Methanex [MEOH] Conference call transcript for 2022 q1
2022-04-28 17:24:04
Fiscal: 2022 q1
Operator: Ladies and gentlemen, thank you for standing by. Welcome to the Methanex Corporation Q1 2022 Earnings Call. I would now like to turn the conference call over to Ms. Sarah Herriott. Please go ahead.
Sarah Herriott: Good morning, everyone. Welcome to our first quarter 2022 results conference call. Our 2022 first quarter news release, management's discussion and analysis and financial statements can be accessed from the Reports tab of the Investor Relations page on our website at methanex.com. I would like to remind our listeners that our comments and answers to your questions today may contain forward-looking information. This information, by its nature, is subject to risks and uncertainties that may cause the stated outcome to differ materially from the actual outcome. Certain material factors or assumptions were applied in drawing the conclusions or making the forecast or projections, which are included in the forward-looking information. Please refer to our first quarter 2022 MD&A and our 2021 annual report for more information. I would also like to caution our listeners that any projections provided today regarding Methanex's future financial performance are effective as of today's date. It is our policy not to comment on or update this guidance between quarters. For clarification, any references to revenue, average realized price, EBITDA, adjusted EBITDA, cash flow or adjusted income or adjusted earnings per share made in today's remarks reflects our 63.1% economic interest in the Atlas facility, our 50% economic interest in the Egypt facility and our 60% economic interest in Waterfront Shipping. In addition, we report our adjusted EBITDA and adjusted net income to exclude the mark-to-market impact on share-based compensation and the impact of certain items associated with specific identified events. These items are non-GAAP measures and ratios that do not have any standardized meaning prescribed by GAAP and therefore unlikely to be comparable to similar measures presented by other companies. We report these non-GAAP measures in this way because we believe they are a better measure of underlying operating performance and we encourage analysts covering the company to report their estimates in this matter. I would now like to turn the call over to Methanex’s President and CEO, Mr. John Floren for his comments and a question-and-answer period.
John Floren: Good morning. I hope that everyone is continuing to stay safe and healthy. Today, we will review our strong first quarter 2022 financial results provide an overview of the methanol markets, discuss our operational results and share our near-term outlook. Then we will be open up the call for questions. Turning to our financial results, methanol posted prices were supported in the first quarter of 2022 by favorable supply/demand fundamentals. Our average realized price of $425 per ton in higher produced product sales volume drove adjusted EBITDA of $337 million and adjusted net income of $159 million or $2.16 per share. Now turning to the methanol market. Global methanol demand in the first quarter of 2022 increased slightly compared to the fourth quarter of 2021. This increase was driven by an increase in operating rates for methanol to-olefins or MTO plants after the impact from the dual control policy in China and turnarounds in the fourth quarter. MTO operating rates increased by approximately 20% from 65% during the fourth quarter of 2021 to 85% in the first quarter of 2022. Demand from traditional chemical applications was lower in the first quarter compared to the fourth quarter, due to the seasonal slowdown of manufacturing activity during the Lunar New Year in China, combined with some downstream turnarounds in the United States. Traditional demand is recovered from the seasonal lows in February. Industry operating rates remain challenged during the first quarter due to ongoing operating rate constraints related to winter conditions in the Middle East and feed stock availability and cost in Europe. Methanol prices in the first quarter were supported by tight industry conditions and the impact of continued high global energy prices on producer costs. Increased production from Iran is expected in the second quarter and we expect tight market conditions to continue as plants in Trinidad, Europe and Asia have planned turnarounds. We estimate the industry cost curve, which is set in China is $380 to $400 per ton based on coal price range of RMB 1,000 to RMB 1,100 per ton. Our main posted prices were slightly lower in all regions. North American prices decreased by $21 per ton to $638 per ton. Asia-Pacific and China prices decreased by $20 and $30 per ton to $520 and $470 per ton respectively. Our European contract price is set quarterly and we increased our second quarter 2022 price by €65 per tonne to €570 per tonne. Our first quarter discount rate was in line with our guidance of 2022 at 20%. The methanol market fundamentals remain solid. To date, we have not seen significant evidence of demand destruction because of sustained elevated methanol prices, COVID-related lockdowns in China, the conflict between Russia and Ukraine or inflationary pressures. Industry operating rates remain challenged and high energy prices and geopolitical events could further constrain production. High global energy prices enhanced methanol’s cost competitiveness against alternative fuels. And we continue to see firm demand from traditional chemical applications. Turning to our operation results. Our production levels were lower in the first quarter compared to the fourth quarter due to lower gas availability in New Zealand, minor unplanned outages in Geismar and Trinidad, and a 20 day planned outage in Egypt. In Chile production levels in the first quarter were comparable to the fourth quarter as our Chile IV plant ran continuously in both quarters. We expect to continue operating both Chile plants through the end of April 2022. In Medicine Hat product in the first quarter was slightly higher compared to the fourth quarter. And the plant ran at nearly full operating rates. We continue to forecast our 2022 production to be approximately 7 million equity tonnes. Although actual production may vary quarter-by-quarter based on gas availability, planned maintenance, extended planned outages or unanticipated events. Now turning to our balance sheet and capital allocation. In February, we closed the previously announced strategic partnership with Mitsui O.S.K. Limited or MOL involving waterfront shipping and received proceeds of approximately $145 million. We ended the first quarter in a strong financial position with approximately $1.1 billion in cash and $600 million of undrawn backup liquidity, which meets our goal of having cash on hand to fund the remaining G3 capital cost spend as well as having $300 million for operational flexibility. Our discipline approach to capital allocation has not changed and our priorities remain the same. We use the cash we generate to maintain our business, pursue accretive growth opportunities and continue our consistent track record of returning excess cash to shareholders. Construction on our advantage Geismar 3 project is progressing well and is on schedule, on budget and is expected to reach commercial production by late 2023 or early 2024. At that time we believe the industry will need new supply to meet growing demand. G3 will enhance our current asset portfolio and significantly increase our cash flow generation capability. At $400 metric tonne average realized price G3 generates approximately $325 million of adjusted EBITDA per year. It is a world class CO2 emissions intensity profile will help us meet our recently published commitment to reduce our greenhouse gas emissions intensity. Our capital cost estimate for the G3 project is $1.25 billion to $1.35 billion, and we’ve spent approximately $620 million to the end of the first quarter. We expect approximately $625 to $725 million of remaining capital costs before capitalized interest. We continue to anticipate spending approximately $100 million per quarter although the timing of expenditures may fluctuate period to period. Our consistent track record and commitment of returning cash to shareholders is highlighted and the Board’s decision to approve both a 16% increase in the quarterly dividend to $0.145 per share, as well as an increase to our share buyback program for 3,810,464 to 6,094,171 shares, representing 10% of the public float. The maximum allowed in a 12 month period under Canadian regulations. This buyback program will expire in September of 2022. I would also like to highlight that earlier this month we released our 2021 sustainability report where we outlined achievable and solution-focused environmental, social and governance commitments. We continue to deepen our understanding of the opportunities and the risks from the transition to a low carbon economy and I believe that we’re well positioned to continue to deliver long-term shareholder value as the world transitions. Now turning to the outlook for the second quarter. Based on our current posted prices for April and May we expect Q2 to be another excellent quarter for EBITDA generation and earnings. Looking forward, the methanol market fundamentals are solid. Our cash generation is strong. Our G3 project is fully funded and we’re well positioned to continue with our commitment to return excess cash to our shareholders. We remain focused on progressing our advantage G3 projects safely and on budget, operating our plants safely and reliably, securing long-term economic gas for our idle plants in Trinidad and New Zealand and delivering secure and reliable supply to our customers and delivering on our capital allocation priorities. We would now be happy to answer any questions.
Operator: Thank you. The first question is from Ben Isaacson from Scotiabank. Please go ahead.
Ben Isaacson: Thank you very much and good morning and congratulations on the good numbers. John, two questions for you. Number one, with respect to China and the lockdowns that we’re seeing from COVID, are you seeing any pivots in methanol demand and in methanol production there? Can you just frame what you’re seeing in China right now?
John Floren: Yes. As of today, we’re not seeing any impact on demand. We have obviously the headwind and we’re watching certainly the lockdowns aren’t as severe as they were in the spring of 2020. But it’s something we’re watching. On the supply side, again, most of the plants are outside the lockdown areas. So we’re not seeing our customers or even our competitors having to shutdown at this time. Having said that if you look at pricing in China today is around $365 equivalent U.S. dollars per tonne that’s below the cost curve that we see in China based on coal and natural gas. So if they were to shutdown, it’s probably more as a result of cost curve, then COVID at this point, Ben.
Ben Isaacson: Thank you for that. And then just my follow-up, if we leave the price for the moment, can you talk about the value of methanol. We’re seeing a lot of swings in commodities, oil at $100. We’re also hearing about recession fears. So what is the most secure right now in terms of downstream value for methanol and what’s at risk?
John Floren: Well, I think the one that we always watch is the MTO and that’s the one that’s on the affordability curve as we call it, the one that gets impacted first. Most of the chemical derivatives, methanol is not a very large component of the cost of their product. But MTO is the one we watch. We’re fortunate in a high energy environment like we’re seeing today. That’s also very good for olefin pricing because the naphtha crackers obviously are paying a lot more for naphtha today than they would’ve been this time last year. So that lifted the cost curve quite nicely. So the MTO producers are running, like I said, at 95% today. So, unless you saw a huge correction in olefin prices and that would mean energy prices falling quite a lot from where they are today. I think we’re going to be fine on the demand side.
Ben Isaacson: Great. Thanks.
John Floren: Thanks, Ben.
Operator: Thank you. The next question is from Joel Jackson from BMO Capital Markets. Please go ahead.
Joel Jackson: Hi, good morning, John.
John Floren: Hey Joel.
Joel Jackson: John, I missed a bit of the last question. I hope I don’t ask the same question. What do you think is setting the methanol price right now? Is it the cost curve? Is it affordability? Seems like it’s more the cost curve. And then what are you sort of seeing into April here in terms of the market, maybe a little more supply coming out from some of the different regions, maybe a little bit of demand restrictions, lockdowns, things like that in China, GDP concerns. What do you think is going on, on the ground kind of April right now?
John Floren: Yes. I think there’s a lot of negative sentiment out there, Joel, and I think that’s driving some of what we’re seeing in the short-term. When we look at our supply demand balances, demand is holding up, has bounce back the traditional demand from Chinese New Year, MTO is running well, high energy makes the other energy applications very, very attractive for methanol. So we expect demand to continue to grow and we’re watching it very closely. Obviously, we have visibility throughout the globe through our network of supply chain and marketing teams. And we’re not seeing, like I said, any impact on demand. And I think we’re expecting quite a few planned outages coming up here in the May, June period, which in our view are going to continue to have a favorable supply demand balance, which will lead to strong pricing. Cost curve hasn’t been setting the pricing. If you look at the last two quarters, we’ve been well above the cost curve. It’s been really supply issues that led to the higher pricing than cost curve. And we’ll continue to watch it. But when we look at all the puts and takes, we think conditions are still pretty tight and inventories are pretty low throughout the system. So we’ll continue to follow it. One caveat and I said it in my opening remarks, we are expecting a bit more supply from Iran as they come out of their winter. And we’re seeing that as we speak. But we’re also seeing, like I said, other planned and unplanned outages.
Joel Jackson: Okay. And then if I recall, I think you said you would kind of have a really – the next really good view on where costs are going for G3. I think I want to say June or sometime this summer. So, when are you going to have a really good handle on the remaining cost of G3, if you’re going to have any material inflation? Maybe you can give an update on how much the remaining costs are fixed versus variable? What are the biggest deltas for cost good or bad that could happen as you finish the last, I guess, what six quarters of that project?
John Floren: Yes. Really the only cost that we’re facing going forward is labor. All the equipments on site, the engineering’s done, we’ve actually completed most of the civil works. We’re starting to come out of the ground. We’ve got a video that we just produced that will sort of throw up on the website for you to see. And if you come to our Investor Day in June, you’ll be able to see it firsthand and the progress we’ve made. So it’s really around labor. And as of today, we’re quite a bit through the construction of the civil, like I said and the labor rates that we forecasted and the productivity numbers we forecasted are bang on. So we’re not having to compete with labor in the area, there’s not any other large projects being constructed during this time. We’ve got a wonderful site there, it’s a safe site. We’ve got parking for everybody. It’s easy to get in and out. So it’s a preferred site for people to work at. So as of today, we are not seeing any pressure on labor or productivity. And that’s the one thing that we’ll continue to monitor. I’ll remind you on this project, we have quite a bit larger owners team than we did on G1 and G2. So we’re much more involved in the scheduling and the workflows, et cetera than we were in the previous projects. And that really helps with productivity. We’ve got about 1,100 people on site today. So coordinating all that activity is really important to make sure your productivity doesn’t fall off.
Joel Jackson: Got it. Just if I do one follow-up on that. So the way to think about it, and you talked about this before when you estimate the budget a long time ago, you put in so much contingencies, even if you’re seeing inflation, it’s not worse than your contingencies. Is that fair?
John Floren: Yes. We haven’t barely touched a contingency and it’s a very large contingency based on, let’s say compared to previous projects we’ve had. So I think we’d have to see rates and productivity increase significantly on rates or productivity decrease significantly before we use up all that contingencies. And even if we did use up all the contingencies, we’d still be in line with the guidance that we’ve given you for completing the project. So I feel really good at where we are on the project. And first priority is always safety. And if you have a safe site, then you’ve got a high quality project and a good productive site. And that’s our focus.
Joel Jackson: Thanks a lot.
John Floren: Thanks, Joel.
Operator: Thank you. The next question is from Nelson Ng from RBC Capital Markets. Please go ahead.
Nelson Ng: Great. Thanks and congrats on a strong quarter. First question is on Egypt. So the 20 day outage, should we think of that as a full turnaround? So that would be one of the two to three turnarounds we expect each year.
John Floren: I think I would think of it as a partial turnaround, Nelson. There are some things that we had to take the plan off to address from a safety perspective. We couldn’t continue on. So we addressed those. When you plan a turnaround, you plan a bunch of people, you plan a bunch of catalyst and equipment and that’s years in the making. So you should think of that as we did a lot of – some of the work that we would do in a normal turnaround during that outage. So if we did have a turnaround there at some time in the near future some of the work would’ve already been done.
Nelson Ng: Okay. Thanks for that. And then just on that topic, you mentioned that you expect multiple plants to be shut down for turnarounds in the sector. Can you mention any particular regions that are going to get hit harder on the supply side?
John Floren: Yes. Maybe I’ll ask Rich Sumner, our VP of Marketing – Senior VP of Marketing and Logistics to answer that.
Rich Sumner: Yes. So the plants that we see heading into turnaround, we know that that in Russia there’s a few plants there that would be regularly scheduled in Europe, the plant in Norway. We know in Trinidad, there’s already a plant down and then in Southeast Asia, Malaysia and Brunei both have plant turnarounds. And as of today as well, we know that there are some ongoing issues in Iran happening today as well.
Nelson Ng: Thanks. And then just moving on to the dividend, so the dividend increase. Can you talk about what you see long-term for the dividend? Like, can you see it getting back up to the pre-pandemic levels in 2019? Or should we expect that to be much further on the horizon?
John Floren: Well, I think we’ve mentioned previous times that we’ve seen a lot of volatility in the last 10 years. We’ve seen prices ranging from $200 to $500, so it’s really been volatile for a number of black swan events that happen and you know them as well as I do. So I think after the last one, the COVID lockdowns we kind of came to the conclusion that having flexibility and how we return money to shareholders has got a lot of value. So I think there is room to continue to increase our dividend as we bring on G3 and pricing continues to be strong. And we’ll look at that. But I think our preferred at this point in time is to use the share buyback and the flexibility it allows to return cash to shareholders. So getting back to pre-pandemic levels of the dividend I don’t see that in the near-term.
Nelson Ng: Okay. Got it. Thanks. I’ll leave it there.
Operator: Thank you. The next question is from Jacob Bout from CIBC. Please go ahead.
Jacob Bout: Good morning. I had another question here on G3. So we talked a bit about inflation. How supply chain and procurement? Is that having any issues or foresee any issues there for the start of G3?
John Floren: Yes. Like I said, we’ve got all the major equipment on site. So the biggest issues would’ve been major pieces of equipment and getting them made because they take a lot of parts and stuff from other people as well. But having those on site, gives us a lot of comfort. Typically with the small things like nuts and bolts and this and that we would have a few weeks supply chain. But what our team’s done down there is they anticipated potential supply chain and ordering those types of equipment or small parts way in advance. So we’ve seen the odd thing here or there, but really hasn’t delayed the project or been a huge impact on, like I said, the productivity or the completion at this time. So I know the team’s on top of it and it’s one of their key risk factors they’re managing. And we certainly haven’t any significant impact on the project because of supply chain issues at this time.
Jacob Bout: Okay. And then maybe a bigger picture type question. Just as you think about the fallout of the Russia-Ukraine war, what do you think of the long-term implications from the methanol industry? Do you think there’s going to be more of a focus on stable methanol supply, industry moving away from Russian gas-based methanol supply? What do you think is the opportunity here for Methanex?
John Floren: I guess, it depends on how significant the war continues and what happens, does it get wound up and what happens with the energy complex as a result. It seems to me, Europe is set on moving away from Russian energy, so that means that they’re going to have to be replaced from elsewhere, which is in my view lead to higher prices. And if there’s higher gas prices in Europe, that means less production of methanol. Certainly the Norwegians might decide to maybe send gas instead of making methanol. That could be an option for them as well. Russia itself continues to make methanol and they consume methanol in the country and they export about 1.5 million to 1.8 million tonnes almost from day one of the war. Our customers told us they would – did not want to get Russian material. And I think that’s pretty much across the board in the European customers. So they’re looking to get product from other places, which are displacing supply chains, which is leading to higher costs. So, you don’t like to see these disruptions and wars. But we’re certainly not benefiting to the same extent that some of the agricultural businesses are. But certainly it’s been – something that’s been disruptive for our customers. And I think they’re going to be reluctant to sign up for Russian material in the near-term. So that I think that’ll mean, companies like us will be in more favor for contracts as we go through the process this year.
Jacob Bout: I’ll leave it there. Thank you, John.
John Floren: Thanks, Jacob.
Operator: Thank you. The next question is from Steve Hansen from Raymond James. Please go ahead.
Steve Hansen: Yes. Good morning, guys. Thanks. John, just a question on gas prices. We’ve seen pretty extraordinary moves in the domestic gas market through spring this year. I think we’re over $7 at the hub now. I know you’re extremely well positioned domestically with your various contracts in place, but you do have some open exposure as it stands. Do you want to maybe just give us an update on your gas thinking here today?
John Floren: Yes. So we’re continuing to want to hedge gas out in front of G3 and for our expiring hedges and contracts for G1 and G2, and we’ve done that in the last six months. And certainly, right now the prices of oil out of where our range, where we’d like to hedge gas. But we’re looking at it every day. But right now, 65% of our needs in North America, either fixed priced or hedged at relatively really low prices compared to what we’re seeing in AECO and Henry Hub. So I think we’ve done this since we’ve started G1 and G2 and we are on the other side of that hedge for some time. And here we are, with $78 gas. So we’re really well positioned versus our competitors who we don’t believe have hedge much of their gas at all for any length of time. So I always thought that was a natural hedge for us as well, because they’re going to be much higher on the cost driven than we are because they’re not hedged on gas. So I think we’re extremely well positioned. And we chose that rate of 65% because, if things get really out of whack on gas and we get above the cost curve, then we can lower operating rates to those levels. But we don’t anticipate getting there. When we look at the gas market fundamentals in North America, we still have that kind of $4 range in our mind, lots of gas in that range. And doesn’t mean we won’t see times like we’re seeing today with outside that range, and we’ll probably see lower than for it as well. The commodity doesn’t take much. Having said that too, there hasn’t been a lot of exploration and development in the last two or three years because of COVID and now because of ESG issue. So, what happens when there’s no development and exploration there’s less supply, which leads to higher prices. So we’ll see how things go forward. But certainly at today’s prices, anybody that’s got reserves would want to be developing them and selling them.
Steve Hansen: Okay. That’s helpful. And just one follow-up for me on New Zealand. The gas supply there continues to be challenged. We know that we’ve seen some of the history there recently. How long do you think it will take to get some better visibility on your feedstock needs there? Do you think we’re talking a year from now, two years from now? I know there’s been talks about development exercises in the offshore there, but the government has also got a pretty hard tilt on how they view that sort of broader complex. So just where are we at in that broader development from your perspective and obviously your assets that are sitting there. Thanks.
John Floren: Yes. There’s lots of drilling going on as we speak. So there’s been success and there’s more fields. The field that had the upset is being drilled. And we’ll know in the next quarter, I would say what the results are. So, I think high energy prices again, are really good for us because the suppliers, which are all private in New Zealand that have reserves will want to develop. They’re getting a great price for their gas at current methanol prices. And obviously the liquids that they’re getting with the gas, they are very, very rich in liquids. And in $100 oil, they’re getting a lot of money for the liquid. So I think New Zealand as a country, they’ve been running a lot of coal fired electricity generation as well. And certainly that’s not good for their directions on going to zero carbon. So we’ve always said, to go from where we up to zero overnight is physically impossible. But you can make steps along the way, like using natural gas. So I think these higher energy prices and what’s gone on in the world with the wars and displacements got governments thinking a little differently about some of their aspirations in the short-term and keeping the aspirations in the long-term for low carbon economies.
Steve Hansen: Okay, great. Looking forward to seeing you guys here in a couple months. Thanks.
Operator: Thank you. The next question is from Mike Leithead from Barclays. Please go ahead.
Mike Leithead: Great. Thanks. Good morning, John. Just one question for me on the – just one question for me today is on the cash and I’ll say it’s a very high class problem to have. But back at the envelope you have about $1.1 billion cash today about $675 million of that earmarked for G3, you’re generating about $300 million or so of operating cash each of the last three quarters. And just when I think about potential uses maintenance CapEx, isn’t that much your new dividend is, I don’t know, $50-ish million a year, and you can only buyback, call it another 100 million, 150 million or so shares through September under the current bid. So if you’re projecting conditions are expecting to stay strong near-term, just how are you thinking about the deploying the excess cash or keeping it on the balance sheet? And would you consider a special dividend in the interim? Thanks.
John Floren: Yes. So we’re looking at all those options and including retiring debts. So we have debt that’s coming new in 2024. And we could do a make hole on that and retire that as well. So we said we wanted to delever from where we were, and we’ve done that by paying off the construction loan about just under $200 million, $175 million last year. So we want to continue to delever. We want to have that 3:2 at $275 million methanol to $300 million methanol of EBITDA to debt. So I think by retiring those bonds will be well within that range of where we want to be. So we do have that as another potential to use of cash. So I think I’d be doing before, I’d be doing a special dividend. But let’s see how things turn out here in the next quarter or so, and September’s not a heck of a long time away. And we’ve just announced another share buyback. And we’ll complete that based on the pricing that we’re seeing today and then, roll into another NCIB in September provided, the conditions of the methanol market remains strong. So I think we’ve got lots of options. I don’t particularly like special dividends myself. I think they cause tax problems for our shareholders. And I think our stock price is, on trailing EBITDA we’re trading at 3 or 4 multiple. So I think the best use of cash today is by far to buyback our shares and that’s what we’ll be focused on.
Mike Leithead: Great. And again, as I said, high class problem to have. Have a good one. Thanks.
John Floren: Thank you.
Operator: Thank you. The next question is from Hassan Ahmed from Alembic Global Advisors. Please go ahead.
Hassan Ahmed: Good morning, John. John a question around European methanol capacity. If my numbers are correct, it’s roughly call it 10% of global capacity. Just wondering, with gas prices where they are right now, are you already seeing some curtailments there? And if not, if the current sort of geopolitical conditions continue, would you expect to see so sort of curtailments shutdowns and the like?
John Floren: Yes. I don’t know how you can pay the European gas price today, make methanol and create any cash. So, I think we’ve seen OCI shut down last fall, right? And that was before the war. When gas prices got, I think, $6, $7 I can’t remember exactly, but they were under water. Certainly the Norwegians have the ability to on sell gas and not make methanol, but they have contracts. They’ve got honors. So I think that’s more of a medium term decision for them, if they wanted to do that. There’s a couple refineries there that are making methanol in Germany. And we’ve seen them take time as well. And then obviously the impact on our customers of high energy prices too, does that impact their ability to compete. And when we see shifted demand for our product to go to other regions, so there’s a lot of moving parts here. But if the LNG market today is at $17, $20 MMBtu and Europe’s going to wean itself off of Russian gas, it’s going to come from LNG. And you just can’t make methanol at that price unless you get $1,000 plus a tonne for the product. So I think unless something was to change with the directions of both Russia and Europe, it’s going to be tough for not only methanol, but for ammonia and nitrogen and a lot of things that rely on natural gas.
Hassan Ahmed: Makes sense. Makes sense. Thanks for that. And as a follow-up, could you comment a little bit about what you’re seeing in terms of inventory levels? I know maybe there are a couple of moving parts because you talked about higher sort of levels of turnarounds happening. So maybe that sort of bloats inventory levels a bit. But sort of cutting through this noise, where do you see inventory level sitting right now?
John Floren: Yes, our experience is, when you’re – so called high prices, and that’s what people are calling the current situation for methanol pricing. People don’t want to have a lot of inventory, because they’re anticipating the price to go down. So I think people are running their supply change as skinny as they can. And that’s been the case for probably the last 12, 18 months. We have quite a good visibility on the East Coast of China and those inventories are really low. So certainly we don’t see an excess amount of inventory through the system.
Hassan Ahmed: Very helpful, John. Thank you so much.
Operator: Thank you. The next question is from Roland Rausch from Crown Investments. Please go ahead.
Roland Rausch: John, how are you?
John Floren: Good, Roland. How are you?
Roland Rausch: All right. Well, look I have to tag on that one question and spare with me on the total return of capital issue, right? So, you’ve obviously grossed it up to roughly 6 million shares or 10% share purchase you bought as of two days ago 3.8 million that leaves 2.2 million shares to be purchased. You’ve bought 1.9 million in the first quarter, you bought half a million shares just in that first 26 days in April. You're sitting on $1.1 billion of cash. You wouldn't raise dividend significantly. So by my math, by June, July, you must have bought back the shares. I've got one technical question for you and Sarah, why you can only start with the new purchase on May 2. Why you can't do it immediately so long story short, John, what do you do if you bought the rest of the shares back by July? You're sitting on by our math, $1.4 billion of cash, I'm sure you cannot accelerate the CapEx with G3 three because the pieces are coming in and you said it takes to another six quarters. So what do you do with the massive cash builder?
John Floren: Yes. So the reason we couldn't start the second buyback until May 2 was because of blackout because of quarter end. So that's the reason for that Roland. So we both started up on May 2 and turn through it to like we have been, I mentioned already we have the ability to look at retiring the debt early. If we do have that much excess cash, through a make hole arrangement. So that's something we could consider or we could look at what the market fundamentals, if they continue the way they are today, that would probably be a good option for us. Also there's a substantial issuer bid that could be considered, but at that for something like that, it would be more like a $300 million kind of substantial issuer bid. So we'd like to build the cash on the balance sheet before we did that. So if we had that that could be another option for us. And then it would only be another couple of months before we do another NCIB, which is our preferred way to do buybacks. So I think we do have options. And if we are seeing like prices like we see today in cash generation, like we see today in the continued great progress on G3, we'll look at all those options to return cash to shareholders.
Roland Rausch: Okay. So allow me one more. So if you were done before or significantly ahead of the end of September, could you launch another 10% or 5%? What's the way we would do these share purchase then?
John Floren: Yes, for a normal course issuer bid we'd have – we can only do 10% of the public vote in 12 month period. So that means we couldn't do a normal course until this September period comes but we could do substantial issuer bid. But what I’d say there, the nice thing about normal course is you don't have to make a large commitment. You can just like take so many shares per day or so much money per day. And if market conditions change, then you can adjust on a substantial issuer bid before we'd want to have the cash on the balance sheet to do that. And, you'd have to do like I say 200, 300 million, but a current cash generation and if that continues for the next few quarters, we could consider that as well. So I think we have options and we're committed to getting to those that the leverage targets that I've already mentioned and returning all excess cash to shareholders. So we got lots of things we could consider and we just hope that the current market and the current pricing continues and everybody will be benefiting.
Roland Rausch: Okay. Thank you.
John Floren: Thanks Roland.
Operator: Thank you. The next question is from Laurence Alexander from Jefferies. Please go ahead.
Laurence Alexander: Good morning. Two questions. One is, with the discussion earlier about customers wanting reliability of supply, would that have any impact on – would that help you narrow the discount between the posted prices and the realized prices or is the dynamic completely separate there?
John Floren: And no…
Laurence Alexander: It could – sorry, go ahead.
John Floren: Yes, I think that's a good point. I mean, if customers have less choice, then the power ships a little bit to the suppliers, so we won't know till we get into renegotiation, but if they have less choice, then there's lots of liquidity in Europe, as example, then certainly the suppliers will have a bit more ability to think about, maybe calling back some of the discounts. So that is something that could happen. We'll just see how things evolve here with the Russian supply and the wars. So but even, if it gets all tomorrow, I think there's still going to be a reluctance of customers in Europe to be using Russian product, but we'll see how things evolve.
Laurence Alexander: Okay, great. And secondly, can you give an update on your thinking about both green methanol and the order backlog for Marine fuel, your fuel flexible ships in particular, are you seeing fleets becoming more comfortable with larger orders or ordering several ships at a time or larger ships are being more comfortable with the transition? So can you just help with our backlog on both of those?
John Floren: Sure. So what's on order or on the water today are 65 ocean going vessels and there's more and more interest every day it seems. If those 65 vessels that have the capability to ran on methanol a 100% of the time that would be 1.5 million tons of demand. So that's, what's on the water what's coming in the next couple of years. Obviously Maersk has been very public about wanting green methanol to run their ships. And we are obviously in discussion with Maersk about supplying green methanol. We have the ability to do this in Geismar plants, where we're certified to make green methanol using renewable natural gas. The challenge is the economics, it's one thing that want to use green methanol. It's another thing to pay for green methanol. And if you look at renewable natural gas, or if you look at the other pathways to making green methanol, you need around $1000 a ton in a selling price to make it work. So we have that ability, we're in discussions with Maersk and I know they're in discussions with a number of different parties and they're going to be facing those same economics. But our view has always been as the shipping industry converts to methanol, they'll use natural gas based methanol and with the intention as the economics get better, the ability to afford green methanol, it gets through the system that they'll want to slowly convert, but they can use in combination as well. I think what's going to happen is like they get the methanol we're going to make in Geismar 3 is going have our lowest carbon footprint of any of our plants. And maybe customers will start saying, I want the Geismar 3 molecules because they have 0.4 of a ton of CO2 versus others that have 0.6 or Chinese coal has five times 0.4. So it's evolving. I think the willingness to pay is not there yet. I'll remind you. We were the early investors in CRI in Iceland to make methanol – green methanol from CO2 off of power plant and hydrogens through electrolysis using cheap energy. And it's a small pilot plan of 4,000 tons. And we could barely sell that out. So I think the market will develop, but it's kind of a chicken in the egg now, but we have a team – internal team that's looking at all the possible avenues to green methanol. And when it makes sense for us to invest, you should expect us to invest.
Laurence Alexander: And I guess also can you just – one clarification, if I may is you had the comment earlier that the kind of breakeven for someone making methanol in Europe had current LNG prices, would be around 1000 which is also around where you peg the green methanol kind of economics. As you look at kind of the European policy around carbon adjustments at the border and how they're talking about dealing with those – putting taxes on imports. Is there – should we be thinking about sort of a possibility that the green methanol in Europe gets pulled forward and that Methanex might participate in that? Or how are you thinking about the moving pieces on the regulatory side?
John Floren: Yes. Those are all under discussion with how things end up with governments. I'm not a good predictor of how governments behave, what they decide, but certainly aware of all of those discussions. It's kind of before we make significant investments, we want to have a place to sell the product where we can make $1, right. We're not going to do make it for $1000 and sell it for $500, that we're not going to have a company very long if we do those things. So we're certainly willing to make investments in the green methanol space. The challenge is there's no market for today that's willing to pay, so that may change. And if that changes, we'll be making investments. So like I said, it is a bit of a chicken in the egg, but we're looking at all the different technologies out there that are thinking of doing green methanol and the other challenge with the technologies. They're not very scalable and they're not very reliable, especially the electrolyzers. So lots of issues with the technologies, but you'd have to have some certainty that if you're going to invest some millions of dollars in a plant as you can sell it and make a profit. So you'd have to have a contract signed for the off-take of that plant that allows the economics to work. So certainly up to now, we haven't been able to secure a contract that allows us even to make a renewable methanol from natural gas in, in Geismar.
Laurence Alexander: Okay, great. Thank you.
John Floren: Thank you.
Operator: Thank you. The next question is from Josh Spector from UBS. Please go ahead.
Josh Spector: Yes. Hi. Thanks for taking my question. Just coming back to the U.S. gas hedging strategy, and just thinking in the context of Europe and everything that's been discussed earlier. And if the U.S. is part of solution in terms of exporting LNG over to Europe to solve that problem, does that change your thoughts around the hedging strategy of Methanex two, three years from now. And to the extent, kind coupling that with the excess cash comment, do you ever think about co-investing in some of the upstream supply or development as a way to get you off-take gas contract as a part of that? Is that something you'd think about or no?
John Floren: Been there done that wasn't very successful. So we're a methanol producer. We're not an exploration and development company, so I never say never, but highly unlikely under my watch, but the next yield might have a different view. So I never say ever, but you can take that as no, we don't – we wouldn't invest upstream in oil and gas. As far as our hedging strategy, it'll remain the same. We want to be hedged for about 65% of our requirements for G1 and G2 and slightly less for G3. And then we include Medicine Hat in the hedge profile because it's all one market in North America. So we're out there. We have a strategy in place we're executing over the last 12 months for further hedges for G3 and for the ones that are expiring in G1 and G2. And when we get to the range that we think makes sense, we'll continue to do so. So there's really no change in our hedging strategy at this time.
Josh Spector: Okay. Thanks. And just on the Mitsui partnership that you guys now closed, I was just wondering if you could talk about some of the benefits to both parties in that transaction, I guess for you, it's clear you unlock some cash. I assume you're thinking with their kind of scale, they can maybe improve or go get some better operations that help reduce the cost of the entire fleet. But from their end, I'm not exactly sure. Are there specific economics for them that drive methanol fuel adoption or anything else that's a reason for them to want to enter this with you that drives the fuel adoption benefit that you cited in the releases? Thanks.
John Floren: Yes, so the benefits for us are obviously unlocked value for an asset that we didn't get any value for. Our Waterfront Shipping, which is a fantastic organization and will continue to be a standalone organization. We'll continue to be able to manage that and send ships where we want, et cetera. What MOL got obviously is a great customer. They now have a locked in customer for a long time because they have ownership position in Waterfront Shipping and Methanex contracts, it's shipping to Waterfront. So they got Methanex as a long-term customer. So that really helps with their ideas around replacement ships, et cetera, we've been partnering with them on methanol based carriers for a long time anyway. So they've already been in that game and they understand that game and they've been a good partner and we also get a great shipping partner that's way larger than us in the shipping industry. And we do a lot of backhaul cargoes, but a third of what we carry today is not methanol on a backhaul basis. And certainly if you have an owner that has a lot more ships than you do, it gives you a lot more options to think about doing more backhaul or other backhauls with their ships. So it's early days, but we're really excited about the potential there. And I think it was a win-win deal for both companies and that's usually the ones that do the best and that survive the longest. So we're very happy with it.
Josh Spector: Got it. Thank you.
Operator: Thank you. The next question is from Jason Crawshaw from Polaris Capital Management. Please go ahead.
Jason Crawshaw: Great. Hey John. Good morning. Just maybe two quick questions here. Just one on Russia, I mean, obviously I assume that tonnage is making its way into the market somehow. Any idea, I mean, how much of that selling in a discount? I mean, have your marketing people kind of heard through the grapevine or can they sell that at market price? I guess just out of curiosity is the first question.
John Floren: Yes. So we're seeing some of it, not all of it is getting out. Like I said, it's about $1.5 to $1.8. So we are seeing cargoes out of Finland, more than normal, let's say larger cargos and they're making their way to mainly India and China. And right now those markets are open for the Russians. They are the lowest price markets in the world. So de facto versus what they would've gotten Europe, they're getting less not to mention the freight penalty that they're absorbing because of the extra freight to get it from Russia all the way to India and China. So their economics would be not as attractive as before they were no longer wanting to buy Russian in Europe. So yes, some of it's getting out, but like Rich mentioned earlier, this is usually the turnaround season for the Russian plants as they come out of their winter. So there'd be less production at this time of the year, into the summer anyway, so we are monitoring it. We do have really great visibility because of the ports that we monitor where the product is coming out of. But we certainly wouldn't say all of that 1.5, 1.8, been placed in other markets.
Jason Crawshaw: Got it. No, that's great. Thank you. And then I guess the other question is I mean, I think you mentioned on Geismar 3, I think the number you said at $4 methanol, it might be a 3.25 EBITDA number, correct me if I'm wrong in that. But if that's the case, what's the gas price assumption on that, is that – I mean, you reference kind of $4 gas as your kind of medium or long-term assumption is it also a $4 gas price assumption that gets us to that maybe just give me some color around the economics there?
John Floren: 3.25 is the number for the gas that based on that EBITDA generation. So if you have a higher gas in your model, you can do the conversion. So that's based on 3.25.
Jason Crawshaw: So that a 3.25 gas. Okay. And then for the 65% hedge, just remind me kind of what's the duration of the hedge and when do those start to roll off and you have to hedge at high prices?
John Floren: Yes. So it's different like G1 was a 10 year fixed price contract. G2 was rolling hedges for 10 years as well for 40%. So that's for the site, it was about 65% between the two and then Medicine Hat is through 2031 on a fixed price for most of the gas there.
Jason Crawshaw: Got it. So I mean, it sounds like, I mean, I could have to – I have to get my calendar out, but I mean, by and large, it doesn't sound like you're going to have a substantially unhedged position or less hedged position next year, the year out. I mean, is that a fair assumption?
John Floren: That's a very good assumption. And like I said earlier, we've been putting further hedges in for G3, right. So out in the – yes, we're not exposed beyond the spot component that we've been buying which is around 35% of our needs for the next few years.
Jason Crawshaw: Got it. That's great. And then I guess the last question is, I mean, you commented that, you think a fair amount of your competitors are – don't have the same hedge position in the U.S., I'm assuming. And so, I mean, do you think the U.S. methanol prices reflecting the reality of the current spot gas price, or do you think if some of your peers have kind of shorter duration hedges, as those roll off, maybe the U.S. methanol price needs to reflect the gas price reality and who knows what the gas price is, but I mean, I guess in your assessment, the current U.S. methanol price is reflective of what do you think kind of the blended gas price – gas cost price for the producer. I mean, I know it's sort of, kind of a long winded obscure question, but I mean, how do I think of that?
John Floren: Yes. At today's methanol prices in the U.S. if you're paying $7, $8 for gas, you're still cash positive. So even if they are buying spot gas, but obviously, the margins are really sliming at those prices. So you'd have to have a view that these $7, $8 gas prices are shorter term, but if you got a view their longer term or higher than they're going to be under pressure, which will either lead to shutdowns or higher prices, and if you have shutdowns, you're going to get higher prices. So that's why we never wanted to be exposed. We always wanted to be able to run our plants with a $200 delivered cash cost to China through a hedging and fixed price contracts. Obviously when prices were 250, wasn't it attractive for us is today. But I think our strategy of having certainty in being able around our plants and service our customers is proving out to be the right ones. So I'm really glad we're not 100% exposed in North America to spot gas today.
Jason Crawshaw: Got it. That's great. Thanks for the color and good luck. Appreciate it. Thank you.
John Floren: Thank you.
Operator: Thank you. The next question is from Cherilyn Radbourne from TD Securities. Please go ahead.
Cherilyn Radbourne: Thanks very much and good morning. Most of my questions have been answered, but in terms of the discussion on green methanol, I was just hoping you could talk about how that influences your thinking about the next project beyond Geismar 3 in terms of location and so forth, if at all and whether there are things that you can do to lower the carbon intensity of your existing plant network?
John Floren: Yes. So it does – let's say G3 is going to buy us some time, we want to grow in line with the market. If you look at the market today, the demand is probably similar to just pre-COVID levels. So we haven't seen any real significant demand growth in the last few years. So as G3 comes on and things normalize, that'll satisfy our growth needs for quite some time. As well our focus will be on getting our idle plant New Zealand and Trinidad restarted. So that'll technically be growth for us today because they're idle today. So that'll be our focus. As far as the green methanol, like I said earlier, it's small scale. So I think the largest that you could do that we're aware for a CRI type plan is 100,000 tons. So that's 18 Geismar 3. And the capital cost versus Geismar 3 will be substantially higher. So I think the other issue, carbon intensity and emitting carbon and you're making 25 year investments. What's the world going to look like from a carbon tax point of view, et cetera. So all of those things are going to go into our decision making and it's certainly the locations that we would choose, maybe impacted by carbon tax regimes. But our view is probably the world will always end up being somewhat – having the same carbon price, whether it's through import duties or whatever. So the other option we have to really lower our carbon footprint is carbon capture and storage. And we're looking at both Geismar and Medicine Hat where there are reservoirs available to do carbon capture and storage. Obviously, there's capital involved in operating costs, but we have a team looking at those this year and that would reduce our carbon footprint significantly 80%, 90%. So those are possibilities in North America. We don't have the same kind of structure in some of the other regions because there's not a plant to full reservoirs today, but we'll look at it for North America. If it makes sense there, then we'll think about expanding it. And our teams are looking at other things we can do to lower our carbon footprint and intensity. And the chemistry is the chemistry for our existing plants and there's only so much you can do the biggest bang we would make with carbon capture and storage. We're also going to be testing out some new equipment. We think even G3 is down to 0.4 a ton of CO2 per ton of methanol by changing some equipment. And we think we can get it down to 0.2 for any new build, but we got to prove about that equipment over the next coming years. And then if you buy renewable energy in the area, you can almost get to a zero carbon footprint using natural gas. So there's many pathways we're looking at here, and obviously, we're going to look at everything and consider everything and look at the economics and make decisions around what makes sense for 20 years from now. We'll have to make some guesses around what the regime might look like.
Cherilyn Radbourne: Great. And then since no one has asked about Titan, maybe you can just give us a quick update on the gas situation in Trinidad and the potential to restart that plant at some point?
John Floren: Yes. So right now the upstream and the government are negotiating, their contracts are coming up this year and until that negotiation gets finalized, I would say, it's unlikely you should expect us, Titan for us to secure a gas contract to allow that to restart. But those contracts will be negotiated this year. And the government is told us they want to keep all the downstream alive and they just need to have their contracts renegotiated with the upstream and that's ongoing. So we're continuing to dialogue with the government. And our intent is to get gas at an economic price, allows us to operate Titan through the cycle. And that's what we're focused on.
Cherilyn Radbourne: Thank you for the time.
John Floren: Thank you.
Operator: Thank you. The last question will be from Matthew Blair from Tudor, Pickering, Holt. Please go ahead.
Matthew Blair: Hey good morning, John. When thinking about your Q2 outlook, do you think it's reasonable to assume that your sales of methanol will be up quarter-over-quarter, just as you roll off some of the outages and plant maintenance from Q1? I think it also tend to have an inventory release in Q2 or do you think that would all be offset by probably lower production at Chile just due to seasonal factors?
John Floren: Yes. So you're talking about our produced molecules. It's really hard to guess even this far into the quarter because of the way the FIFO layers work around the world. So if we do have less of our produced molecules in our sales, traditionally there is a product released from our produced inventory. I'd say going into this quarter, if I look at the makeup of our inventory, we have a much higher produced inventory today than we normally would entering into a quarter. So I'm not sure how it's all going to work out. And I don't really pay that close attention to it because I think more longer term and to me, every molecule we've produced today, we're making $200 a ton in EBITDA. So that's what I focus on, how it gets – what quarter gets in and how it flows. That's above my pay grade. So I'm really focused on making sure we run the plants reliably and safely and get that product to our customers.
Matthew Blair: Sounds good. I’ll leave it there. Thanks.
John Floren: Thank you.
John Floren: Okay. Thanks for all the questions. We are pleased to share our excellent financial results with you today. We've continued to demonstrate the strength of our business model and our competitive advantage of delivering secured and reliable net supply to our customers. We believe that the long-term outlook for methanol is robust. Methanol is an essential building block for hundreds of consumer and industrial products, as well as cleaner and burning fuel that can help improve air quality by reducing emissions compared to traditional fuels such as diesel or coal. Our asset portfolio generates meaningful cash flow across a wide range of methanol prices. Our capital allocation priorities remain the same. We use cash that we generate to maintain our business, pursue value accretive growth opportunities and continue our strong track record of returning excess cash to shareholders. We will continue to execute on those strategy to deliver significant value to our shareholders. Thank you for joining us today and we'll speak with you in July. And thank you for the interest in our company.
Operator: Thank you. The conference has now ended. Please disconnect your lines at this time and thank you for your participation.
