Methanex Corporation

Moat: 2/5

Understandability: 3/5

Balance Sheet Health: 3/5

MEOH is a global supplier of methanol, a key chemical building block used in various industrial and consumer products.

Investor Relations Previous Earnings Calls

The moat, understandability, and balance sheet health scores reflect a conservative evaluation to ensure a margin of safety in any assessment.

Business Overview:

Methanol is a foundational chemical used in a variety of applications. It’s a key feedstock for chemicals like formaldehyde and acetic acid, which are then used in products from adhesives and plastics to solvents and synthetic fibers. Methanol also serves as a transportation fuel, particularly in China where methanol-based blends see higher adoption. Additionally, methanol is an energy source, increasingly finding its niche in marine fuels and even power generation.

  • Revenue Distribution: MEOH’s revenue is generated from the sale of methanol, which is typically sold under long-term supply agreements and spot market transactions.
  • Industry Trends: The methanol market is sensitive to several factors, with raw material costs being a major influence. Natural gas, the primary feedstock for methanol production, has seen volatility in recent years, impacting both methanol production costs and prices. Geopolitical factors, particularly those that influence natural gas supply and global trade, can also introduce instability in the market. The pace of economic growth can also impact the demand for methanol, with economic downturns leading to lower volumes and pricing. In addition to these influences, growth in end-use sectors like the chemical and fuel markets and changes in government policies, which have been trending toward cleaner fuels, will also affect the overall methanol market. MEOH stands to benefit from environmental trends and increased use of methanol as a fuel.
  • Competitive Landscape: The global methanol market is fairly consolidated with a few large players, such as MEOH, Methanol Holdings, Sabic, and OCI, dominating the market. Each company has somewhat different regions where they have more influence. Some players are integrated meaning that they own not only the methanol-producing plants but also the gas wells that supply those plants (or own the pipelines) for their plants as well. Most players engage in long-term supply contracts and spot sales. MEOH’s strategy to have access to key inputs such as natural gas and its established position should help the company maintain an edge against competitors. The industry’s cyclical nature and susceptibility to commodity price fluctuations does cause most players to be price takers. MEOH’s efforts to diversify its supply chain will allow them to have a more secure and reliable position in the market and provide a higher margin.
  • What Makes the Company Different: MEOH stands out due to its diverse geographical production footprint and global distribution network. The company has facilities in North America, South America, the Caribbean, and Asia. Furthermore, MEOH’s integrated supply chain, long-term contracts with natural gas suppliers, and investment in production capacity enhancement are core elements of its strategy. The scale, diversification, and low costs are the company’s key advantages, but MEOH relies heavily on access to natural gas, which can be volatile.

Moat Analysis: 2 / 5

MEOH possesses a Narrow Moat. This rating acknowledges the company’s ability to generate above-average returns due to some advantages but with limitations. The company does have some advantages over their competitors, yet are not truly unique and don’t provide a strong and wide moat against other players in the same space.

  • Intangible Assets: MEOH does not have strong intangible assets that can create a wide moat. Although it has been in the methanol business for a while, their brand does not carry a premium as there is no consumer facing branding.
  • Switching Costs: The switching costs for companies that buy methanol from MEOH are relatively low. Companies can easily buy from competitors, making the industry prone to price competition.
  • Network Effects: MEOH’s business does not benefit from network effects.
  • Cost Advantages: The company has some cost advantages due to its diversified production portfolio and long term contracts with natural gas suppliers. But competitors also try to be as efficient and find locations with cheap resources as well. MEOH’s recent issues with production in some plants proves that those costs can quickly disappear.
  • Scale Advantage: MEOH benefits from economies of scale, and these can provide a long-term cost advantage. They also benefit from the size of their supply and distribution networks.

Risks to the Moat and Business Resilience:

  • Commodity Price Volatility: MEOH’s business is heavily influenced by fluctuations in natural gas prices and methanol prices. Both are prone to volatility due to a myriad of factors, including geopolitical events, weather, and global demand shifts. In a rising commodity market, MEOH might perform extremely well and achieve large profits. But in periods where prices are falling, they will severely reduce profitability.
  • Dependence on Natural Gas: Natural gas is a key input for Methanex’s production. Any supply chain issues, bottlenecks, or sudden price surges will have severe impacts on the company’s performance. MEOH has been trying to mitigate this by sourcing gas from different parts of the world, but this can create other challenges as the supply chain becomes more complex and long.
  • Environmental Regulations: Government regulations relating to carbon emissions could add compliance costs and further volatility to input costs. Although methanol has been used as an alternative to traditional fossil fuels, new laws may impact the use of methanol and their competitive advantages.
  • Competitive Pressure: The methanol market is highly competitive with many established companies already in the space. These companies are always competing and trying to find a cost advantage to increase profitability. New entrants and competition from emerging economies also present a threat to profitability.
  • Production Issues: MEOH has faced recent problems with several plants failing due to unforeseen reasons. These plants represent important revenue for the company, and these issues might impact profitability and their ability to create and sustain free cash flow.
  • Recession Risk: MEOH is a cyclical company. If the broader economy suffers from a major recession, the demand for their products might come down and put a lot of strain on their financials.
  • Technological Innovation: The rise of new and disruptive technologies, or a major shift in the product mix, can leave MEOH’s current products obsolete in the long run. The technology must be monitored at all times.

Financial Deep Dive:

  • Revenue Trends: MEOH’s revenue is primarily tied to the methanol market and prices, and hence tends to show strong cyclicality. Although, MEOH’s efforts to expand market share in new regions and focus on long-term contracts helps increase stability. MEOH has also benefited from increased demand of methanol as an alternative fuel.
  • Profit Margins: Profit margins are dependent on the spread between natural gas prices and methanol prices. Higher prices of methanol over natural gas benefit MEOH, but high natural gas prices will shrink profitability.
  • Operating Expenses: Operating expenses have remained relatively stable and seem dependent on their production capacity.
  • Capex: Capex has remained consistent in the years before 2020, where they had a few projects ongoing. However, capex has decreased as these projects are now operational. Any major infrastructure investments will drive up capex in the near term.
  • Free Cash Flow: FCF has followed a cyclical pattern and is a direct reflection of the company’s operating profitability. Free cash flow fluctuates with volatility in the market. MEOH is not consistent in generating FCF, even though it is a profitable enterprise, they tend to reinvest a lot in capital improvements, which greatly affects FCF.
  • Debt to Equity: Debt levels are relatively low and don’t seem to be a concern, it is also within their established target range. MEOH does seem to have a more conservative stance on debt.
  • Liquidity: MEOH maintains a relatively low cash level on their balance sheet.
  • Return on Invested Capital: ROIC has been impressive in the years when methanol prices were elevated. ROIC does seem to trend in the market with price volatility.
  • Stock price: The stock is currently priced well below the historical levels, which indicates an undervaluation. But this must be considered in the light of the cyclicality of the industry and possible impacts in the future on the business fundamentals.

Understandability: 3/5

The company’s operations are relatively easy to grasp but there are several things that an average investor might need time to grasp.

  • The overall supply chain is simple (Natural Gas > Methanol) but does have complexities. MEOH also has operations spanning various continents.
  • The company’s sensitivity to both natural gas and methanol market prices can be a bit difficult for the average person to see through.
  • The effects of regulations, geopolitics, and macroeconomics on the business fundamentals may seem tricky.
  • The specific processes of producing methanol are not that hard to understand, but getting all the inputs needed for valuation can be a tedious process.

Balance Sheet Health: 3/5

  • While MEOH maintains a decent cash position and the debt levels are acceptable, it has been spending a lot on capex and hasn’t been producing a reliable track record of positive free cash flow.
  • The balance sheet is healthy, with the company having a relatively low debt level and significant liquidity but it needs to improve its free cash flow in the future.
  • Some recent impairments to assets could have a negative impact on the balance sheet, but are deemed to be one-offs. MEOH has also indicated that it will attempt to sell these assets, and will therefore see some cash influx.

Recent Concerns/Controversies/Problems:

MEOH has recently had some operational hiccups in its production plants, which is a major concern as this will disrupt operations. Management believes that these are due to unforeseen operational issues and that production should return to normal. Also, the CEO has announced a change in role, and the incoming CEO needs to be verified in the eyes of the market.

This recent information is highly critical and has to be taken into consideration when considering an investment in MEOH.

Conclusion:

MEOH operates in a highly cyclical industry, and that’s why any financial analysis needs to take into account both the cyclicality and the company’s internal capabilities and actions. MEOH possesses a narrow moat that protects their profitability, which is mostly driven by cost-advantages as the industry does not have high switching costs. The business model is relatively easy to understand, but understanding their financials can be a bit tricky as it involves several nuances. MEOH has a decent balance sheet that is neither too strong nor too weak, and recent news is of importance. The business is reasonably sound, and with an emphasis on long-term sustainable growth, it could do better in the future.