Methanex Corporation (TSX:MX)(NASDAQ:MEOH) is in the inherently volatile industry of methanol production. Still, the company trumpets its 15% global market share with most of its major competitors being high-cost, state-owned producers. This strong competitive position has allowed the company to grow its dividend from $0.62 per share in 2010 to $1.10 today, resulting in a 3.3% yield.
Over that time, Methanex has also doubled its EPS to $2.01 a share, implying that shares trade at roughly 16 times earnings.
Despite this impressive historical growth, shares have had a tough showing recently and are down 30% in the past 30 days with a total fall of over 60% from its highs set last year. Is this a buying opportunity?
This time it’s different
Roughly 60% of demand for methanol comes traditional sources such as lubricants, formaldehyde, and paints, while the remaining 40% stems from primarily energy-related sources such as bio diesel and fuel blending. It doesn’t have to be said that serving the energy industry lately has become a lot less lucrative. Not only has a supply glut driven down profitability for producers, but major demand drivers such as China seem to be slowing down.
Chinese growth is now headed for its weakest pace in 25 years. “In China, you had 1.3 billion people industrializing, something on that scale has never been seen before,” says Andrew Lapping, the chief investment officer at Allan Gray Ltd. “But there’s just no way that can continue indefinitely. You can only consume so much.” The fall in consumption growth has pummeled commodity prices with the Bloomberg commodity index hitting levels not seen since 1998.
Unfortunately for Methanex, the China story is imperative for methanol because 43% of global demand stems from China with another 21% from nearby countries. While the company still expects China consumption to grow, that hasn’t stopped the market from driving methanol prices down to just $249 a metric tonne. Last year prices were nearly double that.
The price drop may be here to stay
Any investment in Methanex would hinge on methanol prices rebounding. At current levels the company would likely generate negative EBITDA and free cash flow. In fact, the company’s presentation from December uses a sensitivity analysis that only prices methanol down to $350 a metric tonne, an indicator that management has been blindsided by recent volatility.
If you want to bottom pick the stock with expectations of a price reversion, think again. The last time prices reached these levels was in 2009 when nearly every commodity was oversold. Prices went on to rebound within a few months, but continuing China demand was there to backstop things. Without the China story, things get pretty ugly.
In the years preceding the Chinese growth explosion (2001-2003), methanol prices only averaged around $200 a metric tonne, hitting lows of $120 a tonne in February of 2002. Methanex stock during that time was under $10 a share. Over the next decade, however, the company experienced selling prices that were consistently over $400, putting them into cash flow-positive territory. The stock hit all-time highs of $75 in 2014. That growth period looks to have come to an end.
If the commodity super-cycle is indeed over and China’s consumption rate continues to normalize, don’t be surprised to see lower methanol prices for longer. If that’s the case, Methanex would be massively overvalued at its current $34 a share with the long-term viability of its dividend in doubt.
