Fitch Affirms Methanex Corporation at 'BB'; Outlook Negative

(The following statement was released by the rating agency) Fitch Ratings-Chicago-29 March 2021: Fitch Ratings has affirmed Methanex Corporation's Long-Term Issuer Default Rating (IDR) at 'BB' and affirmed all associated unsecured debt at 'BB'/ 'RR4'. The Rating Outlook is Negative. The 'BB' rating reflects the company's position as the largest global supplier of methanol, with a global distribution network and 9.2 million metric tons (MT) in production capacity. The ratings also reflect the company's portfolio high grading, good historical financial performance, and solid historical FCF and leverage metrics. Offsetting considerations include methanol's sensitivity to crude and natural gas prices and China's demand, particularly at methanol-to-olefins (MTO) facilities, and the significant expense associated with maintaining shipping and storage facilities. The negative outlook reflects the pressured but improving demand environment, elevated leverage profile, and financial risk related to the company's Geismar 3 (G3) project. Expectations of continued financial discipline alongside an improved demand environment could result in a stabilization of the outlook. Key Rating Drivers Elevated Leverage Profile: Fitch believes that Methanex has the funding to complete the cost-advantaged G3 expansion, with $927 million in combined availability under its delayed drawn term loan and revolver as of 4Q20. Fitch anticipates that the company may use these facilities to fund the G3 project. The company has articulated a desire to find a strategic partner to help fund the expansion, which would alleviate some of the need for debt funding. In the event Methanex resumes G3 spending, Fitch forecasts funds from operations (FFO) leverage trending towards 3.5x. The decision not to resume G3 spending would likely be a result of a sustained trough in methanol demand, which could result in lower EBITDA levels and a similar leverage profile to Fitch's Base Case despite the lack of additional debt funding. Uncertain But Improving Pricing: Average realized price for Methanex fell to $256/ton in 4Q19 and then to $211/ton in 2Q20. This period represented the bottoming out of pricing and utilization rates, with average realized price of $247/ton on the year, and Fitch believes that realized prices will exceed $300/ton in the near to medium term. Although 2020 demonstrated the relatively higher cash flow risk for methanol producers like Methanex relative to investment-grade chemical peers, Fitch notes that a favorable pricing environment for ethylene and polyethylene and an ongoing recovery in economic activity and fuel demand are positive indicators for methanol prices and volumes. FCF Generation to Rebound: Methanex's position as a low cost producer has allowed it to achieve generally favorable cash generation, with cash outlays often directed toward capital expenditures and a steady dividend. Pressured FCF generation followed the large decline in methanol prices, and Methanex proactively cut dividends and delayed capital spending, including Geismar 3 (G3), to bolster liquidity. The company will likely resume G3 spending if it determines that methanol demand can support the execution risk and liquidity requirements associated with completing the project. Potential G3 Project Spending: Methanex's $1.3 billion-$1.4 billion, 1.8 million MT Geismar 3 (G3) expansion creates short-term risks and longer-term opportunities for the credit. At an estimated $775/MT and with roughly $1.0 billion in spending remaining, the Brownfield G3 project has a number of cost advantages, including shared storage and terminal facilities; lack of need to build a reformer given the ability to use purge gas; procurement synergies, and amortization of other fixed costs over a larger production base. Medium-term credit risks in the event that full project spending is resumed include cost overruns and delays. Fitch notes that the capacity increase associated with the project may serve as a deterrent to the company's competitors who may be considering bringing additional capacity online as methanol prices recover. Energy Applications Drive Price: Methanol prices are volatile, and correlated to oil prices, while methanol's feedstock costs are linked to natural gas and coal prices in Asia. As a result, sharp declines in the oil/gas price ratio can periodically pressure the credit. Methanol demand is increasingly driven by methanol for energy applications, which prior to the downturn had been the fastest growing component of demand and included MTO plants, gasoline blendstocks to increase octane (MTBE), a substitute for bunker and vehicle fuel, and an industrial boiler fuel. Energy applications for methanol are sensitive to demand in China, particularly MTO, which could cap methanol prices. Low Cost Producer: Methanex is the largest global supplier of methanol, with 9.2 million MT in current production capacity, and sales of 10.7 million MT or about 13% of the methanol market. Natural gas is the main feedstock and is its single largest expense. Methanex's portfolio benefits from low cost/stranded gas. The company's plants outside North America have credit-friendly contract structures, which include a low initial fixed gas price, plus a variable component that is shared between Methanex and the gas supplier as methanol prices rise. This structure is countercyclical insofar as it lowers the company's costs in a down-cycle in exchange for surrendering some methanol price-related gains on the upside. Methanex's North American plants (Geismar 1 & 2, and Medicine Hat, Canada) lack these features but benefit from low gas prices linked to the shale revolution. Derivation Summary Relative to the IG chemical companies, Methanex has exhibited relatively higher cash flow volatility. The company's single product focus on methanol means it is less diversified than integrated chemical producers such as Eastman Chemical Company (NYSE:EMN) (BBB-/Stable) and Westlake Chemical (BBB/Negative), and more in line with certain U.S. Oil and Natural Gas producers like CNX Resources Corporation (BB/Positive). YE 2020 Total Debt with Equity Credit/Operating EBITDA for Methanex was 6.9x, which compares unfavorably to Eastman and Westlake, each at 3.0x. Fitch anticipates Methanex's leverage to decline from its peak in 2020. However, this is offset by the company's strong position as the world's largest supplier of methanol, its portfolio of geographically diversified, low-cost plants and an increasingly supportive pricing environment. MEOH's margins are in line with IG chemical peers but more cyclical given methanol's linkage to crude and coal pricing, and sensitivity to China's demand for methanol in energy applications. Key Assumptions --Methanol prices recover sharply through 2022 due to increased fuel and MTO demand, as well as general economic recovery; --G3 expansion resumes in 2021, completed in 2023 - no strategic partner considered for G3; --Delayed draw term loan (DDTL) drawn to fund G3; --Share repurchases resume and dividends restored to pre-pandemic levels by 2024. RATING SENSITIVITIES Factors that could, individually or collectively, lead to positive rating action/upgrade: -- FFO Leverage durably below 3.25x, potentially due to finding a beneficial strategic partner to help fund the G3 expansion alongside a faster-than-anticipated recovery in and favorable outlook for methanol prices; -- Increased product diversification. Factors that could, individually or collectively, lead to negative rating action/downgrade: -- FFO Leverage durably above 3.75x, potentially due to a sustained trough in methanol prices and a lower demand for MTO production; -- Cost overruns, delays, or realization of other execution risk related to G3 expansion leading to stepped up borrowings; -- Sustained disruption in operations of major facilities. Best/Worst Case Rating Scenario International scale credit ratings of Non-Financial Corporate issuers have a best-case rating upgrade scenario (defined as the 99th percentile of rating transitions, measured in a positive direction) of three notches over a three-year rating horizon; and a worst-case rating downgrade scenario (defined as the 99th percentile of rating transitions, measured in a negative direction) of four notches over three years. The complete span of best- and worst-case scenario credit ratings for all rating categories ranges from 'AAA' to 'D'. Best- and worst-case scenario credit ratings are based on historical performance. For more information about the methodology used to determine sector-specific best- and worst-case scenario credit ratings, visit https://www.fitchratings.com/site/re/10111579. Liquidity and Debt Structure As of YE 2020, Methanex had $834 million in readily available cash and $927 million in availability between its revolver and its delayed draw term loan. The company faces a challenging mismatch in cash flows versus planned capital expenditures, with an improving methanol pricing environment coinciding with around $1.0 billion in remaining capital spending related to the G3 expansion. Fitch expects the company will partially draw on its delayed draw term loan to fund the expansion, which will drag on its credit metrics. Liquidity will remain sufficient, with the company maintaining full availability on its $300 million revolver. Mitigating these challenges is a relative lack of near-term maturities, with a $300 million bond maturity in 2024. Should the company draw on its delayed draw term loan, it would face a modest maturity wall in 2024, consisting of $300 million in unsecured bonds plus the DDTL maturity. REFERENCES FOR SUBSTANTIALLY MATERIAL SOURCE CITED AS KEY DRIVER OF RATING The principal sources of information used in the analysis are described in the Applicable Criteria. ESG Considerations Unless otherwise disclosed in this section, the highest level of ESG credit relevance is a score of '3'. This means ESG issues are credit-neutral or have only a minimal credit impact on the entity, either due to their nature or the way in which they are being managed by the entity. For more information on Fitch's ESG Relevance Scores, visit www.fitchratings.com/esg. Methanex Corp.; Long Term Issuer Default Rating; Affirmed; BB; Rating Outlook Negative ----senior unsecured; Long Term Rating; Affirmed; BB Contacts: Primary Rating Analyst Noah Naiditch, Associate Director +1 312 368 3130 Fitch Ratings, Inc. One North Wacker Drive Chicago, IL 60606 Secondary Rating Analyst Patrick Hughes, Associate Director +1 312 368 5456 Committee Chairperson Philip Zahn, CFA Senior Director +1 312 606 2336 Media Relations: Sandro Scenga, New York, Tel: +1 212 908 0278, Email: sandro.scenga@thefitchgroup.com Additional information is available on www.fitchratings.com Applicable Model Numbers in parentheses accompanying applicable model(s) contain hyperlinks to criteria providing description of model(s). 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