Methanex Misses by a Mile in 2Q

Methanex Corporation ( MEOH - Analyst Report ) , the world’s largest supplier of methanol, saw its earnings increase to 50 cents per share in the second quarter of 2012 from 43 cents last year. However, the jump was not good enough to meet the Zacks Consensus Estimate of 63 cents. Profit increased almost 29% year over year to $52 million.

Revenues rose 5.3% year over year to $656 million, also missing the Zacks Consensus Estimate of $708 million. Sales volumes in the quarter totaled 1.85 million tons, down 1% from the year-ago quarter.

Average realized price per ton amounted to $384 in the quarter, up from $363 last year. Total production in the quarter was 1,034 thousand tons compared with 1,050 thousand tons in the prior-year quarter.

Production Summary

Chile: During the reported quarter, the company produced 82 thousand tons in Chile, operating one plant at approximately 30% capacity versus 142 thousand tons in the prior-year quarter. The company operated its methanol facilities in Chile, significantly below the site capacity due to curtailed natural gas supplies from Argentina.

However, the company is focused on resolving this problem and is collaborating with Empresa Nacional del Petroleo (ENAP) and others for accelerating natural gas exploration and development in southern Chile. But the effects of such efforts might not be seen anytime soon as existing gas fields are witnessing declines and ramp up of gas production is taking longer than expected.

New Zealand: During the second quarter of 2012, Methanex produced 210 thousand tons from one Motunui facility at full capacity, but slightly down from last year. However, the company restarted its second Motunui facility in July, adding 650 thousand tons of annual production capacity to its operations in New Zealand.

Methanex is also focused on removing bottlenecks at the Motunui site and is currently carrying out feasibility studies for the same. Methanex aims to restart the 530 thousand ton capacity Waitara Valley plant which is capable of adding 900 thousand tons to New Zealand’s annual production capacity by the end of next year.

Trinidad: Methanex owns two facilities in Trinidad. The company has full ownership of the Titan facility with an annual capacity of 900 thousand tons. Titan produced 196 thousand tons in the second quarter, higher than the 186 thousand tons produced last year. The other facility, known as Atlas, is owned to the extent of 63.1% by Methanex. Atlas produced 264 thousand tons in the quarter at 95% capacity, almost flat from last year.

The company is facing natural gas supply restrictions in Trinidad. Although it is trying to find a solution to this problem, Methanex expects to experience natural gas curtailments in the short term.

Egypt: The facility produced 164 thousand tons in the quarter, down from 178 thousand tons that it produced a year ago. The decline in production was a result of planned maintenance and inspection activities at the facility.

The company faced natural gas shortages in this region as well due to upstream gas platform outages and seasonal domestic demand for natural gas electricity generation. Methanex has a 60% interest in the Egyptian facility.

Medicine Hat: The facility produced 118 thousand tons in the quarter, significantly up from 74 thousand tons produced last year. Methanex is currently exploring the feasibility of de-bottlenecking the facility, a move which can add another 90 thousand tons of annual production capacity to Medicine Hat.

Financial Review

Consolidated cash flows from operating activities in the second quarter of 2012 were $135 million compared with $78 million in the prior-year quarter. Cash and cash equivalents were $623.2 million as of June 30, 2012, compared with $245.6 million as of June 30, 2011.

Methanex had $873.6 million of debt on its balance sheet as of June 30, 2012, slightly down from $876.4 million last year. The company also raised its quarterly dividend by 9% to 18.5 cents during the second quarter.

Outlook and Recommendation

Methanex said that overall methanol demand remained strong along with stability in pricing, despite some softness due to the economic environment. However, methanol price will depend on a number of factors such as economic health, operating rates, global energy prices and demand.

As part of its strategy to strengthen its position as the global leader in the production and marketing of methanol, Methanex intends to continue pursuing new opportunities to boost its strategic position in the methanol industry.

We currently have a long-term (more than 6 months) Neutral recommendation on the Methanex. The company, which faces stiff competition from Celanese Corp. ( CE - Analyst Report ) and Eastman Chemical Co. ( EMN - Analyst Report ) , retains a Zacks #4 Rank, reflecting a short-term (1 to 3 months) Sell rating.