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I first wrote about Methanex (NASDAQ:MEOH) in March, 2011. When my article came out, MEOH was trading at $28.35. Friday, it closed at $42.19 after a strong 2012, a solid first quarter of 2013, and a nice dividend increase.

A few introductory points. MEOH is a Canadian company which produces, markets, transports and stores methanol. Methanol has a number of chemical applications. In recent years, there has also been growing demand for methanol as a substitute for petroleum based transportation fuels. Methanol is made from natural gas and so the enormous BTU price differential between petroleum and natural gas has created a strong incentive to switch from diesel and gasoline to methanol in transportation applications. MEOH is by far the largest player in the methanol space and, looking forward, accounts for roughly half the planned additional capacity slated to come on line between now and 2016.

MEOH's strategy has been to try to find "stranded gas" (natural gas supply in a location where there is no corresponding demand), execute a long term purchase contract and then make the considerable investment in a plant. This strategy has taken the company to New Zealand, Trinidad, Chile, Egypt and Canada. In my article, I suggested that the company consider taking a considerable risk and locate in a new venue. The country I described had plentiful natural gas but had some negative risk factors. It has a very dysfunctional political system, some serious infrastructure problems and a complex legal system which is not always business-friendly. It has had a ruinous civil war and the scars may not be healed as the flag of the losing side is still widely flown in some parts of the country. I felt that the natural gas supply situation outweighed these serious negative factors and so I urged the company to consider this new location. I am happy to announce that MEOH now has plans to build two plants in the United States. These plants are to be built in Lousiana and will provide jobs and needed tax revenue, so all I can say is "Welcome to the United States of America!"

The MEOH story is strong one because the world demand for methanol is strong and getting stronger. Several factors are at work. In China, mixing methanol with gasoline seems to have become the dominant "alternate fuel" strategy and it is creating an enormous demand for methanol. China has its own methanol plants but some of them run on coal and are expensive to operate. China's demand and expensive capacity tend to put a floor under the world methanol price and it is a floor on which MEOH can be quite profitable. There are also MTO (methanol to olefin) plants in China consuming large quantities of methanol. Another new development is the adoption of methanol as a ship fuel in the Baltic. Methanol will displace bunker fuel on certain ferries and very likely other ships over the next few years. An investor interested in doing more research should examine MEOH's recent annual meeting transcript, and its recent conference call transcript.

MEOH has estimated that the demand for more methanol over the next three years is roughly twice as large as estimated capacity additions so the price should be solid. As more MEOH capacity comes on line, cash flow should ramp up sharply. MEOH is already trading at a reasonable PE multiple of 17.5 times adjusted twelve month trailing earnings, which is not outlandish for a company which has been growing and has a clear path to future growth. MEOH recently increased its dividend and pays 80 cents a share for a dividend yield of 1.9%. It is a shareholder friendly company which bought back a substantial volume of its own stock in the last decade. MEOH could very well hit earnings of $5 a share and a price of $75 by the time its planned capacity comes on line in 2016. It is also an attractive takeover target for one of the major oil companies or for a large chemical company. Needless to say, I am long MEOH.

Source: Methanex Is On A Roll