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I have been a fan of Methanex (NASDAQ:MEOH) for a while (writing about it here and here) and it seems to be paying off nicely. MEOH reported solid results for the 4th quarter and moved $1.61 a share to close Thursday at $35.85. Adjusted net income came in above expectations at 64 cents a share and consensus earnings for 2013 (reported by Yahoo Financial) are $2.60 a share. I am convinced that MEOH could move up nicely from here.

My thesis on MEOH is relatively simple. In many parts of the world - including the United States - natural gas is plentiful and cheap. On the other hand, petroleum is still relatively expensive. The price gap between the two which traditionally was 10 to 1 (one barrel of West Texas crude versus 1 mcf of natural gas at the Henry Hub) is now 30 to 1 or more. In the Middle Ages, there was a constant investigation of alchemy - a desperate search for a chemical process to turn other substances into gold. In the modern energy market, there is a similar search for processes to turn natural gas into a liquid fuel that can be used in the transportation market. MEOH dominates what may be the most promising process - the conversion of natural gas into methanol.

Methanol has a number of industrial applications but the real growth potential is as a transportation fuel. China is already mixing methanol into the gasoline supply on a massive scale. A number of other countries - including Israel - are also moving in this direction. Chinese demand virtually guarantees a strong market for the foreseeable future. The Chinese make methanol from coal when they cannot buy methanol on the world market. The coal process is expensive as it tends to put a floor under the world price of methanol.

MEOH markets, transports, stores, and produces methanol. It has a fleet of specialized tankers and it has expertise in the production process. It makes more money when it can produce rather than resell the methanol that it markets.

MEOH's corporate strategy has generally been to look for sources of "stranded gas" - natural gas produced in areas where there is no ready market - and to build methanol plants in such areas. It currently has plants in Chile, Trinidad, Egypt, Canada and New Zealand. It ran into big problems with its plants in Chile because the plants relied on imports of natural gas from Argentina and Argentina imposed export controls on natural gas (does this sound familiar?). In the fourth quarter of 2012, MEOH took a big write off on its Chile investment and posted a GAAP loss. The market seems to have been smart enough to ignore this one time event and look behind the numbers.

MEOH has current plans to move one of its Chile plants to Louisiana and take advantage of cheap U.S. gas supply. It has just entered into a 10 year supply contract with Chesapeake Energy (NYSE:CHK). The plant will probably come on line in the second quarter of 2014 and will add about 20% to MEOH's production capacity. MEOH is considering a second plant in the same general location. If these two plants both come online, the increased production could enable MEOH to achieve EBITDA of between $1 and $1.6 billion a year depending upon pricing and other factors. With a market cap of only $3.4 billion, MEOH obviously stands to move up nicely if this scenario plays out. Its current and planned production and financial information are discussed in its recent conference call.

With a 2.1% dividend yield, a dominant market position, solid financials and a very achievable growth strategy, MEOH is a very attractive investment. MEOH has the enormous advantage of selling into a market which it dominates, which is growing rapidly and under which there is a solid price floor. Put another way, unlike many other companies, MEOH doesn't really have to spend any money trying to persuade customers to buy methanol. MEOH is, of course, an attractive acquisition target for either a large chemical company, a large natural gas producer or one of the major oil companies. But the bullish case doesn't depend upon the possibility of an acquisition. This is one of my strongest recommendations.

Source: Methanex Can Move A Lot Higher