This conference is being recorded. 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.
Good morning, everyone. Welcome to our Q1 2022 results conference call. Our 2022 Q1 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'd 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 forecasts or projections, which are included in the forward-looking information. Please refer to our Q1 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, adjusted income, or adjusted earnings per share made in today's remarks reflect our 63.1% economic interest in the Atlas facility, our 50% economic interest in 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 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. I hope that everyone is continuing to stay safe and healthy. Today, we will review our strong Q1 2022 financial results, provide an overview of the methanol markets, discuss our operational results, and share our near-term outlook. We will open up the call for questions. Turning to our financial results, methanol posted prices were supported in the Q1 of 2022 by favorable supply-demand fundamentals. Our average realized price of $425 per ton and 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 Q1 of 2022 increased slightly compared to the Q4 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 Q4 . MTO operating rates increased by approximately 20% from 65% during the Q4 of 2021 to 85% in the Q1 of 2022. Demand from traditional chemical applications was lower in the Q1 compared to the Q4 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 has recovered from the seasonal lows in February. Industry operating rates remained challenged during the Q1 due to ongoing operating rate constraints related to winter conditions in the Middle East and feedstock availability and cost in Europe.
Methanol prices in the Q1 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 Q2 , 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-$400 per ton based on coal price range of 1,000-1,100 RMB per ton. Our May 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 Q2 2022 price by EUR 65 per ton to EUR 570 per ton. Our Q1 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 enhance methanol's cost competitiveness against alternative fuels, and we continue to see firm demand from traditional chemical applications. Now turning to our operational results.
Our production levels were lower in the Q1 compared to the Q4 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 Q1 were comparable to the Q4 as our Chile four plant ran continuously in both quarters. We expect to continue operating both Chile plants through the end of April 2022. In Medicine Hat, production in the Q1 was slightly higher compared to the Q4 , and the plant ran at nearly full operating rates. We continue to forecast our 2022 production to be approximately 7 million equity tons, although actual production may vary quarter by quarter based on gas availability, planned maintenance, extended plant 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. Lines, Ltd. or MOL involving Waterfront Shipping and received proceeds of approximately $145 million. We ended the Q1 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 disciplined 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 advantaged 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 a 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 a $400 per metric ton average realized price, G3 generates approximately $325 million of adjusted EBITDA per year. It has 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-$1.35 billion, and we've spent approximately $620 million to the end of the Q1 .
We expect approximately $625-$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 in 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 from 3,810,464 shares to 6,094,171 shares, representing 10% of the public float, the maximum allowed in a twelve-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 Q2 . 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 project 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.
Thank you. As a reminder, you may press star one if you have a question. The first question is from Ben Isaacson from Scotiabank. Please go ahead.
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?
Yeah. As of today, we're not seeing any impact on demand. We're also aware of the obvious 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, you know, most of the plants are outside the lockdown areas, so we're not seeing our customers or even our competitors having to shut down at this time. Having said that, if you look at pricing in China, today is around $365 equivalent per ton. That's below the cost curve that we see in China based on coal and natural gas. So if they were to shut down, it's probably more as a result of cost curve than COVID at this point, Ben.
Thank you for that. 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 are also hearing about recession fears. What is the most secure right now in terms of downstream value for methanol, and what's at risk?
I think the one that we always watch is the MTO. You know, that's the one that's, you know, on the affordability curve, as we call it. That was the one that gets impacted first. Most of the chemical derivatives, you know, methanol is not a very large component of the cost of their product. MTO is the one we watch. You know, we are fortunate in a high energy environment like we're seeing today. That's also very good for olefins pricing because the naphtha crackers obviously are paying a lot more for naphtha today than they would have been this time last year. That's lifted the cost curve quite nicely. The MTO producers are running, like I said, at 95% today.
You know, unless you saw a huge correction in olefins prices, and that would mean energy prices falling quite a lot from where they are today, I think we're gonna be fine on the demand side.
Great. Thanks.
Thanks, Ben.
Thank you. The next question is from Joel Jackson from BMO Capital Markets. Please go ahead.
Hi, good morning, John.
Hey, Joel.
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. 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 in April right now?
Yeah, 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 bounced back to traditional demand for Chinese New Year. MTO is running well. High energy makes the other energy applications very attractive for methanol. 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. We're not seeing, like I said, any impact on demand.
I think we're expecting quite a few planned outages coming up here in the May-June period, which, in our view, are gonna 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's led to the higher pricing than cost curve, and we'll continue to watch it. When we look at all the puts and takes, we think conditions are still pretty tight and inventories are pretty low throughout the system. We'll continue to follow it.
The 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. We're also seeing, like I said, other planned and unplanned outages.
Okay. If I recall, I think you said you would have the next really good view on where costs are going for G3. I think I want to say June or sometime this summer. You know, when are you gonna have a really good handle on the remaining cost of G3? If you're gonna 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.
You know, really the only cost that we're facing going forward is labor. You know, all the equipment's on site, the engineering's done. We've actually completed most of the civil works. We're starting to come out of ground. We've got a video that we just produced that we'll sort of throw up on the website for you to see. If you come to our Investor Day in June, you'll be able to see it firsthand and the progress we've made. It's really around labor. 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. We're not having to compete with labor in the area.
There's not any other large projects being constructed during this time. We got a wonderful site there. It's a safe site. We've got, you know, parking for everybody. It's easy to get in and out. It's a preferred site for people to work at. As of today, we are not seeing any pressure on labor or productivity. 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. We're much more involved in the scheduling and the workflows, et cetera, than we were in the previous projects. That really helps when 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.
Just if I do one follow-up on that. Is the way to think about it that, and you've talked about this before, that when you estimated 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?
Yeah. We haven't barely touched a contingency, and it's, you know, it's a very large contingency based on, you know, let's say, compared to previous projects we've had. I think we'd have to see, you know, rates and productivity increase significantly on rates or productivity decrease significantly before we, you know, use up all that contingency. Even if we did use up all the contingency, we'd still be in line with the guidance that we've given you for completing the project. I feel really good at where we are in the project, and first priority is always safety. If you have a safe site, then you've got a, you know, a high-quality project and a good productive site, and that's our focus.
Thanks a lot.
Thanks, Joel.
Thank you. The next question is from Nelson Ng from RBC Capital Markets. Please go ahead.
Great, thanks, and congrats on a strong quarter.
Thanks, Nelson.
The first question is on Egypt. The 20-day outage, should we think of that as a full turnaround? That would be one of the 2-3 turnarounds we expect each year?
I think I would think of it as a partial turnaround, Nelson. You know, there were some things that we had to take the plant off to address from a safety perspective. We couldn't continue on, so we addressed those. When you plan to turn around, there's you know, you plan a bunch of people, you plan a bunch of catalyst and equipment, and that's you know, years in the making. You should think of that as we did some of the work that we would do in a normal turnaround during that outage. If we did have a turnaround there at some time in the near future, some of the work would already been done.
Okay, thanks for that. 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 gonna get hit harder on the supply side?
Yeah. Maybe I'll ask Rich Sumner, our Senior VP Marketing and Logistics, to answer that.
Yeah. The plants that we see heading into turnaround, we know that in Russia there's a few plants there that would be regularly scheduled. In Europe, plants in Norway. We know in Trinidad there's already a plant down. In Southeast Asia, Malaysia and Brunei both have plant turnarounds. As of today as well, we know that there are some ongoing issues in Iran happening today as well.
Okay. Thanks.
Thanks.
just moving on to the dividend. 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?
I think we've mentioned previous times that we've seen a lot of volatility in the last 10 years. You know, we've seen prices ranging from $200-$500. You know, it's really been volatile for a number of black swan events that happened, and you know them as well as I do. I think, after the last one, the COVID lockdowns, we kinda came to the conclusion that having flexibility in how we return money to shareholders has got a lot of value. I think there is room to continue to increase our dividend as we bring on G3 and with pricing continues to be strong. You know, we'll look at that.
I think our preferred, you know, at this point in time is to use the share buyback and the flexibility it allows to return cash to shareholders. You know, getting back to pre-pandemic levels of the dividend, you know, I don't see that in the near term.
Okay. Got it. Thanks. I'll leave it there.
Thank you. The next question is from Jacob Bout from CIBC. Please go ahead.
Good morning.
Morning, Jacob. How are you?
Yeah, I had another question here on G3. We talked a bit about inflation. How can supply chain and procurement is that having any issues or foresee any issues there for the start of G3?
Yeah. Like I said, we've got all the major equipment on site. You know, the biggest issues would have been major pieces of equipment and getting them made, and because they take a lot of parts and stuff from other people as well. Having those on site, you know, gives us a lot of comfort. You know, typically, with the small things like nuts and bolts and, you know, this and that, we would have a few weeks supply chain. What our team's done down there is they anticipated potential issues in supply chain and ordering those types of equipment or small parts way in advance. 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.
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 seen any significant impact on the project because of supply chain issues at this time.
Okay. Maybe a bigger picture type question. You know, just as you think about the fallout of the Russia-Ukraine war, you know, what do you think are the long-term implications from the methanol industry? You know, do you think there's gonna be more of a focus on stable methanol supply, you know, industry moving away from Russian gas-based methanol supply? What do you think is the opportunity here for Methanex?
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. You know, that means that they're gonna have to be replaced from elsewhere, which is gonna, in my view, lead to higher prices. If there's higher gas prices in Europe, that's gonna mean 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 1.5-1.8 million tons.
Almost from day one of the war, our customers told us they did not wanna get Russian material, and I think that's pretty much across the board in the European customers. They're looking to get product from other places which are displacing supply chains, which is leading to higher costs. You know, you don't like to see these disruptions and wars, but you know, we're certainly not benefiting to the same extent that some of the agricultural businesses are. Certainly it's been something that's been disruptive for our customers, and I think they're gonna be reluctant to sign up for Russian material in the near term.
I think that'll mean, you know, companies like us will be in more favor for contracts as we go through the process this year.
Okay. Leave it there. Thank you, John.
Thanks, Jacob.
Thank you. The next question is from Steve Hansen from Raymond James. Please go ahead.
Yeah. 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 wanna maybe just give us an update on your gas thinking here today?
Yeah. We're continuing to want to hedge gas out, as you know, 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. Certainly, you know, right now the price is a little out of where our range, where we'd like to hedge gas, but we're looking at it every day. You know, right now, 65% of our needs in North America are either fixed priced or hedged at, you know, relatively really low prices compared to what we're seeing in AECO and Henry Hub. You know, I think we've done this since we started G1 and G2 and, you know, we were on the other side of that hedge for some time, and here we are and, you know, with $70-$80 gas.
We're really well positioned versus our competitors who we don't believe have hedged much of their gas at all for any length of time. You know, I always thought that was a natural hedge for us as well because they're gonna be much higher on the cost curve than we are because they're not hedged on gas. I think we're extremely well positioned and, you know, we chose that rate of 65 because, you know, if things get really out of whack on gas and, you know, we get above the cost curve, then we can lower operating rates to those levels. We don't anticipate getting there.
You know, 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 $4 as well. The commodity and, you know, that doesn't take much. Having said that too, you know, 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 issues. You know what happens when there's no development exploration, there's less supply, which leads to higher prices. We'll see how things go forward. Certainly at today's prices, anybody that's got reserves would wanna be developing them and selling them.
Okay. That's helpful. Just one follow-up, if I may, on New Zealand. You know, 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, you know, your feedstock needs there? Or 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, you know, got a pretty hard tilt on how they view that sort of broader complex. Just, you know, where are we at in that broader development, you know, from your perspective and obviously your assets that are sitting there? Thanks.
Yeah. There's lots of drilling going on as we speak. There's been success and there's more fields. You know, the Pohokura field that had the upset is being drilled, and we'll know in the next quarter, I would say, what the results are. You know, 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 wanna develop. They're getting a great price for their gas at current methanol prices, and obviously the liquids that they're getting where the gas there is very rich in liquids. At $100 oil, they're getting a lot of money for the liquids.
I think, you know, 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. We've always said, you know, to go from where we are to zero overnight is physically impossible, but you can make steps along the way, like using natural gas. I think these higher energy prices and what's gone on in the world with the wars and displacements have 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.
Okay, great. Looking forward to seeing you guys more in a couple of months. Thanks.
Great.
Thank you. The next question is from Mike Leithead from Barclays. Please go ahead.
Great. Thanks. Good morning, John. Just one question for me today. It's on the cash, and I'll say it's a very high-class problem to have. Back of the envelope, you have about $1.1 billion of cash today, about $675 million of that's earmarked for G3. You're generating about $300 million or so of operating cash each of the last three quarters. 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 buy back, call it another $100-$150 million or so shares through September under the current bid. Do-
If you're projecting conditions are expected to stay strong near term, just how are you thinking about deploying the excess cash or keeping it on the balance sheet? And would you consider a special dividend in the interim? Thanks.
Yeah. You know, we're looking at all those options including retiring debt. We have debt that's coming due in 2024, and we could do a make-whole on that and retire that as well. 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, you know, last year. We wanna continue to delever. We wanna have that 3-to-1 at $275 methanol to $300 methanol of EBITDA to debt. I think by retiring those bonds, we'll be well within that range of where we wanna be. We do have that as another potential use of cash.
I think I'd be doing that before I'd be doing a special dividend. You know, let's see how things turn out here in the next quarter or so. 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. Then, you know, roll into another NCIB in September provided you know, the conditions of the methanol market remain strong. I think we've got lots of options. I don't particularly like special dividends myself. You know, I think they cause tax problems for our shareholders. I think if where our stock price is, you know, on trailing EBITDA, we're trading at 3 or 4 multiples.
I think the best use of cash today is by far to buy back our shares, and that's what we'll be focused on.
Great. Again, as I said, high-class problem to have. Have a good one. Thanks.
Thank you.
Thank you. The next question is from Hassan Ahmed from Alembic Global Advisors. Please go ahead.
Morning, John.
Hi, Hassan.
John, a question around European methanol capacity. You know, if my numbers are correct, it's roughly, call it 10%, of global capacity. Just wondering, you know, with gas prices where they are right now, are you already seeing some curtailments there? And if not, you know, if the current sort of geopolitical conditions continue, would you expect to see sort of, curtailments, shutdowns and the like?
I don't know how you compare the European gas price today, make methanol and create any cash. You know, I think we've seen OCI shut down last fall, right? That was before the war, when gas prices got, I think, $6-$7 or whatever. I can't remember exactly, but they were underwater. Certainly, the Norwegians have the ability to onsell gas and not make methanol, but they have contracts they've got to honor. 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, you know, take time as well. Obviously the impact on our customers with high energy prices too. You know, does that impact their ability to compete?
Would we see shifted demand for our product to go to other regions? There's a lot of moving parts here. You know, if the LNG market today is at $17-$20/MMBtu, and Europe's gonna wean itself off of Russian gas, it's gonna come from LNG. You know, you just can't make methanol at that price unless you get, you know, $1,000+ per ton for the product. I think unless something was to change with the directions of both Russia and Europe, it's gonna be tough for not only methanol, but for ammonia and nitrogen and a lot of things that rely on natural gas.
Makes sense. Thanks for that. As a follow-up, you know, 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, you know, 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 levels sitting right now?
Yeah. Our experience is when you're in, you know, so-called high prices, and that's what people are calling the current situation for methanol pricing, people don't wanna have a lot of inventory because they're anticipating the price to go down. I think people are running their supply chain as skinny as they can, and that's been the case for probably the last 12, 18 months. You know, we have quite a good visibility on the east coast of China, and those inventories are really low. You know, certainly we don't see an excess amount of inventory through the system.
Very helpful, John. Thank you so much.
Thank you.
Thank you. The next question is from Roland Rausch from Crown Investments. Please go ahead.
Hey, John, how are you?
Good, Roland. How are you?
All right. Well, look, I have to tag on that one question and bear with me on the total return of capital issue, right? You know, you've already 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 Q1. 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 dividends significantly. 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 second, and why you couldn't do it immediately. Long story short, John, what do you do if you bought the rest of the shares back by July? You're sitting on, you know, by our math $1.4 billion of cash. I'm sure you cannot accelerate the CapEx with G3 because, you know, the pieces are coming in, and you said it takes until another six quarters. What do you do with the massive cash buildup?
The reason we couldn't start the second buyback until May second was 'cause of blackout because of quarter end. That's the reason for that, Roland.
Right.
We will start it up on May second and, you know, churn through it, like we have been. You know, 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-whole arrangement. 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, you know, a substantial issuer bid that, you know, could be considered, but for something like that, it would be more like a, you know, $300 million kind of substantial issuer bid. We'd like to build the cash on the balance sheet before we did that.
If we had that could be another option for us. It would only be another couple of months before we do another NCIB, which is our preferred way to do buybacks. I think we do have options, and if we're seeing like prices like we see today and cash generation like we see today and the continued great progress on G3, we'll look at all those options to return cash to shareholders.
Allow me one more. If you were done before or significantly ahead of end of September, could you launch another 10% or 5%? What's the way we would do the share purchase then? Or legally-
Right.
Economically do it?
Yeah. For a normal course issuer bid, we can only do 10% of the public float in 12-month period. That means we couldn't do a normal course until this September period comes. We could do-
Right.
a substantial issuer bid. 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 wanna have the cash on the balance sheet to do that. You know, you'd have to do, like I said, $200 million-$300 million. But at current cash generation, you know, and if that continues for the next few quarters, we could consider that as well. I think we have options, and we are committed to getting to the leverage targets that I've already mentioned and returning all excess cash to shareholders.
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.
Okay. Thank you.
Thanks, Roland.
Thank you. The next question is from Laurence Alexander from Jefferies. Please go ahead.
Good morning. Two questions. One is, with the discussion earlier about customers wanting reliability of supply, would that help you narrow the discount between the posted prices and the realized prices, or is the dynamic completely separate there?
No, I think.
Sorry, go ahead.
Yeah, I think that's a good point. I mean, you know, if customers have less choice, then, you know, the power shifts a little bit to the suppliers. We won't know until we get into renegotiation. If they have less choice and there's less liquidity in Europe as example, then certainly the suppliers will have a bit more ability to think about maybe clawing back some of the discounts. That is something that could happen. We'll just see how things evolve here with the Russian supply and the war. You know, even if it gets solved tomorrow, I think there's still gonna be a reluctance of customers in Europe to be using Russian product, but we'll see how things evolve.
Okay, great. Secondly, can you give an update on your thinking about both green methanol and the order backlog for marine fuel, you know, 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 or being more comfortable with the transition? Can you just help with our perspective on both of those?
Sure. What's on order or on the water today are 65 ocean-going vessels. There is more and more interest every day, it seems. If those 65 vessels that have the capability to run on methanol ran on methanol 100% of the time, that would be 1.5 million tons of demand. 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. We're 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 to wanna use green methanol, it's another thing to pay for green methanol.
If you look at renewable natural gas or if you look at the other pathways to making green methanol, you need around $1,000 a ton in a selling price to make it work. You know, 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 gonna be facing those same economics. 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 or the ability to afford green methanol, it gets through the system that they'll wanna, you know, slowly convert. They can use it in combination as well.
I think what's gonna happen is, like, as they get the methanol we're gonna make in Geismar 3 is gonna have our lowest carbon footprint of any of our plants. 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, you know, that has five times 0.4. 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 a power plant and hydrogen through electrolysis using cheap energy. It's a small pilot plant of 4,000 tons, and, you know, we could barely sell that out.
I think the market will develop, but it's kind of a chicken and the egg now. We have a team, internal team that's looking at all the possible avenues to green methanol. When it makes sense for us to invest, you should expect us to invest.
I guess also, if one clarification, if I may, is you had the comment earlier that the kind of break even for someone making methanol in Europe at current LNG prices would be around $1,000, which is also around where you pegged the green methanol kind of economics. As you look at kind of the European policy around carbon, you know, adjustments at the border and how they're talking about dealing with those, you know, putting taxes on imports, 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?
Yeah. Those are all under discussion. Well, how things end up with governments, I'm not a good predictor of how governments behave or what they decide, but certainly aware of all of those discussions. You know, it's kind of before we make significant investments, we wanna have a place to sell the product where we can make a dollar, right? We're not gonna do, you know, make it for $1,000 and sell it for $500. That's. We're not gonna have a company very long if we do those things. We're certainly willing to make investments in the green methanol space. The challenge is there's no market for it today that's willing to pay. That may change, and if that changes, we'll be making investments.
Like I said, it's a bit of a chicken and the egg, but we're looking at all the different technologies out there that are thinking of doing green methanol. The other challenge with the technologies, they're not very scalable, and they're not very reliable, especially the electrolyzers. Lots of issues with the technologies, but you'd have to have some certainty that if you're gonna invest some $ millions in a plant, that you can sell it and make a profit. You'd have to have a contract signed for the, you know, the offtake of that plant that allows the economics to work. Certainly up to now, we haven't been able to secure a contract that allows us even to make renewable methanol from natural gas in Geismar.
Okay, great. Thank you.
Thank you.
Thank you. The next question is from Josh Spector from UBS. Please go ahead.
Yeah, hi. Thanks for taking my question. Just coming back to the US gas hedging strategy and just thinking in the context of Europe and everything that's been discussed earlier, and if the US is part of the 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? To the extent, kind of 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 a offtake gas contract as a part of that? Is that something you'd think about or no?
Been there, done that, wasn't very successful. We are a methanol producer. We're not an exploration and development company. I never say never, but highly unlikely under my watch. The next CEO might have a different view. I never say never, but you know, you can take that as no, we couldn't invest upstream in oil and gas. As far as our hedging strategy, yeah, it'll remain the same. We wanna be hedged for about 65% of our requirements for G1 and G2 and slightly less for G3. We include Medicine Hat in the hedge profile 'cause it's all one market in North America. We are 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. When we get to the range that we think makes sense, we'll continue to do so. There's really no change in our hedging strategy at this time.
Okay, thanks. 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. 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.
Yeah. You know, the benefits for us are obviously unlocked value for an asset that we didn't get any value for. You know, our Waterfront Shipping, which is a fantastic organization and will continue to be a standalone organization, will continue to be able to, you know, manage that and send the ships where we want, et cetera. What MOL got, obviously, is a great customer. You know, they now have a locked-in customer for a long time because they have an ownership position in Waterfront Shipping, and Methanex contracts its shipping to Waterfront Shipping. They got Methanex as a long-term customer, so that really helps with their ideas around, you know, 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. We also get a great shipping partner that's, you know, way larger than us in the shipping industry. You know, we do a lot of backhaul cargos. About a third of what we carry today is not methanol on a backhaul basis. 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. That.
You know, 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.
Got it. Thank you.
Thank you. The next question is from Jason Crawshaw from Polaris Capital Management. Please go ahead.
Great. Hey, John. Good morning.
Good.
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 is selling at 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.
Yeah. We're seeing some of it. Not all of it is getting out. Like I said, it's about 1.5-1.8. We are seeing cargoes out of Finland, more than normal, let's say, larger cargoes, and they're making their way to mainly India and China. Right now, those markets are open for the Russians. They are the lowest priced markets in the world, so de facto, versus what they would have got in 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. Their economics would be not as attractive as before. They were no longer wanting to buy Russian in Europe.
Yeah, some of it's getting out. Like Rich mentioned earlier, this is usually the turnaround season for the Russian plants as they come out of their winter. There'd be less production at this time of the year into the summer anyway. We are monitoring it. We do have really great visibility, because of the ports that we monitor, where the product is coming out of. We certainly wouldn't say all of that 1.5-1.8's been placed in other markets.
Got it. No, that's great. Thank you. I guess the other question is, I mean, I think you mentioned on Geismar 3, I think the number you said is $400 on methanol. It might be like a $325 EBITDA number. I mean, correct me if I'm wrong on that. If that's the case, what's the gas price assumption on that? Is that I mean, you referenced 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 number? Or maybe just give me some color on the economics there.
$3.25 is the number for the gas based on that EBITDA generation. If you have a higher gas in your model, you can, you know, do the conversion. That's based on $3.25.
It's on $3.25 gas. Okay.
Yeah.
For the 65% hedge, just remind me kind of what's the duration of the hedge and, you know, when do those start to roll off and you have to hedge at higher prices?
It's different. Like G1 was a 10-year fixed price contract. G2 was rolling hedges for 10 years as well, for 40%. That's for the site, it was about 65% between the two. Then Madicine Hat it through 2031 on a fixed price for most of the gas there.
Got it. I mean, it sounds like, I mean, I'm gonna have to get my calendar out, but I mean, by and large, it doesn't sound like you're gonna have a substantially unhedged or less hedged position next year or the year out. I mean, is that a fair assumption?
No. That's a very good assumption. Like I said earlier, we've been putting further hedges in for G3, right?
Yeah.
Out in the
Got it.
The second half. Yeah. Yeah, 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.
Got it. No, that's great. I guess the last question is, I mean, you had commented that, you know, you think a fair amount of your competitors don't have the same hedge position, right, in the US, I'm assuming. I mean, do you think the kind of the US methanol price is reflecting the reality of the current spot gas price? Or do you think, you know, if some of your peers have kind of shorter duration hedges, you know, as those roll off, you know, maybe the US methanol price needs to reflect the gas price reality, and who knows what the gas price is?
I mean, I guess in your assessment, the current U.S. methanol price is reflective of what? What do you think kind of the blended gas cost price for the producers? I mean, I know it's a long-winded obscure question, but I mean, how do I think of that?
Yeah. At today's methanol prices in the US, if you're paying $7-$8 for gas, you're still cash positive. Even if they are buying spot gas, but, you know, obviously the margins are really slim at those prices. You'd have to have a view that these $7-$8 gas prices are shorter term. If you got a view they're longer term or higher, then they're gonna be under pressure, which will either lead to shutdowns or higher prices. If you have shutdowns, you're gonna get higher prices. 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, you know, through a hedging and fixed price contracts.
Obviously, when prices were $250, you know, wasn't as attractive for us as it is today. I think our strategy of having certainty and being able to run our plants and service our customers is proving out to be the right one. I'm really glad we're not 100% exposed in North America to spot gas today.
Got it. No, that's great. Thanks for the color and good luck. Appreciate it. Thank you.
Thank you.
Thank you. We ask that you please limit yourself to one question and one follow-up. The next question is from Cherilyn Radbourne from TD Securities. Please go ahead.
Thanks very much, and good morning.
Good morning.
Most of my questions have been answered, but in terms of the discussion on green methanol, was just hoping you could talk about how that influences your thinking about the next project beyond Geismar Three, 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.
Let's say G3 is gonna buy us some time. You know, we wanna 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. As G3 comes on and things normalize, you know, that'll satisfy our growth needs for quite some time. As well, our focus will be on getting our idle plant in New Zealand and Trinidad restarted. That'll technically be growth for us today 'cause they're idle today. That'll be our focus. As far as the green methanol, like I said earlier, it's small scale. I think the largest that you could do that we're aware of for a CRI type plant is 100,000 tons.
That's 18 Geismar threes. The capital cost versus Geismar Three will be substantially higher. You know, I think the other issue, you know, carbon intensity and emitting carbon, and you're making 25-year investments, what's the world gonna look like from a carbon tax point of view, et cetera. All of those things are gonna go into our decision-making, you know, and certainly the locations that we would choose, you know, may be impacted by carbon tax regimes. You know, our view is probably the world will always end up being, you know, somewhat having the same carbon price, whether it's through import duties or whatever. The other option we have to really lower our carbon footprint is carbon capture and storage.
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 and operating costs, but we have a team looking at those this year, and that would reduce our carbon footprint significantly, 80%-90%. Those are possibilities in North America. We don't have the same kind of structure in some of the other regions 'cause there's, you know, not as plentiful reservoirs today. We'll look at it for North America. If it makes sense there, then we'll think about expanding it. Our teams are looking at other things we can do to lower our carbon footprint and intensity. But, you know, the chemistry is the chemistry for our existing plants, and there's only so much you can do.
The biggest bang we would make was carbon capture and storage. We're also gonna be testing out some new equipment. We think even with, you know, G3 is down to 0.4 a ton of CO2 per ton of methanol by changing some equipment and, you know, we think we can get it down to 0.2 for any new builds. We got to prove out that equipment over the next coming years. Then if you buy renewable energy in the area, you can almost get to a zero carbon footprint using natural gas.
There's many pathways we're looking at here, you know, and obviously, we're gonna look at everything and consider everything and look at the economics and make decisions around what makes sense for the, you know, twenty years from now, when, you know, we'll have to make some guesses around what the regime might look like.
Great. 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.
Yeah. Right now, the upstream and the government are negotiating. Their contracts are coming up this year. You know, until that negotiation gets finalized, I would say it's unlikely you should expect us to secure a gas contract to allow that to restart. Those contracts will be negotiated this year. You know, the government has told us they want to keep all the downstream alive, and they just need to, you know, have their contracts renegotiated with the upstream, and that's ongoing. We're continuing to dialogue with the government, and our intent is to get gas at an economic price that allows us to operate Titan through the cycle, and that's what we're focused on.
Thank you for the time.
Thank you.
Thank you. The last question will be from Matthew Blair from Tudor, Pickering Holt. Please go ahead.
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, you know, some of the outages and planned maintenance from Q1? I think you also tend to have an inventory release in Q2. Or do you think that would all be offset by, you know, probably lower production at Chile just due to seasonal factors?
Yeah. You're talking about our produced molecules. You know, it's really hard to guess even this far into the quarter because of the way the FIFO layers work around the world. You know, if we do have less of our produced molecules in our sales, traditionally there is a product release from our produced inventory. I'd say going into this quarter, if I look at the makeup of our inventory, we have much higher produced inventory today than we normally would entering into a quarter. I'm not sure how it's all gonna work out, and I don't really pay that close attention to it because I think we're longer term. You know, to me, every molecule we produce today, we're making $200 a ton in EBITDA, so that's what I focus on.
What quarter it gets in and how it flows, that's above my pay grade. I'm really focused on making sure we run the plants reliably and safely and get that product to our customers.
Sounds good. I'll leave it there. Thanks.
Thank you. 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 secure and reliable methanol 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 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 our strategy to deliver significant value to our shareholders. Thank you for joining us today, and we'll speak with you in July. Thank you for the interest in our company.
Thank you. The conference has now ended. Please disconnect your lines at this time, and thank you for your participation.