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 revised to Positive from Negative.
The 'BB' rating reflects the company's position as the largest global supplier of methanol, with a global distribution network and 9.3 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 Positive Outlook reflects an improved demand environment combined with challenges on the supply side, with realized prices sufficient to allow the company to simultaneously reduce leverage and fund its Geismar 3 (G3) project, alongside a more conservative medium-term capital deployment policy and expectations that FFO Leverage will remain below 3.25x throughout the duration of the forecast.
Key Rating Drivers
Solid Methanol Price Environment: 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. Though 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 fuel demand has driven a much stronger methanol pricing environment, with average realized prices of about $376/MT in Q1-Q3 2021.
Improving Leverage Profile: Fitch believes that Methanex has the liquidity and FCF generation to complete the cost-advantaged G3 expansion with little to no incremental debt. The company has $900 million in combined availability under its delayed drawn term loan and revolver as of 3Q21. Fitch believes that given the current demand profile, the company will likely be able to fund the project using balance sheet cash and FCF, resulting in funds from operations (FFO) Leverage trending below 3.25x.
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 in the onset of the coronavirus pandemic, and Methanex proactively cut dividends and delayed capital spending, including Geismar 3 (G3), in order to bolster liquidity. The company has since resumed G3 spending, which Fitch believes indicates that methanol demand can support the increased execution risk and tighter liquidity associated with completing the project.
G3 Project Resumed: Methanex's $1.25 billion-$1.35 billion, 1.8 million MT Geismar 3 (G3) expansion creates short-term risks and longer-term opportunities for the credit. At an estimated $722/MT, 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 include cost overruns and delays. The capacity increase associated with the project may serve as a deterrent to the company's competitors which 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 fuel and as 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 9.3 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 and a meaningful hedge program in place.
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 (BBB-/Stable) and Westlake Chemical (BBB/Stable), 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.
Methanex's leverage has declined from its peak in 2020 given an improved pricing environment. The company's recent history of elevated leverage and near-term high capital spending are offset by the company's strong position as the world's largest supplier of methanol, its portfolio of geographically diversified, low-cost plants and the increasingly supportive pricing environment. Methanex's margins are in line with IG chemical peers but are more cyclical given methanol's linkage to crude and coal pricing and sensitivity to China's demand for methanol in energy applications.
Key Assumptions
Fitch's Key Assumptions Within Our Rating Case for the Issuer
Methanol prices recover sharply through 2021 due to increased fuel and MTO demand, as well as general economic recovery, with realized prices remaining about $300/MT thereafter;
G3 expansion completed in late 2023 and operational in 2024, no strategic partner considered for G3;
No incremental debt used to fund G3;
Share repurchases resume, with balance sheet cash around $500 million.
RATING SENSITIVITIES
The Positive Outlook could be revised to Stable should the presently strong pricing environment soften, leading to an increased likelihood that Methanex must use incremental debt to fund the completion of G3.
Factors that could, individually or collectively, lead to positive rating action/upgrade:
Completion of G3 in a timely manner, with limited incremental debt;
FFO Leverage durably below 3.25x, potentially due to a continued 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 Q3 2021, Methanex had $932 million in readily available cash and $900 million in availability between its revolver and its delayed draw term loan. The improved demand environment may allow the company to cover capital expenditures related to G3 without taking on incremental debt, with roughly $800-900 million in G3 construction costs. Fitch expects the company will not need to draw on its delayed draw term loan to fund the expansion, which would drag on its credit metrics. Liquidity will remain sufficient, with the company maintaining full availability on its $300 million revolver.
The company enjoys 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.
Issuer Profile
Methanex is the world's largest supplier of methanol, with approximately 9.3 million metric tons (MT) of nameplate production capacity across New Zealand, the U.S., Trinidad, Egypt, Canada, and Chile. Its low-cost position is driven by access to cheap/stranded natural gas feedstocks and advantageous contract structures.
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
RATING ACTIONSENTITY/DEBT RATING RECOVERY PRIOR
Methanex Corp. LT IDR BB Affirmed BB
senior unsecured
LT BB Affirmed RR4 BB
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METHANEX CORPORATION 
