Methanex Corporation

Methanex Corporation (TSX: MX) manufactures and sells methanol. The end products of methanol are adhesives, foams, solvents, and windshield washer fluids. The group also sells its products to the oil and gas industry, wherein the methanol is blended with gasoline to produce a high-octane fuel or blended as a component of biodiesel. 

Key Highlights:

• Strong Sequential growth: The group reported a surge in revenue in Q4FY20 at USD 811.3 million, significantly higher from USD 581.3 million and USD 512.3 million in Q3FY20 and Q2FY20, respectively. The improvement was driven by higher realized methanol prices (USD 282/tonne in Q4FY20 v/s USD 217/tonne in Q3FY20). Moreover, the group reported an operating profit of USD 9.2 million in Q4FY20, v/s an operating loss of USD 64.5 million and USD 63.5 million, respectively, in Q3FY20 and Q2FY20, respectively. At the end of Q4FY20, the company successfully reduced its total debt to USD 3,085.6 million, from USD 3,335.1 million in Q3FY20. A lower debt would improve the company’s overall financial flexibility and would lead to lower finance costs as well. 

• Ample Liquidity to Support future operations: The company has an undrawn credit facility of USD 300 million, which expires in July 2024. Notably, the Company has drawn USD 173 million of its USD 800 million construction credit facility for the Geismar 3 project that expires in July 2024. Moreover, the group has ~USD 834 million of cash and cash equivalents at the end FY20, which together with the credit facility seems sufficient to meet the working capital needs. 

Q4FY20 Financial Highlights:

• MX announced its quarterly result, wherein the company posted revenue of USD 811.323 million v/s USD 769.239 million in the previous corresponding period (pcp). The increase was due to a higher average realized price (USD 282 million v/s USD 256 million in pcp), partially offset by a lower sales volume of 2,868 thousands of tonnes v/s 2,986 thousands of tonnes in pcp.

Source: Company Report

• Operating income slide to USD 9.164 million, from USD 67.442 million in Q4FY19. The quarter witnessed an increase in cost of sales and operating expenses (USD 715.139 million v/s USD 663.863 million in pcp). Moreover, the company reported an insurance recovery amounting to USD 50 million in Q4FY19.
• The company reported a net loss of USD 17.949 million, as compared to a net profit of USD 33.661 million in Q4FY19.
• The group reported its cash and cash equivalents of USD 833.841 million, while total assets were recorded at USD 5,696.051 million.

Q4FY20 Income Statement Highlights (Source: Company Report)

Risks: The company’s operations depend on the global supply demand dynamics of crude oil, which might create volatility in the international commodity prices and subsequently impact the company’s realization prices.

Valuation Methodology (Illustrative): EV to Sales

Note: All forecasted figures and peers have been taken from Thomson Reuters

Stock Recommendation:

There was a continued improvement in global methanol demand and methanol industry supply outages and delayed start-up of new industry capacity additions supported higher methanol prices, which is a key positive for the group. The company has a resilient business model and continues to deliver reliable methanol supply to customers around the world throughout 2020. The management is encouraged by the early signs of economic recovery that we saw starting in the second half of 2020 and continue to regularly monitor and review the methanol demand outlook and changes in the industry. The management believes that long-term methanol industry fundamentals are strong and methanol demand will continue to improve as the global economy fully recovers. We have valued the stock of MX by using the  EV to Sales based relative valuation approach and arrived at a target price offering lower double-digit upward potential (in % terms). We have considered industry (Basic Materials) median on NTM basis, etc. Hence considering the aforesaid facts, we recommend a ‘Speculative Buy’ rating on the stock of MX at the closing price of CAD 45.5 on March 25, 2021.

One-Year Price Chart (as on March 25, 2021). Source: Refinitiv (Thomson Reuters)

Precision Drilling Corp

Precision Drilling Corp (TSX: PD) is one of Canada's significant player in contract drilling which has expanded themselves into the United States with Grey Wolf and in the Middle East region, with more than 250 land rigs. Also, company offers completions, workover, maintenance, and abandonment services.

Key highlights

• Debt Repayment: After additional open market repurchases of its unsecured senior notes in the fourth quarter, the group’s 2020 debt repayments totalled CAD 170 million, exceeding the high end of its 2020 annual targeted range of CAD 100 million to CAD 150 million, which is a key positive. As a result of this, to some extent, the interest cost pressure would be relieved. Moreover, the group increased its long-term debt reduction target from CAD 700 to CAD 800 million for the years 2018 through 2022.

Source: Company

• Generating strong free cash flow: In FY 2020, the company generated CAD 226 million of cash provided by operations. As a result, the company reported higher free cash flow, against the previous corresponding period.

• Cash preservation & Cost control remains top priorities: In the current situation, when things have started improving, preserving cash is on top of the mind of the company’s management. Presently, they have a decent liquidity position of nearly CAD 700 million. Regarding preservation, the group reduced its cash spending in 2020 through a reduced capital spending plan. G&A expenses and interest expense also saw a declining trend.

Source: Company

Financial overview of FY2020

Source: Company

• The company reported revenue of CAD 935.7 million in FY 2020, which decreased by 39% compared to FY 2019 due to lower activities across all their operating segments.
• Adjusted EBITDA was down by 32% and stood at CAD 263.4 million, against CAD 391.9 million in the previous corresponding period. The lower EBITDA was primarily due to lower revenues, partially offset by lower G&A expenses.
• The company's net loss in the reported period stood at CAD 120.1 million, against a profit of CAD 6.6 million in 2019. The rise in net loss was primarily due to lower activities. 

Risks associated with investment

There are many risks involved with the company which can create a massive impact on the operations and financial health, such as fluctuations in the level of oil and natural gas exploration and development activities, changes in drilling and well-servicing technology, the impact of weather and seasonal conditions on operations and facilities, etc. 

Valuation Methodology (Illustrative): EV to Sales

Note: All forecasted figures and peers have been taken from Thomson Reuters 

Stock recommendation

FY2020 financial results demonstrated Company’s business model's resiliency and strong cash-generating capabilities of its High-Performance rig fleet. Despite unprecedented obstacles caused by the COVID-19 pandemic and oil price collapse, the group exceeded the targets set out in its 2020 strategic priorities. Moreover, the company reduced debt levels by CAD 171 million, exceeding the high end of its annual targeted range for the third consecutive year and increased its long-term debt reduction target from CAD700 million to CAD800 million from 2018 through 2022, targeting a debt leverage level of less than two-times net debt to Adjusted EBITDA. We believe the trend will improve as the oil industry is likely to return to normalcy with a gradual recovery in demand of the group’s offerings. Therefore, based on the above rationale valuation, we recommend a “Speculative Buy” rating at the closing price of CAD 25.95 on March 25, 2021. We have considered Ensign Energy Services Inc, Western Energy Services Corp, Patterson-UTI Energy Inc. as the peer group for the comparison.

1-Year Price Chart (as on March 25, 2021). Source: Refinitiv (Thomson Reuters)

Disclaimer

The advice given by Kalkine Canada Advisory Services Inc. and provided on this website is general information only and it does not take into account your investment objectives, financial situation and the particular needs of any particular person. You should therefore consider whether the advice is appropriate to your investment objectives, financial situation and needs before acting upon it. You should seek advice from a financial adviser, stockbroker or other professional (including taxation and legal advice) as necessary before acting on any advice. Not all investments are appropriate for all people. The website www.kalkine.ca is published by Kalkine Canada Advisory Services Inc. The link to our Terms & Conditions has been provided please go through them. On the date of publishing this report (mentioned on the website), employees and/or associates of Kalkine do not hold positions in any of the stocks covered on the website. These stocks can change any time and readers of the reports should not consider these stocks as advice or recommendations later.