Methanex: A Way To Capitalize On The Oil/Gas Price Gap

 |  About: Methanex Corporation (MEOH)
by: Philip Mause

Methanex (NASDAQ:MEOH) posted very strong numbers for the fourth quarter of 2011 and for 2011 as a whole. In the fourth quarter, Methanex earned 68 cents per fully diluted share resulting in $2.06 earnings for the year as a whole. I have written in more detail about MEOH in previous articles here and here.

Methanex is the dominant player in the methanol industry, providing production, transportation and marketing. It sells methanol throughout the world using a fleet of specialized tankers and produces and stores methanol as well. Methanol is a liquid with a number of important industrial applications, it can also be used as a transportation fuel either alone or more frequently blended in with a petroleum-based fuel. China is moving toward using a methanol blend as a transportation fuel on a large scale. The demand for methanol has been strong and Methanex's management believes it will continue to be strong.

Methanex makes more money on the methanol that it produces and sells than it does on the methanol it buys and resells- and it can sell much more than it currently produces. The big issue going forward is whether production can increase, thereby providing a powerful tailwind to profits.

Methanex has production facilities in Chile, Trinidad, Egypt, Canada and New Zealand. It is planning to deploy a production facility in the United States. A number of the existing facilities are operating below capacity, achieving greater production from these existing facilities would, of course, be enormously positive for profits.

The history of Methanex's facility deployments and production issues provide a good lesson in the problems and opportunities associated with natural gas. Often, the strategy is to try to find "stranded gas" (natural gas that is being produced in a location in which it cannot be readily used), negotiate a contract for the purchase of the gas at an attractive price, and then construct a methanol plant.

The problem is that, in the time it takes to construct the plant, circumstances can change and new uses for the natural gas can emerge or supply can be reduced. Methanex has confronted a nightmarish scenario after making a big investment in Chile. And it is still pursuing strategies to achieve a higher capacity factor at its plants. I won't go into detail, but Methanex's problems provide a warning to any investor with plans to capitalize on the "natural gas glut." The history of oil and gas is a history of gluts turning into shortages and back into gluts and, if read carefully, will make an investor very humble.

Methanex is very profitable at current levels of production and should be able to increase production using a variety of strategies including the addition of a plant in the United States. Methanex pays a 2.5% dividend and so an investor is being paid to wait.

Disclosure: I am long MEOH.