Methanex: Worth Another Look

After much searching I found a stock screener for Canadian stocks (more on this in another post). I was able to assemble a Graham style screener with the following criteria:

• Exchange TSX
• P/E less than 15
• Dividend Yield > 3.5
• Average EPS > 33%
• Revenue > $550M
• Current Ratio > 2
• Price/Book Ratio less than 1.5

Up popped two companies, one of which is Methanex (MEOH). Showing up on the screener is not sufficient to merit my investment. So here is the abridged version of my analysis. Before diving in though, I am compelled to say that I never analyze a company with the intent of buying and selling it within a few months. Also please, please this is my analysis, any investment you make should supplement what I present here and possibly involve consulting your own investment consultant.

Company Intro

Methanex is in the business of extracting and shipping methane (surprise). Methane is the central component in natural gas (about 87% by volume). Its principal use therefore is in heating and energy production in addition to a number of industrial uses.

Company Fundamentals

• P/E ratio 3.12
• Yield 5.69%
• Average EPS Growth Rate 650% - only 6 yrs available here are the exact numbers:
• EPS 3.63 (2007), 4.4 (2006), 1.39 (2005), 1.95 (2004), 0.06 (2003), 0.18 (2002)
• Growth Rate -17.5% (2007), 216.55% (2006), -28.72% (2005), 3150% (2004), -66.67% (2003)
• Avg EPS 5yr growth rate 86.3%
• Revenue $2250.99M (2007)
• Current Ratio 2.79 ($988.59M / $354.42M) See here for how this was calculated.
• Price/Book =.76
• Return on assets 12.92
• Return on Capital 2007 1.47 ($2266521 /($2869899 - $1335354))

Revenue Looks solid and continues to grow.

Interesting pattern here.

Analysis of General Market

As Methanex essentially trades in a commodity, it is worthwhile to look at the overall health of the industry:

Data collected from: http://www.methanex.com/products/documents/MxAvgPrice_Dec232008.pdf

We see then that generally last year was a good year for the sales of methane with an average strike price of $1.65 compared to the year before of $1.42. There is some cause for concern though with the January prices receding back to $.70, a price not seen since December 2003.

Understanding How the Company Came to be Cheap

• Working with Argentina: Reading the company's financial statements one can see that a large part of the business in based in Chile. Chile has, in the past, been refining Argentinian gas. Argentina though has for the past few years blocked the export of gas due to concerns over a possible shortage within its own borders. As a result Methanex claims that its plants in Chile ran at around 60% of max production. Reading some more on this, it appears Chile has made great efforts to make itself fully independent of Argentinian resources over the last few years and should continue to do so in the future. One news story quoted a senior Chilean government representative as saying they would be gas independent of Argentina by the end of 2008. As such we should expect that this 60% should grow steadily in the future closer to the company average of 87.1% it has been running over the last 10 yrs.
• Refinery in New Zealand: Methanex has a refinery in New Zealand - after having fired it up earlier this year, it appears to have shut it down again this quarter. This news appears to have scared off some investors but in my opinion this appears to be just a prudent business decision based on market conditions. In reviewing Methanex's financial statements, starting and stopping facilities appears to be a regular activity with a plant in Canada currently offline.
• Softening in the Price: As we can see from the chart above the price of methanol has dropped off substantially for January of 2009.
• Global Downturn: Every area has seen a downturn over the last few months.
• Possible End of Year Capital Gains Losses: As we are at the end of the tax year investors tend to sell more than they buy so as to assume the necessary tax losses.

Other Opinions on Methanex

President Lincoln believed in surrounding himself with people who did not necessarily agree with his opinion. I believe this is one of the best ways to test your research. I would encourage you to read the following, please keep in mind that some of these links refer to the American stock, not the Canadian, so prices targets will differ:

• Methanex falls on analyst's cut of profit estimate
• Methanex in proper value range
• Methanox "outperform," target price reduced
• Zacks Analyst Blog Highlights: L-3 Communications Holdings Inc., Methanex Corp., Union Pacific Corporation, Cypress Semiconductor Corporation and SunPower.
  

Summary Comments

Negative

• Methanex was incorporated in 1992 - traditionally I like to see a company with a longer history.
• Methanex started paying a dividend in 2003 so the history of a long consistent dividend is not there.
• The methane market has gone soft, like everything else.
• Methanex is likely to report negative results for the year.

Positive

• Methanex has never decreased or canceled a dividend, and it has also raised its dividend each year since inception by an average of 21.2% (usually in the second quarter of the year).
• Methanex has been buying back its own stock since 2004.
• The issues in Argentina appear to be coming to a conclusion with the Chilean government stating it would not be dependent upon Argentinian gas by the end of 2008.
• While industry is the largest consumer of electricity and a global downturn will decrease residential energy needs will most certainly be a constant.

Disclosure

At the time of writing the author is in the process of purchasing Methanex.

Have an opinion on this stock? Please leave a comment, I would love to hear from you.

Comments

[Bobbejaan:]

Your analysis contains a number serious fundamental flaws. Firstly Methanex are not in the business of "extracting and shipping methane". Rather it is a producer of methanol (also known as MeOH), using natural gas. So its main feedstock is natural gas. That is also why they shut their plants in New Zealand, a lack of natural gas in New Zealand - now operating at reduced capacity again.

The company's fortunes, or misfortune, lies with the price of methanol, a commodity used in the petrochemical industry.

Jan 19 03:59 AM

[john s. gordon:]

there could be a future oversupply of methanol if waste gas from persian gulf oilfields is converted (the conversion is easy) to methanol, which can be shipped anywhere by tanker. it is toxic to fish; no spills allowed.

methanol is an excellent combustion-turbine fuel & can be converted to high octane gasoline using the MobilMTG process.
> jack

Jan 19 09:06 AM

[kotika98:]

You are wrong to worry about dividend: Methanex is a dividend powerhouse. Management sees paying and growing dividends as their mission, and cares much less about stock price. I like that.

On the negative side, you state "Methanex is likely to report negative results for the year." I am not sure how you got to this conclusion, but keep in mind that although methanol is commodity product, Methanex is the dominant producer - 60% worldwide market share. They are also the lowest cost producer. These two things mean that they will never be operating at a loss - all other competitors will shut down before they do, and they themselves can shut down as many plants as necessary to balance supply and demand. In any case, noone ever would operate a methanol plant at a loss.

So, in all, an operating loss for the year 2009 is possible, but only if the price collapse is accompanied by volume collapse of 50-60% - something i think is impossible gives current world 2009 GDP projections.

Jan 19 01:49 PM

[Diegojames:]

MEOH OR METHANOL CAN ALSO BE USED IN FUEL CELLS; IT IS CHEAP AND CAN BE MIXED WITH WATER TO AVOID COMBUSTING-BURNING.
IT IS A SOLVENT AND COULD BE USED TO POWER A HYDROGEN CAR. SOME BRIGHT GUY MAY BE ABLE TO COMPARE THE VIABILITY OF IT AS A COMPARATIVE FUEL.
BUT IT IS LOW ON THE POLE AS A FUEL TO AMERICA.
dIEGOJAMES
PORTER RANCH, CALIFORNIA

Jan 19 11:13 PM

[User 340660:]

Methanex uses methane(gas) as a feed stock and produces and ships methanol(liquid) your article stated they extract and ship methane. Details count. Thanks.

Jan 20 01:45 AM

[Nerv:]

The fundamentals are against Methanex. The number one use of methanol is in formaldehyde production which is in turn used to treat wood used in construction. This market is one that is obviously not strong right now. It is also directly correlated to fuel prices as it can be used directly as a fuel, or converted into the fuel additive MTBE which I believe is still used in Europe, though not in North America.

They are having a hard time getting cheap Argentine gas to their Chilean plant - a problem that doesn't look like it's going away any time soon, and they are competing with 2 Middle Eastern mega plants that just came online.

Jan 30 04:36 PM

[Jim C.:]

It is correct that Methanex' only product is METHANOL, a liquid, and not methane, which is a gas. Methanol is produced from natural gas and Methanex has had to close 3 of 4 of its New Zealand production units and also 3 out of 4 of its Chilean plants because of a lack of this feed stock. No real relief is in site for the foreseeable future. Granted, Methanex may be the largest seller of methanol in the world but, because of the units sidelined, it is no longer the largest producer.In order to cover its sales committments Methanex has now become the largest BUYER of methanol in the world at about 2.5 million metric tons last year. This makes them notheing more than a market intermediary or methanol trader by buying and selling a global commodity. However, global spot methanol prices, the market Methanex purchases from, are currently below contract prices that provides Methanex an attractive arbitrage. Also a plus for Methanex is their Waterfront Shipping sub that was an anchor around its neck because of the plant shutdowns but now those vessels can be put into the clean petroleum products market, but that also has downwards pressure.

Feb 04 11:56 AM

[PIPELINEBOB:]

I am looking for their debt/equity ratio. Currently they are in the bond market and I am attempting to gauge the safety of the investment. Any comments?

Feb 24 09:56 AM