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July 30, 2010
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Methanex Corporation (MEOH), the world’s largest supplier earned $11.7 million or 13 cents in the second quarter of 2010 in contrast to last year’s net loss of $5.7 million or 6 cents. However, earnings missed the Zacks Consensus Estimate of 17 cents. It also narrowed from $26.6 million or 31 cents in the first quarter of 2010.
Revenues
Quarterly revenues of $448.5 million outshined the Zacks Consensus Estimate of $408 million and nearly doubled from year-ago revenues of $245.5 million, led by volume and pricing gains. Sales volumes jumped 18% year over year to $1.7 million tons while prices soared 48% to $284 per ton. However, revenues declined 4% sequentially with a 7% fall in methanol prices and volumes remaining flat. Production disruptions at the Atlas plant in Trinidad, where Methanex holds a major interest of 63.1%, lowered output in the quarter. Methanol production fell 14.5% year over year and 21% sequentially to765,000 tons.
Costs
Besides producing Methanol, Methanex also trades in it. During the reported quarter, the company purchased a higher proportion of methanol, which led to higher costs. Rising natural gas prices increased costs further. Cash costs shot up 77% year over year to $392 million in the reported quarter.
Financial Review
We are concerned about Methanex’s highly leveraged balance sheet. Although the company does not have any debt maturities in the near term, total debt of $942.5 million is considerably high against cash and cash equivalent of $177.9 million. Methanex generated operating cash flow of $94.5 million in the first half of 2010.
Outlook
Although Methanex did not provide any financial guidance, it expects production outages at the Trinidad plant to impact sales volumes negatively and increase costs in the third quarter of 2010. However, Methanex is optimistic about its near-term performance encouraged by the upcoming low cost 1.3 million Egyptian methanol project, which is scheduled to start operations by the end of 2010. The company anticipates methanol prices to surge in the backdrop of an improving Methanol industry, where demand has reached historical levels.
Zacks Recommendation
Methanex Corporation is the world’s largest supplier of methanol, and also includes dimethyl ether and bio-diesel businesses. About 80% of Methanex’s total methanol output is used in the production of formaldehyde, acetic acid and a variety of other chemicals. These chemical derivatives are used to manufacture a wide range of products including plywood, particle board, foams, resins and plastics. Demand for methanol largely stems from the energy sector for the production of methyl tertiary-butyl ether, a gasoline component and a direct fuel for motor vehicles.
Weak pricing as well as an increase in global inventories, are negatively affecting the company. More so, Methanex operates its Chilean facilities substantially below capacity due to natural gas supply outages, which resulted in a 25% drop in production to $229,000 tons in the reported quarter. We believe Methanex is likely to see more of sales decline in the upcoming quarter due to production outages at the Atlas plant. This would also lead to higher cost of sales in the quarter.
In the long term, we believe Methanex would see costs decline with the start up of the Egyptian facility. The company also has the opportunity to increase methanol capacity at its Chilean facility as it has embarked on a number of growth projects, including an alternative natural gas project in Chile. However, such benefits are not expected before 2011.
Currently, Methanex has a short-term (1 to 3 months) Zacks #4 Rank (Sell) but a long- term Neutral recommendation.
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