Fitch Affirms Methanex Corp. at 'BBB-'; Outlook Stable

CHICAGO--(BUSINESS WIRE)-- Fitch Ratings has affirmed Methanex Corporation's (Methanex) Long-term Issuer Default Rating (IDR), revolving credit facility and senior unsecured notes ratings at 'BBB-'. The Rating Outlook is Stable.

KEY RATING DRIVERS

The ratings reflect Methanex's position as the largest global supplier of methanol, its global distribution network, relatively low-cost production, reduced execution risk, improving asset profile, low capital spending requirements going forward, and substantial free cash flow (FCF) generation ability. These considerations are offset by the company's single-product focus, natural gas supply uncertainties facing multiple facilities, structural headwinds from U.S. capacity increases, and medium- to long-term effects of volatile global crude prices.

Fitch recognizes that cash flows and credit metrics have been weak in 2016 due to sharply lower methanol prices and a lag in associated cost declines. Methanol prices have been weak due to lower coal prices and oil price-linked demand combined with heightened methanol supply due to North American (NA) capacity additions. However, Fitch expects increasing global demand for methanol, longer-term oil and coal price improvements from 2016 lows, and limited foreseeable capacity additions. The Stable Outlook reflects Fitch's expectations that these factors, in conjunction with the company's improved operating profile, will return credit metrics to within the range of the investment-grade category on a mid-cycle basis.

GROWING METHANOL APPLICATIONS STRENGTHEN DEMAND

Fitch expects growing methanol demand outside of traditional uses will underpin strong long-term methanol demand growth. Energy applications, such as fuel-blending and methanol-to-olefins (MTO) processes, now account for approximately 40% of global methanol demand. Methanol has found a growing demand source in fuel blending applications, particularly in China, which has implemented standards for methanol fuel. Derivatives such as methyl tertiary-butyl ether (MTBE) and dimethyl ether (DME) can be blended with gasoline to reduce pollution and increase efficiency or, in the case of DME, can replace diesel fuel without infrastructure changes. Management stated annualized year-over-year third-quarter demand growth was approximately 10%, led by a 19% increase in non-traditional energy demand.

COMMODITY VOLATILITY

Methanol prices have been volatile and highly correlated to oil prices, as methanol is a substitute in energy applications and olefin production. Higher crude oil prices, and the prospects of the significant increases in APAC coal prices increasing the higher end of the cost curve, have led to a relatively strong recovery of global methanol prices from 2016 lows. Additionally, the shrinking U.S. methanol supply deficit and reduced international shipping costs reversed the price premium over China the U.S. used to benefit from, as U.S. methanol traded at a discount to Chinese methanol earlier in the year. A return of this premium would exacerbate the rebound in Methanex's realized prices resulting from global oil prices. Fitch expects that these factors, combined with our long-term oil and gas price assumptions, will lead to increased realized prices through 2018, but that significant commodity price volatility risk will remain. A sustained period of depressed crude oil prices and/or significantly increased raw materials prices without an increase in global crude oil and methanol prices would likely weaken the company's credit profile.

LOW COST POSITION, MINIMAL CAPEX REQUIREMENTS DRIVE FCF CAPACITY

Methanex has the capacity to generate positive cash flow through the cycle and substantial FCF, for its size, in peak periods. Methanex's portfolio is low on the global cost curve, benefitting from trapped low-cost natural gas at most facilities and gas surplus created by the NA shale boom. Additionally, Methanex's contracts with gas suppliers offer a measure of downside protection for creditors - contracts at several of the company's methanol plants allow Methanex to pay low base natural gas prices but share the upside with natural gas suppliers when methanol prices rise above certain levels. Roughly two-thirds of gas purchases are linked to methanol prices. Its low-cost profile and purchase contracts help maintain margins and cash flows, offering meaningful downside protection in the trough of a cycle.

Methanex recently finished capital spending related to the Geismar relocations, and will have only approximately $80 million in annual maintenance capex going forward. There will likely be some small projects related to de-bottlenecking and measured brownfield expansions at Chile plants, but Fitch expects minimal amounts of required capital spending in the near- to medium-term.

ADDITIONAL CAPACITY COULD PRESSURE PRICES

Fitch expects demand growth to outpace supply growth through the ratings horizon due to relatively long permitting and construction periods for new facilities and Fitch's expectations that greenfield facilities are not economical in the current environment. The 1.8 million tonne Natgasoline LLC facility in Beaumont, TX will be the largest in the U.S., but it is the only material additional U.S. capacity addition expected before the end of 2017. However, the rebound in oil and methanol prices in 2016 and expectations of favorable long-term North American production economics has spurred additional interest in NA new-builds in the second half of 2016 (2H16). Methanex management has estimated approximately 7 million-8 tonnes of capacity coming online between Iran and China by 2019. Additional unforeseen U.S. capacity additions and including additional Middle East gas-based and Chinese coal-based capacity will limit large price increases and could significantly pressure methanol prices in a lower oil price scenario in the long term.

IMPROVED PROFILE, BUT OPERATIONAL RISK REMAINS

Fitch believes Methanex's operating profile has improved recently, with the Geismar plants adding low-cost, stable production, new natural gas supply contracts for the Chile plants providing at least partial utilization into 2018 at profitable levels, and an improved supply outlook for the Egypt plant based on the development of new reserves. However, several plants still face capacity constraints due to local natural gas restrictions. The Trinidad plants will likely continue to face moderate gas curtailments until significant new developments come online and the supply situation for the Egypt plant remains volatile.

EXPECTATIONS

Credit metrics are currently weak compared to peers, as margins have been significantly depressed in 2016. However, Fitch expects a rebound to total adjusted debt/EBITDAR (with non-recourse debt) to under 3.5x in the next 24-36 months. Fitch expects the company to be slightly FCF negative for 2016, but that the company will generate positive FCF at current prices and in our base case. Fitch expects the company to be able to generate over $200 million of FCF in a $300/t methanol price environment.

KEY ASSUMPTIONS

Fitch's key assumptions within the rating case for Methanex include:

--Volumes at gas-based capacity, including approximately 30% utilization in Chile through 2018, and the Egypt facility running at seasonally adjusted 2H16 levels.

--Realized methanol price less discounts at roughly current spot ($255/t-$260/t) until end of 2016, $265/t in 2017, $315/t in 2018, and ~$350/t long term.

--Capex at maintenance after finishing Geismar 2.

--Common dividend levels increase at moderate pace.

--Portfolio costs decline as a higher percentage of sales will come from Methanex-produced methanol at lower-cost assets going forward and cost outlooks for under-used assets should improve with increased utilization.

RATING SENSITIVITIES

Positive: Future developments that could lead to positive rating actions include:

--Increased product diversification;

--Adjusted debt-to-EBITDAR below 1.5x on a sustained basis.

Negative: Future developments that could lead to negative rating actions include:

--Adjusted debt-to-EBITDAR above 3.5x on a sustained basis;

--Large share repurchases or special dividends financed by debt;

--Lack of a meaningful methanol price recovery over the ratings horizon due to a lower oil price environment or a structural de-linkage from oil prices;

--Further sustained disruption in operations of major operating sites.

LIQUIDITY

Methanex has $534 million in liquidity, including $234 million cash on hand and an undrawn $300 million credit facility. The cash balance includes $25 million related to the 50% non-controlling interest in Egypt.

Methanex's notable covenants, including cross-default provisions, apply to the company and its subsidiaries, and exclude the limited recourse subsidiaries (the Egypt entity). The limited recourse debt of the Egypt entity is secured only by assets of the Egypt entity, and lenders of those facilities have no recourse to Methanex or its other subsidiaries.

Methanex's credit facility contains a minimum interest coverage ratio covenant of 2.0x and a debt-to-capitalization ratio of 55%. During 2Q16, the company amended its credit agreement to allow for relief, if required, of the interest coverage ratio covenant through the end of 2017. At Sept. 30, 2016, management believes Methanex was in compliance with all covenants and Fitch expects Methanex's to continue to have sufficient headroom in its interest coverage and debt-to-capitalization ratio covenants.

Fitch notes that Methanex has a significant amount of minimum operating lease payments that contribute to its calculation of total adjusted debt which primarily relate to vessel charters and terminal facilities. The minimum payments as of Dec. 31, 2015 are $87 million in 2016, $123 million in 2017-2018, $87 million in 2019-2020, and $209 million thereafter.

FULL LIST OF RATING ACTIONS

Fitch affirms the ratings for Methanex as follows:

--Long-Term IDR at 'BBB-';

--Senior unsecured credit facility at 'BBB-';

--Senior unsecured notes at 'BBB-'.

The Rating Outlook is Stable

Additional information is available on www.fitchratings.com

SUMMARY OF FINANCIAL STATEMENT ADJUSTMENTS

Fitch has made no material adjustments that are not disclosed within the company's public filings.

Applicable Criteria

Criteria for Rating Non-Financial Corporates (pub. 27 Sep 2016)

https://www.fitchratings.com/site/re/885629

Additional Disclosures

Dodd-Frank Rating Information Disclosure Form

https://www.fitchratings.com/creditdesk/press_releases/content/ridf_frame.cfm?pr_id=1014210

Solicitation Status

https://www.fitchratings.com/gws/en/disclosure/solicitation?pr_id=1014210

Endorsement Policy

https://www.fitchratings.com/regulatory

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Fitch Ratings
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Source: Fitch Ratings

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