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Gurus and Methanol Say No to Methanex

March 20, 2014 | About:

For quite some time now, global warming has become a common lexicon. The fear of an unsustainable world due to pollution and radical weather has fueled the search for alternative fuels. The incentive drove individual and corporate efforts to develop and propose some interesting solutions. Biodiesel, bioalcohol, fuel cells, hydrogen, vegetable oil, among other fuels are considered substitutes for fossil fuels. Nonetheless, neither alternative has developed sufficient acceptance or the necessary infrastructure to serve the world market. In the USA, the latest alternative to be proposed has been methanol from natural gas. Should the proposal garner enough support at Washington DC, it would be a game changer, especially for Methanex (MEOH). So far, lawmakers have not been too moved by the idea, and analysts argue that intense lobbying will be a key to reverse their opinion.

Gurus’ Dumping and Operational Difficulties

Through much of 2013, major shareholders for Methanex have reduced their position if not opted out. John Burbank (Trades, Portfolio) and Renaissance Technologies opted out, while Steven Cohen (Trades, Portfolio), Scott Black (Trades, Portfolio), Pioneer Investments (Trades, Portfolio) and Joel Greenblatt (Trades, Portfolio) considerably reduced their positions. And Louis Moore Bacon (Trades, Portfolio) has been the only new investor through the same period. So, gurus do not expect the configuration of an abnormally favorable environment to the firm.

Nonetheless, Methanex has started a relocation process and restructuring policy with the hope of taking advantage of any market synergy. That is, two methanol producing plants located in Chile have been dismantled and management hinted that assembling will be completed in Louisiana. “It would help if people on the Hill understood the value to the consumer and the importance in the fuel mix,” added John Hofmeister, founder of Citizens for Affordable Energy and president of Shell Oil Co. from 2005 to 2008. Through a benevolent judgment, the decision is a shot in the shadows.

Under the light of a big structural gamble, Jefferies Group confirmed Methanex’s “Buy” rating. Zacks and MorningStar however, were more cautious and gave the stock a “Neutral” and “Hold” rating. Hence, opinions over future performance are divided and concomitant with current operational difficulties: a mismatch between upstream commitments and downstream demand from customers in Trinidad, periodic natural gas supply restrictions since mid-2012 in Egypt, and insufficient natural gas feedstock in Chile.

What Can Be Expected?

Healthy demand and higher methanol pricing boosted top and bottom lines swung Methanex into a profit in the fourth quarter of 2013. Additional benefits are expected to derive from operations in China, capacity boosting policies, and asset relocation. "With over $700 million of cash on hand, an undrawn credit facility, robust balance sheet, and strong cash flow generation, we are well positioned to deliver on our growth projects, continue to grow our business and deliver on our commitment to return excess cash to shareholders,” John Floren, President and CEO of Methanex commented. But, what is there is not enough gas?

It is no secret that Methanex has confronted great supply issues. As mentioned above, facilities at Chile, Trinidad, and Egypt have not operated at full capacity. Feedstock shortage, supply-demand mismatch, and political instability have been the reasons behind inefficient production. And, while assets in Trinidad remain under the firm’s total ownership, a 50% interest of Egyptian assets has already been sold, and capacity in Chile is being relocated.

Trading at 19.4 times its trailing earnings, Methanex’s stock carries a 17% premium to the industry average. Also, overall performance has been troubled through the last 3 years, by a high debt with unstable revenues and net income. Overall, gurus’ decision to dump the stock responds to an unfavorable context loomed with uncertainty, indicating that a long-term investment is inappropriate at this time.

Disclosure: Vanina Egea holds no position in any of the mentioned stocks.

About the author:

Vanina Egea
A fundamental analyst at Lone Tree Analytics

Visit Vanina Egea's Website


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