Ladies and gentlemen, thank you for standing by. Welcome to the Methanex Corporation Q2 2019 earnings call. I would now like to turn the conference call over to Ms. Kim Campbell. Please go ahead, Ms. Campbell.
Thank you. Good morning, everyone. Welcome to our second quarter 2019 results conference call. Our 2019 second 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 outcomes to differ materially from the actual outcome. Certain material factors or assumptions were applied in drawing the conclusions or making the forecasts or projections, which are included in the forward-looking information. Please refer to our second quarter 2019 MD&A and to our 2018 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, EBITDA, cash flow, or income made in today's remarks reflect our 63.1% economic interest in the Atlas facility and our 50% economic interest in the Egypt facility. 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. We report these non-GAAP measures in this way to make them a better measure of underlying operating performance, and we encourage analysts covering the company to report their estimates in this manner.
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.
Good morning. For the second quarter of 2019, we recorded adjusted EBITDA of $146 million and adjusted net income of $26 million, or $0.34 per share. As we announced on our last earnings call, as of January 1st, 2019, our financials now include the impact of IFRS 16, a substantial change to lease accounting standards. The impact of IFRS 16 increased adjusted EBITDA by $27 million. I want to remind everyone that the IFRS 16 does not change the total cash flows or underlying economics of our business. There were a few different factors that impacted our earnings this quarter. We generate our earnings primarily from sales of methanol that we produce.
Our sales of Methanex produced methanol of 1.7 million tons were approximately 250,000 tons lower than the first quarter, and approximately 150,000 tons lower than our second quarter production, primarily due to the timing of inventory flows, which impact our mix of produced versus purchased methanol sales. A lower proportion of methanol produced methanol sales relative to our total sales volume also resulted in higher costs. In addition, we incurred higher logistics costs and higher selling and administrative expenses related to events during the quarter. Our average realized price of $326 per ton declined slightly in the second quarter based on lower posted prices in North America and Asia in June, and a discount of approximately 17%. Higher methanol industry operating rates in the quarter and volatility in oil and olefins prices, which impacts methanol affordability into energy-related application, impacted methanol prices.
The industry cost curve sets the floor for methanol prices, and we estimate the cost curve to be in the range of $260-$280 per ton, and current prices in China are below this range. We have observed some high-cost methanol producers to start to reduce operating rates as spot prices have dipped below the lower end of the cost curve. Methanol demand in the second quarter of 2019 was approximately 3% higher compared to the second quarter of 2018, and steady compared to the first quarter of 2019. Most Methanol-to-Olefins, or MTO facilities, ran at high rates during Q2, despite very low olefins prices. At the end of the second quarter, two new MTO plants started up that have a combined capacity to consume 3.6 million tons of methanol annually at full operating rates. We expect them to progress to full operating rates over the coming months.
The methanol industry supply operated well in the second quarter as several plants restarted following planned and unplanned outages in the first quarter. Turning to our operations. In New Zealand, we produced 446,000 tons in the second quarter compared to 437,000 tons in the first quarter. Our New Zealand facilities experienced gas constraints primarily as a result of natural gas suppliers completing planned maintenance activities. We expect upstream maintenance activities to continue in the third quarter. In Geismar, we produced 530,000 tons in the second quarter, which was a quarterly site record. This compares to 405,000 tons in the first quarter, when our production was impacted by our first successful turnaround at our Geismar 1 facility. In Trinidad, we produced 384,000 tons during the second quarter, compared to 429,000 tons in the first quarter.
Production was lower quarter-over-quarter as we completed a turnaround at our Titan facility and experienced a short, unplanned outage at our Atlas facility. We continue to guide to approximately 85% operating rates for our Trinidad operations. In Chile, we produced 290,000 tons during the second quarter compared to 241,000 tons in the first quarter. We've continued to receive reliable gas deliveries from our suppliers in Chile and Argentina over the last few months. We continue to resolve the technical issues we faced with the startup of our Chile IV facility, which is now running on a standalone basis. We have begun the first phase of our Chile I plant refurbishment scheduled to match expected lower gas deliveries during the Southern Hemisphere winter months.
We expect that our current gas arrangements will allow for a two-plant operation in Chile for approximately nine months of the year, with lower operating rates during the winter months when gas deliveries are lower. We continue to guide to an annual operating rate of up to 75% of a two-plant operation or annual production of up to approximately 1.3 million tons per year. In Egypt, we experienced an outage in early April that required the plant to be shut down. We are continuing to complete the necessary repairs and expect to restart the plant later this month. We estimate that the Egypt outage had an impact of approximately $25 million, reflecting our 50% share of Egypt on our Q2 adjusted EBITDA results, including higher logistics costs to serve our customers in the Mediterranean. We expect some further cost impacts to adjusted EBITDA in Q3.
We have insurance that covers repairs and business interruptions subject to deductibles. However, no insurance recoveries have been recorded to date. We ended the quarter with $228 million in cash on the balance sheet. Methanex share of cash, including our proportional share of Atlas and Egypt's cash, was $204 million. We have a long track record of making disciplined capital investments to enhance our leadership position while maintaining a strong balance sheet and returning excess cash to shareholders. Our balanced approach to capital allocation remains unchanged. We believe that we are well-positioned to meet our financial commitments, execute our growth projects in Louisiana and Chile, and deliver on our commitment to return excess cash to shareholders through dividends and share repurchases. Our planned maintenance capital for the second half of 2019 is estimated to be approximately $50 million, primarily related to preparation for turnarounds to be executed in 2020.
In addition, we expect the first phase of our Chile I refurbishment to cost approximately $25 million. Provided that we are able to secure sufficient long-term natural gas, we will complete the second phase of the refurbishment over the coming years. Our team is continuing to make progress on the debottlenecking opportunities at our Geismar facilities to increase production by approximately 10% for a few tens of millions of dollars of capital. We completed some elements of the work required to debottleneck the Geismar 1 plant during our turnaround in the first quarter. We plan to complete the additional work required, including construction of a pipeline to bring CO2 to the site and necessary work at the Geismar 2 plant over the next couple of years. We are extremely pleased to announce that our board of directors reached a unanimous final investment decision for the Geismar 3 project.
Geismar 3 will be a 1.8 million ton methanol plant in Geismar, Louisiana, located adjacent to the Geismar 1 and Geismar 2 facilities. This project benefits from substantial capital and operating cost advantages. We expect will deliver outstanding returns. We have a robust and flexible financing plan for the project with an $800 million construction loan facility, a renewed $300 million revolving credit facility, and we expect to access the debt capital markets in the second half of 2019 to pre-fund a significant portion of the Geismar 3 2020 expenditures. We believe we're well positioned to complete this project as we have a rigorous and well-defined execution plan, an experienced team in place, and a strong balance sheet and financial flexibility to execute this project.
As we have stated previously, we have a preference to have a strategic partner for the project, and we will continue to pursue that option. We expect that Geismar 3 will significantly enhance our asset portfolio starting in 2023. We have a consistent track record of returning excess cash to shareholders. We repurchased nearly 1 million shares for $47 million during the quarter under our share repurchase program. Up to June 30th, we have repurchased nearly 1.1 million shares of approximately 3.9 million shares approved under the current Normal Course Issuer Bid. We have increased our target cash on the balance sheet from $200 million to $300 million during the construction of the G3 plant. The pace of the share repurchase program will depend on methanol prices and our ability to generate excess cash.
Based on our posted methanol prices so far this quarter, we expect average realized prices in the third quarter to be lower than the second quarter. We expect our production levels in the third quarter to be similar to the second quarter. We expect adjusted EBITDA to be lower in the third quarter compared to the second quarter. I would now be happy to answer any questions.
Thank you. Please press star one at this time if you have a question. Our first question is from Michael Leithead from Barclays. Please go ahead.
Good morning, John.
Good morning.
I guess first on the methanol price environment, if you look back to maybe previous deflationary pricing cycles, can you just talk about what the historic response time has been for supply to moderate when we're seeing prices below the high end of the cost curve? What's your experience in the industry told you about how quickly they are to respond to that?
Yeah. It takes a few weeks or sometimes a month. What we see happen is we've rapidly gone through the cost curve here in the last few weeks, and we're starting to see people adjust rates, and especially in the coal and natural gas plants in China. People look around and see what's the outlook for their expectation for price. Sometimes they'll last a little longer, thinking prices will rebound.
I'll remind you, there's a couple of new MTO plants that have just started up in China, which will impact demand. We see it taking a few weeks to a month to see them shut down, and they have to have a view that prices are going to stay below the cost curve for a period of time.
Got it. That's helpful. On Geismar 3, I know you've laid out why you guys are really excited by the opportunity to build this advantage project for $750 a ton. By my math, I think today you're trading for roughly $450 a ton in the open market, which is a pretty wide gap, especially to an asset replacement value of $1,100 a ton. Is there a valuation threshold at which you just put the brakes on G3 and say to the market, "You guys are really dumb for allowing me to buy myself back at this discount," or are we moving forward with Geismar 3, and that's just the plan right now?
Well, you can't predict the future. Our plan is to move forward and complete Geismar 3. As far as what we're trading per ton, I'll remind you, all assets are not created equal. Our Geismar assets are worth quite a bit more than some of our other assets in other regions. We think as we complete Geismar 3, it's going to be at the top end of our portfolio and worth substantially more than the $750 per ton that we're going to build it for. To me, now it's about executing the project safely and reliably and get a very reliable plan. We'll continue to focus on completing the plan on time and safely and monitor the markets. I'm a big believer in cost curves. This industry has demonstrated in the past two times we've had lower prices, that the cost curve kicks in and pricing rebounds.
We have the ability to sustain two years of really low pricing in our financing plan and still complete Geismar 3. To think about stopping it now would be a little reactionary and a little knee-jerk, and we think long-term, we don't think quarter by quarter. If you did, you wouldn't ever make an investment in anything. We think this project will have tremendous returns for shareholders over the long term.
Good. Thank you.
Thank you. Our next question is from Joel Jackson from BMO Capital Markets. Please go ahead.
Hi, John. Maybe following up on that question a bit more on the buyback and cap allocation, though. Is the toggle point about $300 a ton where the buyback doesn't make sense, or put it below that, the buyback doesn't make sense? Or put another way, if methanol prices stay here for the rest of the year, will Methanex still do more buybacks? Thanks.
Yeah, our plan is to have a balanced approach to capital allocation, as I've mentioned many times. At $300 a ton, our forecast would be that we have about $400 million in free cash before G3 dividends and buybacks. If you look at the pace of spend on the equity portion of G3, the non-debt portion, it's about $180 million a year. Our dividend's about $105. At around $300, we still can continue the share buyback. Like I said in my remarks, we've increased our cash target on our balance sheet by $100 million as we build G3, so from $200 to $300. Our plan will remain the same of above $300 million, return excess cash to shareholders through buybacks. No change.
Just on Egypt, but maybe broader. As you discovered the issue in Egypt, my understanding is you had sort of discovered a part of your process in determining maybe some imperfection in some of the metal or some of the piping, that that process wasn't working properly. I imagine you've gone to all your plants to make sure if you're using that process at other plants to see if there's any other issues. Can you maybe speak on if there's any other issues beyond just the Egypt dynamic?
Yeah. That was an issue that was related to the fabrication of certain equipment when the plant was being built. The codes were met, but as we've investigated the issue, the codes were probably not robust enough to catch this potential process safety issue which happened. Obviously, a couple of things. We've looked at all of our other plants, as you've mentioned, to identify if this issue is present. We haven't seen it anywhere else yet. We'll have to change our inspection programs to look at these particular welds and this particular material going forward.
Our plan is to share what we found widely with the industry, because I think for us, safety is the number one thing that we look at each and every day, and this issue could have been really a serious safety issue if it hadn't happened at 5:30 A.M. in Egypt. Our plan is to share with the industry, not only methanol, but as widely as we can, because this is not just a methanol industry issue. We learned as well that this might have happened one time before but wasn't shared widely. If we had maybe been aware because this had happened before somewhere else, then we could have prevented this. Our plan will be to share this quite widely with the industry.
Thank you.
Thank you. Our next question is from Jacob Bout from CIBC. Please go ahead.
Hey, John. I had a couple of questions.
Morning.
Just wanted to go back to G3. Is there any flexibility here at all if say methanol markets were to decline even further?
Yeah, we have a really robust financing plan in place for G3. As I mentioned, we can withstand two years of really low prices for methanol and continue with the project. We don't believe that's going to happen. If that was our belief, obviously we wouldn't have sanctioned the project. We believe in the cost curve. I've mentioned the cost curve is $260-$280. We've seen pricing rebounding in China the last couple of days, but that's early days. We're starting to see production turn off, so if you have that $260-$280, that'll lead to a $300 price realized globally. At that price, we can continue our balanced approach to capital allocation. If our belief was $250 or lower pricing for two years, we wouldn't ever sanction the G3 project.
No, what I'm getting at is do you have the flexibility to push out the construction, say, from a three to five-year period?
We have flexibility to do whatever we want, and we'll examine all options at any given point of the methanol price cycle and make the best option for long-term shareholder value.
Okay, there's no financial cost for that.
I didn't say that. I think any time you extend a project, there's definitely financial cost.
Okay. While you're working on G3, is there any period that G1 and G2 will be shut down, either during connection or that type of thing? Will there be an impact in production?
No. Well, G1, we've just done the first turnaround. We do turnarounds every four to five years on a plant, so you can work out when G2 started and when we might think about doing a turnaround there. That would be a part of our normal turnaround procedures, and at that time, we'll do what we did similar to G1 to tie in the CO2 for the debottlenecking. As we build G3, you shouldn't be thinking of any downtime for G1 or G2 going forward.
Okay. Last question here. Logistic costs and SG&A, does any of that lead into third quarter?
A little bit for Egypt. We are servicing our customers in the Med with a different supply chain than we had. I've always talked about how privileged the Egypt plant is because we can use small vessels to get into many ports in the Mediterranean, and that's where we sell most of the product. When we're bringing it from somewhere else, i.e., Trinidad or the U.S. or elsewhere, you can imagine the logistics costs are quite different. We're going to start that plant up later this month, as I mentioned. We've got a month and a half of these higher logistics costs for Egypt. We also had that incident in Houston at one of our big terminals, so we had some additional logistics cost to service our customers from other locations.
The water level on the Mississippi was quite high, way longer than normal, that led to some additional cost as well. The water level's still relatively high, it's come down quite a bit, ITC, where we had the issue, is back and running. Probably a little bit, but not to the same extent we saw in Q2.
Thank you, John.
Thank you. Please limit your inquiry to one question and one follow-up. You may rejoin the queue by pressing star one if you have further questions. The next question is from Eric Petrie from Citi. Please go ahead.
Hi, John. Good morning.
Hey, Eric.
I wanted to ask, what is your sentiment on the incremental MTO demands, given lower polymer prices and polymer capacity expansions in the U.S.?
Yeah. What we've seen with really low polymer pricing, we've seen ethylene at $800, which is extremely low. We've seen very high operating rates on the MTO facilities. At current methanol prices, they're very affordable and we understand a couple plants are taking some downtime for turnarounds for a few weeks, and the other two new plants are ramping up. Until we see differently, we would expect these plants to run at very high rates.
Okay. Secondly, what do you think is attributing to the lower deflationary methanol price environment, especially the spot market? Demand doesn't seem to be that bad. It's up 3%, so maybe your energy applications are growing 5%-6% and traditional are flat. Is it supply related? Appreciate any views or commentary on that front.
Yeah, I mentioned in my remarks that we saw supply operating very well in the second quarter. The ITC event certainly disrupted supply chains in North America. I'll remind you, North America and Europe spot markets are very illiquid. Only a few thousand tons get traded, unlike China, which is a more robust spot market. That had impact on supply chains and the amount of methanol that was probably being kept in storage. In the quarter, we saw a couple hundred thousand tons of material go to Europe that usually would've gone to Asia, because at that time when those decisions were made, the European pricing was much higher. We were seeing that work its way through as well.
It's a point in time that we've seen these prices go down, and when it's a very illiquid market in Europe and North America, it doesn't take too many extra molecules to really impact the spot market. In those markets, we look at the contract market as the important marker, and certainly in China, spot is really more significant, and that certainly leads to what we talked about, the cost curve and that $260-$280. We're pretty confident that's where we are today on the cost curve, and we're starting to see producers react to the below $260 pricing. Thank you.
Thank you. Our next question is from Cherilyn Radbourne from TD Securities. Please go ahead.
Thanks very much, and good morning.
Morning.
I just had a couple of questions on Geismar 3. The first one being whether you could give us any color on your intentions regarding the gas supply for that plant.
We've completed our gas arrangements for that plant. We've struck a 10-year deal for about a third of the requirements of that plant, but I'll say that gas doesn't have to go to G3. It's totally fundable for the site. This is going to be a three-year construction, so we won't start getting that gas until 2023. We don't have to take it to Geismar 3, we can take it across the site. We're comfortable now with what we've got covered in G1 and G2, and now G3 for either under hedges or for fixed price contracts. The balance will be open to the spot market. We have a very balanced approach to our gas strategy in Geismar.
Okay. That's helpful. Regarding the preference for a strategic partner, can you just indicate whether you're still in dialogue with some potential partners?
Yes.
Anything else you can add?
We're in dialogue with potential partners.
All right. Thank you. That's all from me, John.
Thank you. Next question is from Hassan Ahmed from Alembic Global. Please go ahead.
Morning, John.
Morning.
John, wanted to visit the conventional demand side of things. In the press release, you guys talked about how acetic demand was a bit weak in Q2. I guess you attributed that to a series of planned and unplanned outages in the quarter. Just as we look at Q3 or the second half of the year, have those facilities come back online? Just broad thoughts on how we should think about acetic demand in the back half.
Yeah, I'll ask Vanessa James, who runs our marketing group, to answer that.
Yeah. As you said, we saw a decline in acetic acid demand over the quarter related to both demand and outages. I'll remind you, acetic acid is less than 10% of the demand for global methanol. We'll watch it, but I think we've had other commentators say that they think it's a slower rebound in acetic acid. For other traditional derivatives like formaldehyde, we've seen them recover from a slower Q1 and actually outweigh any methanol demand impact we've seen from acetic acid.
Understood. Moving on to MTO. I know this was asked earlier, but just wanted to dig a bit deeper into it. Spot ethylene's come down and come down quite hard, just here in the U.S. alone. Over the next couple of months, we should see north of three million tons of ethylene supply come online. Obviously a bunch of crosscurrents. Like you mentioned, there's some new MTO plants that have come online. I would expect as you've started those plants, even if ethylene market conditions deteriorate, you're not really going to sort of take down production. Maybe you have some of the older facilities who, after a couple of months of being in the red, may actually think about taking down operating rates.
Just wanted to get a better sense of assuming that the market weakens from here on the ethylene side, what we should think about in terms of these crosscurrents.
Well, we saw ethylene prices hit $800 in China, that's historically low prices. They've rebounded from there somewhat. At $800, we didn't see anybody shut down for so-called economic reasons. I don't think how they look at their economics is well understood by the market and industry experts. Each site's a little different, depending on what derivatives they're making and the relative prices of those derivatives, as well as the price of methanol. We look at that quite seriously when we're looking at our pricing decisions on a month-by-month basis. I said consistently, we look at the economics of each site and calculate the affordability of methanol, we look at their behaviors. Nobody has shut down for so-called economic reasons. I just mentioned earlier, there's a couple of plants that are taking two to three-week turnarounds here.
Right now the affordability based on even relatively low olefins prices is quite good. I can't predict the future. I don't know what the ethylene price will do in China next year. We certainly look at the affordability as we make our pricing decisions.
Super. Very clear. Thanks so much, John.
Thank you. Our next question is from Nelson Ng from RBC Capital Markets. Please go ahead.
Great. Thanks, John. Just diving into your Q3 outlook, you mentioned that production levels will be similar, but pricing and EBITDA would be lower than Q2. Are you expecting further inventory build or a reversal in Q3? Is it too early to say?
I've guided before that as we've grown our sales, our inventories will be a little higher than they have been in the past. I've guided to 1.1.2. I think we're a bit higher than that in Q3, I mean, going into Q3. Again, it really depends on how our sales hold up and how our production does, but our guidance is still around that 1.1 to 1.2 for inventories.
Okay. Just some other factors in Q3. I think you mentioned earlier that logistics costs will improve relative to Q2. In terms of the cost to repair the Egypt facility, are those going to be a lot higher in Q3 relative to Q2, or are they capitalized? I'm just trying to figure out some of the moving parts.
Yeah. I'll ask Ian.
Yeah, Nelson. In terms of the Egypt outage, right now all the repair costs are being charged to the earnings statement. When we file a claim, we will recover a portion of those subject to deductibilities. Deductible, I should say. You will see some more repair costs in the third quarter.
Yeah, we've also taken the opportunity while the plant's been down to do some other work that would've been done during a normal turnaround. That'll obviously be capitalized going forward as well.
Okay, got it. Just switching gears in terms of your debt financing plan. I think you plan to refinance one of your tranches later this year and also upsize it. Obviously interest rates are down, but I guess given the weakness in the chemical market or just general sentiment, how's the environment on the credit side?
Yeah. Our plan is, we have a bond coming due at the end of the year. The plan is to renew that $350 million bond and upsize it, as you mentioned. The markets are quite robust right now. We expect to get a very good interest rate for that bond. There's a lot of appetite for that kind of level of bond for around a 10 years, what we're looking at. Stay tuned.
The lenders are not that sensitive to, I guess, the near term methanol price outlook?
Well, I think they, like us, they take a long-term view of methanol prices. I've mentioned many times, based on the cost curve and MTO affordability, we believe we'll be trading in a range of $300-$400 a ton. We've seen that in the last 12 months, that's pretty recent history. The average price for the last 10 years has been $350. You're going to see times when prices are higher than that, than $350 and lower. We've seen it all in 12 months. I think our lenders know our industry, know our company, know our balanced approach and are wanting to maintain an investment grade. They look through these short-term cycles, whether it's high prices or low prices.
Okay. Thanks, John. I'll get back in the queue.
Thank you. Please limit your inquiry to one question and one follow-up. You may rejoin the queue by pressing star one if you have further questions. The next question is from Matthew Blair from Tudor, Pickering, Holt. Please go ahead.
Hey, good morning, John.
Good morning.
I was hoping you could talk about any contribution from the Iranian methanol facilities in 2Q. It seems like there might have been some production issues at Kaveh and Marjan. Do you feel like you saw the full production power from those facilities, in the quarter? Any insight there?
There's lots of issues going on in Iran. Those plants did run during the quarters, not at full rates. I think going forward, it's hard to predict what we're going to see out of Iran because of the sanctions and the extra insurance now to get shipping in and out of there. Normal maintenance, repairs, catalyst, all of those things. We expect, we haven't seen them shut down. We've seen them continue to run on an intermittent basis, and that's what we would expect in the future unless we see something different. It's really hard to predict what's going to happen in Iran with methanol plants and shipping, et cetera. We do watch it as closely as we can.
Sounds good. I'll leave it at that. Thanks.
Thank you. Our next question is from Jonas Oxgaard from Bernstein. Please go ahead.
Hey, thanks. Thank you for taking my question. It seems that for Geismar 3, in your prices, you're still assuming the U.S. price will be well above Asia. You talk about the cost curve at $270-ish, and then translating that to U.S. price well above $300. How do you square that with U.S. getting longer and longer on methanol as time goes by, and particularly when Geismar 3 finally comes online, becomes pretty massively long. That premium really shouldn't be persisting.
Yeah. We've chatted about this for a long time. We expect the freight differentials to remain intact. The Middle Eastern producer to be swinging between the Atlantic and Pacific based on freight. That's our assumptions today. Obviously we expect additional demand in the Atlantic basin and the next new plant is some time away. Yuhuang is going to be completed at some time over the next couple of years. Our expectation is that the U.S. and Europe will continue to trade at a premium to China based on freight differentials. Until we see it different, that's our expectation.
Okay. If you were to see that go away, coming back to the previous question on flexibility in pushing the plant out, is that something you would do?
Well, our anticipation is a range of $300-$400 methanol pricing. This project will have a cash cost delivered into Asia in the low $200s. Which means you'd have to see around 16-17 million tons of methanol demand to go away because that's the high-cost production above that. I guess anything's possible, but that's certainly not our expectation or if we think the pricing are going to be below $200, why would we go ahead with the project? I guess anything's possible. We can dream up all types of scenarios.
Okay. Thank you.
Thank you. Our next question is from Steve Hansen from Raymond James. Please go ahead.
Hey, guys. Just a quick one. John, the gas contract you described earlier on the call here, I think speaks to some risk mitigation efforts on your part for G3. I'm thinking on the other side, on the output side, how are you guys contemplating the marketing plan for G3, whether it be domestic, international or otherwise, and just how you might be able to sign some sort of off-take that might, again, provide some visibility or risk mitigation to investors?
Yeah. Our plan and the economics that we've shared is to ship 100% of it to Asia, and we have flexibility in our supply chain, whether that's China or other parts of Asia, and we've looked at the different scenarios. If the trade war continues and we see high tariffs into China, we're comfortable with that. Obviously, the more we can keep in North America, the better it is for the overall economics. You should expect us to be trying to contract as much as we can of this product in North America at the same time. Even if the worst case scenario is that all of it goes to China, it's a low 200 delivered cash cost and gets our cost to capital back below $300 a ton, and full returns at $325.
Other people in the industry are going forward with $1,100 projects thinking of a different set of pricing than that to get a return. Again, the future's hard to predict, but I think there's a good range of pricing between $300 and $400 a ton, and that's what we anticipate the methanol price to be over the coming years.
That's helpful. Just a quick follow-up, if I may. New Zealand has shown some improvement here in recent quarters, but we're still running below sort of what would be normalized rates. Where are we at there on the gas supply in the upstream and just the future operating rates there?
Yeah. We had a sale of the Shell assets, which was one of the larger owners of assets in New Zealand, completed last year. The OMV that bought those assets have been doing quite a bit of maintenance on those assets, which we think is a good thing long term. If they're investing significant money in those assets, they must be thinking they're going to sell gas to somebody over the long term. If it's not us, then there's 50% of the gas market goes away. I think we're in a good position there to get gas longer term. There's ongoing development of existing blocks onshore and offshore. Like I said, we're a big chunk of that gas market.
I'll remind you, the gas there is very heavy in liquids, so the economics on the gas itself is not what's driving people to explore or do maintenance. It's the liquids which trade somewhere more with oil than with natural gas. We think the dynamics there are really good. We think we're going to get gas for a three-plant operation for the foreseeable future. If we don't, then we have flexibility there as well. We're talking to our gas suppliers all the time, and I know that we're a big part of that market, and they want us to continue to run three plants. We have good alignment with our gas suppliers, and we're optimistic we'll continue to see good gas deliveries there.
I think the maintenance is something that should be viewed as positive because if people are investing in these fields, then they're thinking more than the next year for gas supplies.
Thank you.
Thank you. Next question is from Chris Shaw from Monness Crespi. Please go ahead.
Good morning, everyone. How you doing?
Good morning, Chris.
Just a quick one. Has there been any meaningful impact from tariffs at this point, either on costs or pricing? Anything you've taken away?
Not in the methanol market. I don't think there's any methanol that's imported from the U.S. into China. Certainly, there's other end-use products that may be affected, but really, we haven't seen any real impact on methanol demand and supply as a result of tariffs. The tariffs aren't good for global trade and global growth. We're operating a global business, and we're big proponents of free trade, and the more freer the trade, then I think the better the world is off. These things happen where there's trade disputes between countries and regions, and I think long term, free trade has proven to be good for everybody. That doesn't mean you're not going to get these disagreements from time to time like we're seeing now. We have tremendous flexibility in our supply chain.
I guess if you had a view that Trinidad and New Zealand are going to be part of a larger trade war, it would reduce our flexibility, but certainly not our view.
Great. Thank you.
Thank you. The next question is from John Roberts from UBS. Please go ahead.
Thank you, John. Could you talk a little bit about why you haven't been able to attract a partner given the favorable economics that you show on the project? Is it, again, back to the trade issue maybe with China or the low MTO economics, or is it just a disagreement on the methanol outlook that's kept you from getting a partner?
No, we've said we want a strategic partner, not a financial partner. We're obviously not going to go out and talk to 20 people at the same time. We took a very targeted approach to that, and we were very close to having an arrangement with one party. Due to the trade war I just mentioned, that precluded them from making the investment that they wanted to do. That was the end of last year. Since then, we've been targeting other potential strategic partners and sharing the economics. Now that we've made the FID, each month that goes by and the project gets more and more de-risked, then people should be more comfortable. Obviously the buying price goes up. We're not just going to give away a third of the value of an advantage project to get a partner.
There's a negotiation ongoing about the relative benefits for both parties. We'll continue to have these discussions, and our preference is to have a strategic partner, but we're not going to give away tons of value to achieve that. There's a balance here, and that's how we'll go forward.
Thank you.
Thank you. This was the last question, so I'll return the meeting back over to you.
Thank you. The strategic investments we made in our business over the last few years have strengthened our asset base, significantly increased our global production capacity, enhanced our ability to serve customers, and substantially improved our earnings capability and cash generation potential over a wide range of methanol prices. Our balanced approach to capital allocation remains unchanged. Our priorities are to meet our financial commitments, execute on our growth projects in Louisiana and Chile, and return excess cash to shareholders through dividends and share repurchases. Thank you for the interest in our company.
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