain methanol, such as windshield-washer fluid, plastic bottles, wood floors, paint, silicone sealants and synthetic 7fibres. Also, it is sometimes blended with gasoline and increasingly added to other fuels such as biodiesel and dimethyl ether (a gaseous fuel used for cooking and heating in Asia). In addition, methanol is used as a fuel on its own.
Methanex’s revenue rose 23.6%, from $2.6 billion in 2011 to $3.2 billion in 2014 (all amounts except share price and market cap in U.S. dollars). However, revenue fell 30.9% to $2.2 billion in 2015, due to sharply lower methanol prices.
The use of methanol as an additive to gasoline and other fuels accounts for about 40% of its global demand; traditional chemical applications account for the other 60%. When crude oil prices are high, refineries substitute lower-cost methanol to improve their profit margins. But they have less economic incentive to use methanol when oil prices decline, as they did in 2015. As a result, Methanex’s average selling price in 2015 dropped 26.3%, to $322 a tonne from $437 in 2014.
The company’s profits are highly erratic. Earnings before unusual items fell from $1.93 a share (or a total of $182 million) in 2011 to $1.90 a share (or $180 million) in 2012. Earnings then soared to $4.88 a share (or $471 million) in 2013, but then fell to $4.12 a share (or $397 million) in 2014. Due to sharply lower methanol prices, earnings dropped to $1.20 a share (or $110 million) in 2015.
In the three months ended June 30, 2016, Methanex’s production of methanol jumped 38.2%, to 77 million tonnes from 1.28 million a year earlier. That’s because in 2015 it started up two new plants in the U.S. However, the company’s average selling price fell 36.3%, to $223 a tonne from $350.
As a result, overall revenue in the quarter declined 26.6%, to $467.9 million from $637.8 million. Methanex lost $31 million, or $0.34 a share, compared to a profit of $51 million, or $0.56, a year earlier.
The company’s long-term debt of $1.5 billion U.S. (as of June 30, 2016) is a high 57% of its market cap. At the quarter’s end, it also held cash of $239.0 million, or $2.66 a share.
Methanex pays a quarterly dividend of $0.275 a share. The annual rate of $1.10 yields 3.7%.
Longer term, the outlook for methanol remains sound. That’s mainly because more countries are mandating greater use of the chemical in fuels. Even so, the methanol business is known for periods of oversupply and low prices followed by periods of shortage and rapidly rising prices.
The company will probably lose $0.33 a share for all of 2016. Its earnings could improve to $2.03 U.S. a share in 2017, based on current forecasts for methanol prices. The stock trades at 14.6 times that estimate. However, next year’s forecasts may turn out to be overly optimistic.
Inner Circle recommendation: HOLD for aggressive investors only
I don’t understand the relevance of a ratio you frequently use: “long term debt as a percentage of market cap? How can an internal liability be related to an external value?
Keith M, Kelowna
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Good report. I would add that the rising use of electric cars, which don’t need gasoline, also hurts Methanex’s growth.
I don’t understand the relevance of a ratio you frequently use: “long term debt as a percentage of market cap? How can an internal liability be related to an external value?
Keith M, Kelowna