On Jul 4, we downgraded our recommendation on leading methanol producer Methanex Corporation ( MEOH) to Neutral. While Methanex is poised to gain from capacity expansion and its Geismar methanol project, its exposure to natural gas curtailment issues leads us to tread with caution.
Why the Downgrade?
Methanex, on Apr 24, reported lower-than-expected first-quarter 2013 results with both revenues and earnings missing Zacks Consensus. Estimates. Profit, however, more than doubled year-over-year, helped by lower costs and higher pricing.
Methanex benefited from growing demand for methanol in the energy industry. However, restricted supply of natural gas affected its operations in Chile, Trinidad and Egypt in the quarter.
Methanex, which carries a short-term Zacks Rank #3 (Hold), is the world’s largest supplier of methanol. We feel that the company may continue to face gas supply restrictions in the near term.
Methanex’s production has been crippled by shortage of natural gas supplies in various regions. It expects short-term natural gas curtailment issues across a number of operations. The gas supply outlook in Chile is more challenging and Methanex’s decision to idle its Chile operations remains in place due to the lack of natural gas feedstock.
Nevertheless, the methanol industry and its pricing environment appear attractive in the longer term as global demand is expected to surpass new capacity additions. Despite the global economic weakness, demand for methanol remains healthy driven by energy-related applications in Asia, particularly in China.
Methanex has also taken up a number of steps to boost capacity. The company is progressing well with the relocation of the first Chilean plant to Geismar, La., and recently announced the relocation of the second Chile plant. The Geismar project is expected to create significant value for its shareholders.
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