Me mind on fire,
Me soul on fire
Feelin' Hot Hot Hot!
Arrow
The world’s
largest supplier of methanol, Methanex (MEOH), reported third
quarter financial results earlier this week.
The multi-continental operation recorded a $10 million net loss on $1.8
billion in total sales in the three months ending September 2019. The numbers were disappointing as about an
equal level of production in the same quarter last year produced significantly
higher revenue and profits. Declining
methanol selling prices was cited as the primary cause of top-line erosion and
shrinking profit margins.
What is
management’s solution to flagging performance?
Expansion! Methanex is building a third production facility in Louisiana
next to two existing facilities. The
location gives the company easy access to natural gas supplies and makes it
possible to leverage existing operational and managerial talent. When the third facility comes online, production
will be expanded by 1.8 million metric tons.
Management also disclosed during the recent earnings conference call
that a new natural gas source has been pinned down to supply the company’s
Chile production facilities. The Chile
plant is undergoing refurbishment.
Methanex
leadership is likely taking a long-term view on methanol demand, seeing healthy
trend into the future. Popularity of
methanol-based transportation fuels is a key demand driver. Methanol is used as a gasoline component for
internal combustion engines and methanol-fuel vehicles are gaining popularity
in China. Industry research firm Research and Markets has predicted that the
market for methanol could grow at an annual compound rate of 5.6% for the next
five years. The forecast acknowledges
that overall methanol demand is negatively impacted concerns for health and
environment. The mixed news for methanol derives from its principal source - steam reformation of methane in natural
gas.
The Methane Origins of Methanol
Composed of just
one carbon atom and four hydrogen atoms, methane is the simplest of the
hydrocarbons. Methane gas is colorless,
has no odor and is not itself toxic. Boy
does it burn! Methane burns easily in
the presence of oxygen and generates between 50 and 55 mega joules of heat per
kilogram. Not impressed? The heating fuel of choice for decades, coal,
generates heat less than half as much heat
- 20 mega joules per kilogram to
25 mega joules depending upon the type of coal.
Crude oil and diesel fuel generates between 42 and 47 mega joules per
kilogram.
The ‘Hot! Hot!
Hot!’ nature of methane helps explain the popularity of natural gas for heating
and electricity generation. Natural gas
is about 90% methane with smaller amounts of other alkanes. The fact that natural gas costs less to
produce than oil is just icing on the cake.
Unfortunately, methane
has a dark side. It is among the worst
greenhouse gases. According to the U.S.
Environmental Protection Agency, in 2017 methane accounted for about 10% of
greenhouse gas emissions from human-related sources. Methane
is particularly worrisome as a greenhouse gas, causing an inordinate worry over
methane gone errant in the atmosphere.
Scientists have determined that a kilogram of methane warms the planet
as much as 80% more than a kilogram of carbon dioxide.
Then there is
thermal expansion. Methane along with
other greenhouse gases creates heat, about 90% of which is absorbed by the
oceans according to NASA. As a consequence
the seawater expands in volume, elevating sea levels. At the turn of the century sea levels began
rising about 3.2 millimeters per year (about one-eighth of an inch). This was up
from a pace between 1.5 millimeters and 1.7 millimeters per year during the
previous ten decades. Of course, glacial
melt and shoreline decay also contributes to rising sea levels. Yet, NASA studies have demonstrated thermal
expansion of oceans is having a significant impact on sea level.
Natural gas
production contributes for about 31% of methane emissions in the atmosphere. Leaks from production pipes and deliberate
venting to the atmosphere release methane into the air. Cattle and their ruminant cousins represent
another major source or errant methane.
Scientists call it enteric fermentation
- the natural digestive process
in animals with four stomachs where microbes breakdown plants for
digestion. Cow belches and methane left
over in cow poops contribute 36% of methane emissions. Coal mining (16%), landfills (9%) and other
sources such as rice paddies and wetlands (8%) account for the rest.
The Trump
Administration has recently tried to become a friend to natural gas
producers. In late August 2019, Trump’s
minions announced a rollback in rules intended to reduce greenhouse gas
emissions from oil and gas production equipment. Interestingly, the largest producers of
natural gas in the U.S. voiced opposition to the rule roll back as contrary to
goals to create cleaner, environmentally sustainable fuels.
Love-Hate
Investment Case
Perhaps Methanex
shares large oil and gas views on greenhouse gas emissions. Like natural gas producers, the company
benefits from a favorable view on the environmental friendliness of their
product. Trump has also signaled
intentions to withdraw from the Paris Accord sets forth goals to reduce
greenhouse gas emissions. The merits of such a move for are uncertain given
that most companies developing and producing derivatives of fossil fuel,
including Methanex with its methanol product, have multi-national
operations. If being able to offer an
environmentally friendly product to the market is a priority, then locations in
Asia or Europe or the Middle East may seem more appealing given continued
support by countries in those regions for the objectives of the Paris Accord.
Putting aside ‘green
branding’ priorities, shares of Methanex are trading at 14 times forward earnings. That may seem appealing to some investors
against the company’s plans to expand.
However, compared to projected earnings growth the stock price/earnings
ratio may be concerning for some investors.
The price/earnings to growth ratio or PEG ratio is 1.40, suggesting
overvaluation.
There is also the
niggling problem of methanol selling prices.
Ample supply and increased production capacity are reportedly the cause
of the drop in selling prices over the last year. Russia has been a big contributor to new
supply that Europe has not been able to absorb.
Furthermore, demand in Asia has been sluggish as the U.S.-China trade
war goes into overtime. Industry
analysts are pointing to continued weak pricing under these conditions. Valuation usually crumbs right along with weak
selling prices.
Neither the author of the Small Cap Strategist web
log, Crystal Equity Research nor its affiliates have a beneficial interest in
the companies mentioned herein.
No comments:
Post a Comment