Methanex Corp (MEOH) 2013 Q1 法說會逐字稿

All participants, ladies and gentlemen, thank you for standing by, and welcome to the Methanex Corporation first-quarter results conference call. I would now like to turn the conference call over to Ms. Sandra Daycock, Director of Investor Relations. Please go ahead, Ms. Daycock.

Thanks. Good morning, ladies and gentlemen. Our 2013 first-quarter report, along with presentation slides summarizing the Q1 results, can be accessed at our website at www.methanex.com.

I would like to remind our listeners that our comments and answers to questions today may contain forward-looking information. This information by its nature is subject to risks and uncertainties that may cause the stated outcome to differ materially from the actual outcome. Certain material factors or assumptions were applied in drawing the conclusions or making the forecasts or projections which are included in the forward-looking information. Please refer to our latest MD&A, and to our 2012 annual report for more information.

For clarification, effective with this first quarter report, we account for the Atlas entity using the equity method of accounting. However, any references to EBITDA, cash flow, or income made in today's remarks reflect our 63.1% economic interest in the Atlas facility, and our 60% economic interest in the Egypt facility. In addition, we report our adjusted EBITDA and adjusted net income to exclude the mark-to-market impact on share-based compensation, and other nonoperating items. We report our results in this way to make them a better measure of underlying operating performance and we encourage analysts covering the Company to report the results in this manner.

I would like to now turn the call over to Mr. John Floren, Methanex's President and CEO, for his comments, and a question-and-answer period.

Good morning. You would've seen from our results we had another very solid quarter, adjusted income of $0.92 per share, and EBITDA of $149 million. We've also are pleased to announce an increase in our dividend to $0.80 a share annualized. And we are also extremely excited to proceed with the Geismar 2 relocation which will commence once the Chile operation shuts down, which we expect to be in the near future, and we expect to have that plant up and running in Geismar in the first quarter of 2016.

Overall, the demand is good, and it is quite strong in energy, fuel bundling at MTO leading the way. The industry itself is dealing with ongoing production issues which is leading to a $100 price differential between the Atlantic and the Pacific basins, and we do not seem to think that, that's going to change in the short term.

We also saw less production in Q1 versus Q4 in the industry. Our own production was quite good. We did have a number of unplanned outages, small ones, in Trinidad, and we had a fairly significant outage in New Zealand during the quarter. We also are experiencing some gas restrictions in Trinidad, but better than last year, and we are ongoing restrictions in Egypt. These combined lead to about 100,000 tons of lost production in the first quarter.

In Chile, we have started to receive Argentina gas and we expect to receive it for about 40 days on average of around 500,000 cubic meters a day, which allowed us to make about 20,000 tons of methanol. We are doing this on a toll basis. We don't own the gas, we don't own the methanol, we are receiving gas from YPF in Argentina, tolling it for them, and returning the methanol back to Argentina.

As I mentioned, we expect to idle the Chile 3 plant, which is running shortly, due to a lack of gas in the basin. And that's the plant that we plan to relocate to Geismar. We will spend some modest amounts of capital over the next three to five months to have Chile 1 ready to start later this year when we expect the gas availability in the region to allow us to operate at higher rates than we have been in the last 12 months.

Egypt is consuming all of the available gas that we are getting in a very difficult environment. We are still comfortable with the guidance we have given of 70% operating rates for 2013. We are also pleased to announce that we've recently expanded our commercial relationship with LyondellBasell, whereby we will off take and market a significant portion of their merchant methanol supply once their Channelview methanol plant restarts later this year.

As you go through our results you will see that we had quite a significant improvement in cost related to our supply chain, our shipping and terminal. And our team there has been working hard to look at -- for ways to reduce costs and it is starting to show in the results. So I will stop now and available to take questions.

Thank you. Questions will now be taken from the telephone lines.

(Operator Instructions)

The first question is from Jacob Bout with CIBC. Your line is now open. Please go ahead.

Hello. Question on moving the plant from Chile to Geismar, and just the cost for the CapEx seems to be up about $100 million from what you were talking about previously. Just wondering what was the driver there?

Thanks for the question, Jacob. I think I got pressured quite a lot on the last call to when we were going to make a decision on relocating a second plant. I recall saying that the things that we are looking for was the capital cost and confirming those. We are going to experience quite a bit of savings related to the first plant in relocating the second one -- one-time cost. Unfortunately as we've gone into the EPC market we've seen rates for engineering and labor increase. I think it is important for us to get out in front of the curve on moving this second plant, because we do anticipate with the number of announcements not only in methanol industry, but the chemical industry in general, because of the shale gas that we would expect rates to increase.

We built quite a bit of contingency into the Geismar II relocation because of the escalation in rates we are seeing. I will remind you we are doing these projects based on a time and materials basis, as opposed to a turnkey, so we just thought it was prudent to build in quite a bit of contingency.

At this point it looks as if moving the plant to -- the second plant is going to about the same costs as the first plant?

Sorry, Jacob, you were breaking up, there. Can you repeat it, please?

At this point it looks like the cost to move the second plant is going to be similar to the first plant?

That's how I would characterize it, Jacob.

That tolling agreement that you have in -- with that Argentinian gas, does that change your thinking as far as the availability of gas for the two remaining plants in Chile? And just remind us, the last time you got gas from Argentina, was that back in 2007?

You are right. The last time we did get any flows was 2007. I think it is a fairly significant milestone just getting gas again from Argentina. Having said that, this is an arrangement that will come to an end here shortly. We are anticipating to be able to access gas in the fall, not only in Chile but optimistically from Argentina.

Why is Argentina sending us gas? They need methanol. Argentina has bio diesel at 7%, they are planning to increase that to 10%. From their point of view, it is a nice way -- we have idle capacity, they have excess gas in their summer. And they need methanol. So it is a great win-win where they ship us gas, we make methanol, and send it back to them. Conditions should be similar in the fall, but there's certainly no guarantees that we will be getting Argentina gas. But we are optimistic.

And they're in that end quarter about what, 20,000 to 30,000 tons?

Of methanol?

Yes.

Yes, and I think what we understand, Jacob, they do make methanol as well in Argentina, but they probably need around 100,000 tons of various other sources of methanol to meet their country needs.

Thank you.

Thank you. The next question is from Ben Isaacson with Scotiabank. Please go ahead.

Good morning. Thank you. Just maybe a follow-up to Jacob's first question. Can you talk about how much contingency, or maybe what the difference in contingency is between Geismar I and Geismar II? I'm trying to look at as, is there risk now that Geismar I CapEx could go over budget?

Maybe I'll ask Michael Macdonald, our SVP of Global Operations, who is managing the project to comment.

Thanks, John. So, Ben, I don't want to get into specific numbers, what I just emphasize is that we are seeing some pressure. I think we are still on track on Geismar I. We've actually just moved in the last week a couple of the big modules down in the staging area and so forth, and getting ready for shipment, so that part of the project is going really well.

The site preparation is going well. But what John commented before is really the point, that we are seeing outwards pressure on EPC in the US market. And we think -- as John said, we think it is prudent. I think it also emphasizes the importance of us moving quickly on these projects. We get ahead of the engineering curve for the whole industry, and I think it outlines the considerable advantage that we see for our relocations, compared to other people trying to build new capacity in the industry. We are seeing an uptick in EPC generally. It is not just going to impact our project, it's going to impact other people's projects, and other industries. So again, we think it's just smart to announce, get out there, and get the plants moving.

Okay, thank you. And then just, my second question, are we now at risk of starting to see some demand destruction in European chemical derivatives markets? The methanol price spread between Europe and Asia has blown out so much, I can't really see how this is sustainable. Thank you.

Ben, we're not seeing any demand destruction per se, because of the differential between the two basins. Most of the applications for methanol make up a very small overall cost of end products. We are certainly seeing soft demand in Europe just because of the economic conditions. Southern Europe continues to be a challenge, Northern Europe continues to chug along, but it is not really related to the differential -- any demand softness is not related to the differential between the two basins.

Thank you. The next question is from Laurence Alexander with Jefferies. Your line is now open. Please go ahead.

Good afternoon. First of all, on the demand disruption team are you seeing any indications of DME demand slipping in China? There's been some chatter in the trade press about another 8% to 9% methanol price increase, and I just want to get a sense for how sustainable that might be.

Yes, we have not seen any demand destruction to date on DME in China. In fact, rates are probably a little higher today than they would have been 30 days ago. We do watch that affordability on methanol into DME in China. Because that is the energy application that would be the first one that may be under pressure if oil prices continue to go down.

The affordability of DME in China -- in the southern part of China -- is quite a bit higher than the eastern part of China. So we do focus on that. We believe that number today is around $370 to $375, somewhere in that area, Laurence. Some of those East China plants as well are integrated into methanol so they may have different operating conditions, which may even if they get below the affordability, so-called affordability, they may continue to operate, which we've seen in the past. But as of right now we haven't seen any down-tick in DME.

And secondly on the tax rate, it was low this quarter, where do you think it will shake out this year?

Maybe I will ask our CFO, Ian Cameron, to comment on that.

So Laurence, the guidance we've provided historically is that we expect a structural tax rate to be about 20% to 25%. With the very low production levels in Chile, and that's where our highest tax rate is, 35% -- our tax rate structurally, temporarily anyway, is a little bit lower than that, so it is bit below 20%. So as long as Chile is -- has low earnings, we would expect that structural tax rate. As we get Chile back into operation, and with Geismar coming on stream in 2014, we would see the structural tax rate head more into that range of the 20% to 25%.

Thank you.

Thank you.

(Operator Instructions)

The next question is from Hassan Ahmed with Alembic Global. Please go ahead.

Question around, recently, obviously, we've seen some downside on the crude oil side of things as well as Chinese coal prices. Historically, obviously, there was a pretty tight linkage between the prices of these commodities and methanol, and it seems methanol is kind of going in the other direction. So what do you attribute this delinkage to? Is it just effective utilization rates being quite tight?

There is a number of questions and issues in there. Coal did go down in China, but we've seen it stabilize for the last six to eight months at around $105 a ton equivalent US. That puts the cost curve somewhere between $350 and $360, and that's kind of where we see that cost curve settling out in China. With regards to oil, I mentioned DME and that's the one that trades let's say more on its energy value of 3.7 or 4 to 1.

The other energy applications don't trade higher on their energy content, like fuel blending and MTO and bio diesel is more of a mandate than, let's say, the economic propositions. So the one we watch is DME. If we do see pricing continue to increase on methanol and oil going down, and relative propane prices going down, we could start to see, especially in East China, some downturn in DME. We haven't seen it yet so we are watching it. It's hard to predict the future.

The price of the methanol itself it is really being driven more by supply outages in both basins, the number of unplanned and planned outages. We anticipate that to continue in Q2. At the same time, the energy applications like MTO are quite strong. Skyford in China operated better than anticipated, and we saw the other one that's on the coast that's going to use merchant methanol, is expected to start commissioning some time in the summer. So that again is going to use another million tons of methanol, so these large applications, demand applications, tend to dwarf some of the other noise that we see in the marketplace.

Fair enough. Now in the past, on the Chilean side of things, in the past you guys have talked about maybe potentially considering coal gasification. Is that something that you are still considering, or is that off the table?

Making methanol from coal is off the table in Chile. Even with the installed capacity we have there, the capital costs were just far too high for us to consider making methanol from coal.

There is an interesting project that's going on that's being led by a different company, where we are supporting them with some technical expertise, and they are thinking of making synthetic natural gas from coal. Early stages of that project. If it did go forward, you are talking three or four years down the road. I think that company, from what we understand, will make some sort of decisions in the coming months with regards to whether they are going to proceed or not. But it is early days.

Fair enough. One final one if I may -- obviously in the extreme near-term, we have Lyondell's facility coming up in the second half of this year. Do you think there's enough local North American demand just to suck up that capacity? Just trying to figure out near-term pricing ramifications.

I think that the global industry is growing quite nicely. The industry does need new production, so we're kind of happy that we are starting to see some new production. One of my biggest concerns on these energy applications is that methanol prices get out in front of affordability, and we see what might have happened in California happening again, where the methanol, because the pricing gets so far in front of the demand for energy, that you destroy some of that demand. I think the industry needs more production.

We've announced, as I've just said in my comments, that we will be marketing a good part of that -- those molecules, so we have the ability to readjust our supply chain quite easily and significantly to make those molecules disappear in the North American market. So it is hard to predict what's going to happen at the end of the year. We anticipate them to come up at that time. And we will adjust our supply chain accordingly.

Very good. Thanks so much, John.

Thank you. The next question is from Steve Hansen with Raymond James. Please go ahead.

Good morning, everyone. John, on the Geismar II move, or GII, I think it's been called -- you've obviously gone ahead with the FID decision which is great news. I'm just hoping you'd provide us with some update about how you and the board feel about the potential for another gas contract, whether it be on a portion of the production or the full basis?

So Steve, we'd prefer to have a gas contract linked with the second one. I think what one of the criteria to move a second one was, to have a gas contract for the first one and we achieved that in January with Chesapeake. We are talking to a number of different players, not only in Geismar, but in Medicine Hat, to secure longer-term gas contracts. We have nothing to report today. I think when we talk to gas suppliers, when there is a firm project, or a firm outlet for methanol that's not five years away, that you can start taking gas in Medicine Hat tomorrow, and in Geismar in early 2016 you get a lot more traction.

So I know our team is working hard. I know we're the only Company still that have achieved a 10 year contract with some sort of link other than to the forward curve on NYMEX, so we're optimistic, but we've got a lot of work to do to bring it across the line.

Fair point. And maybe just a follow-up to that on Medicine Hat. Can you just maybe give us an update on your current gas hedge position for Medicine Hat? I recall, when you first got that plant up and running you had a good deal of hedges locked in but a lot of those are starting to roll off at this point. Just trying to get a sense where those hedge positions might be for this year and through the winter months?

Yes, Steve, it is not public, but I think we are a lot more comfortable with the gas in Medicine Hat. The original strategy when we started up is, we wanted to obviously get the capital back, but we also guaranteed our employees that rejoined us that we would be keeping them employed for three years. So I think we wanted to tie up gas to get our capital back, as well as to have a sustained run.

Our view of the market today in Western Canada is quite optimistic. The US still imports quite a bit of natural gas from Canada. We would expect over the coming years for that to go down, and the pipeline between Alberta and the coast is progressing slowly, so we do believe the Western Canadian gas is going to be more stranded in the future than it has been up even to now. So we're totally comfortable in being exposed more to the spot market than we have been in the last years, and I think those prices today are in the mid-$350, $360, something like that. So we are buying spot gas today and we do have some strips as well which do expire.

Very good. Thanks for the color.

Okay.

Thank you. The next question is from Alex Shernick with BMO Capital Markets. Please go ahead.

Hi. Just a question -- wondering if you could maybe touch on the operating rates in Trinidad, and whether maybe we can expect similar run rates in Q2 as we saw in Q1?

Yes, so the operating rates in Trinidad, as I mentioned, we did have a number of niggly outages, short-term outages, mainly on the Titan plant. Since we've done the turnaround on Atlas, it's run extremely well. We saw some gas restrictions in the quarter, not near as bad as 2012 and that was our anticipation going into the year. We expect it as the year goes on gas restrictions to be less. I think there's another pinch period in September which we are seeing, but we are taking our Titan plant down at that time for a turnaround which was planned. So we expect, provided our plants run according to plan, that the productions in Trinidad will be better in 2013 than they were in 2012.

Okay, great. Thanks. And then just moving over to Montunui and the equipment failure there. What was the nature of that, and was there any kind of one-time cost or anything that would've been embedded there in your numbers associated with that?

Sure. I will ask Michael Macdonald to answer that one, Alex.

Thanks.

Thanks, John. It was just an equipment failure. It took a little longer to get the plant back up and running because we had quite it big fix to do. So the team down there did a great job. It is nothing in terms of a huge capital cost to get it fixed. We've got some ongoing repairs that we are looking at to deal with the issue in the longer term. Got to recall, these are plants started up in the 1980s, so we've got a little bit of the end-of-life stuff that we're dealing with through that and that was an example of that. But I think the team is right on top of it, and the real issue was the production outage for us, and the volume that we lost, not the cost that it cost to actually get the plant back up and running.

Okay, great. That's very helpful. That's all for me, thank you.

Thank you.

The next question is from Charles Neivert with Cowen Securities.

I had two quick ones. One, you talked about bringing Chile I back online sometime later this year when you get some gas. Can we anticipate -- what would we anticipate for run rates? Back then you were getting round numbers near 100,000-plus tons out of that -- the Chilean facilities when gas was a little bit more available. Are we going to be able to see numbers up that high, or are we looking more like what we've see more recently in the 50,000 to 60,000 ton range?

The other -- the follow-on question is, there's been some noise and activity in the US around the, possibly, additional board plants and things like that, that are going to consume a lot more formaldehyde, and therefore the possibility of demand increases of some substance in the US coming from that front, which it has been on a little bit of decline lately. Have you been hearing any noise in those areas? I think Georgia Pacific was specifically mentioned as one that might be bringing up a new capacity for boards. For a structural board.

First question on Chile I, I think I mentioned that we anticipate, based on our current view for gas in the fall to be running at higher rates in Chile, than we have in the last 12 months. So that's our expectation. Again, it is hard to predict the future. There's a lot of work to do to put together a gas profile that makes sense. Whether Argentina's part of that or not, is still too early to tell. So we anticipate to be able to run that site higher than we have in last 12 months and as we get closer we will certainly disclose what our thoughts are.

With regard to formaldehyde in the US, I haven't seen that particular announcement you are referring to. We do see the formaldehyde industry in general because of housing starts and refurbishments, et cetera, better than it was last year. We would anticipate the idle capacity that's out there to run at harder rates before new build. But I can't comment on what you are talking about, Charlie, because I haven't seen the announcement. But there is quite a bit of idle capacity, or capacity that's running at less than full rates in the US and we have started to see, based on demand increases, the capacities operating rates increase.

Yes, I'm guessing the announcements, or at least the talk was about additional board capacity so that would obviously consume more formaldehyde, so since it is new capacity it would therefore need more of the formaldehyde that's on the ground so it just means maybe that the operating rates come up even higher. But again, it's early stage, but the numbers were pretty large that they were talking about in terms of board feet and things like that.

It makes sense. I think board capacity, probably for efficiencies, et cetera, new plants make sense as we've seen in South America. But I would be surprised if we saw additional resin or formaldehyde capacity because there's quite a bit still that can be restarted or operated at higher rates.

Okay, great. Thanks very much.

Thank you.

(Operator Instructions)

The next question is from Robert Kwan with RBC Capital Markets. Please go ahead.

Good morning. John, you mentioned that Titan is scheduled for an outage in September. Just wondering, throughout the rest of the fleet, if you can just refresh over the next year or two what the expected planned outages are. I think there was a major plan for New Zealand as well?

We do have that statutory turnaround that we've been pretty public on in New Zealand. That's in the fall of this year and we're going to -- it is not really a turnaround, it's a major refurbish of the reformer and the distillation columns. Beyond that, I mentioned Titan, we don't usually indicate when our outages are planned, but I just mentioned Titan because there's quite a bit of noise out in the market about potential outages in September for gas in Trinidad. So we are working with the other people that use gas in the estate to see what makes sense that if we know that there might be some potential outages on the upstream to see if we can coordinate our downtime at a similar time so the whole estate benefits. We really don't talk beyond that, Robert, about our planned outages for turnarounds.

Okay. And then just you commented a little bit around DME in China, around some of the break evens, and we've talked a bit about all of the talk about pushing more propane out in North America. There's been a little bit more around potentially pushing ethylene out of North America as well. Just what our your thoughts, and kind of what are you hearing with respect to that going to Asia, with respect to just MTO development?

Yes, the MTO is not really competing with ethylene. The best way to make olefins is from ethane, and that's the most cost-effective and will continue -- we believe that will continue to grow in the olefin space, because of the shale gas phenomena in North America.

The MTO is really substituting for naptha-based olefins, which still make up half -- what we understand half the production of olefins around the world, the market is around 220 million tons, so there's 110 million tons of olefins made from naphtha. The methanol is really competing with that which trades on -- somewhere on an oil basis. Our current view, based on naphtha and MTO is even buying merchant methanol, the affordability is up to $450, $460 on a realized basis for methanol, so there's quite a bit of room in Asia still to see substitution of naphtha-based olefins.

The volumes are quite large, so it is 110 million tons made from naphtha, converts into 330 million tons of methanol potential. So it is 3 tons of methanol to make a ton of olefin, so these are very large markets and they're obviously not all going to convert to methanol, but the economic value proposition is quite strong. China wanting to be more self-sufficient in a number of things is driving some of this merchant MTO. Being located on the coast where the -- all the olefins are consumed makes a lot of sense, the capital just to make a 200,000 ton olefin plant makes a lot more sense than integrated. So there's a number of drivers here.

As far as ethylene being re-exported, probably. I don't follow that market that close. But from what we see on the methanol to olefins in China it's still a very, very small part of the overall olefins global supply.

All right, that's great color. Thanks, John.

Thank you. The next question is from Paul D'Amico with TD Securities. Please go ahead.

Just a quick one on housekeeping. On the CapEx split for the relocation Number Two, the $550 million, John, you or Ian, can you walk through the timing on how that's going to play out?

Paul, it is roughly -- it tends to be in the short term it is going to be sort of the same next year $100 million roughly. Then there is a big bulge in the middle, and then some of it will actually trickle into 2016. So 100, 250, 250 is sort of roughly the profile.

Okay, the money for the 100, that's starting when? We are starting now?

Yes, as John mentioned, we are going to start decommissioning the plant when the Chile operation ceases operation. So that would be the first step in terms of capital spending. We would see relatively modest spend through the first six or seven months, and then it would pick up in mid-next year.

I will ask Michael Macdonald to add a little bit of color to that.

Hi, Paul. The one comment I'd make is that, as Ian indicated, that the spend profile is a little more uniform than a lot of projects, and the simple reason for that is that we don't have a big procurement spend on this, so we don't have to front-load stuff to go out and buy equipment. And again, it is just I think emphasizes the attractiveness of these projects. This is about moving a project, not getting a line up for equipment and so forth.

I appreciate it. Mike, and I don't know how this can happen or not or if you guys would consider it, but is it possible, given the materiality and the transparency that you've got with respect to these projects, you've got a line item on Castrol statement Louisiana -- what do you call it, Louisiana Project Expenditures, is there a way that you can segment that, Louisiana Project 1, Project 2, so we are able to actually have a transparent window into the CapEx for each project?

Actually, Paul, what we are planning to do is probably bring them together. It's going to be extremely hard as we have two projects running with similar teams and similar partners that are executing to keep them really separate. It is probably not adding that much value, so we're probably looking more to consolidate the two projects going forward.

There's a lot of common infrastructure as well, so it really does make sense to think of them as one big project.

Okay. The only reason I was asking for that is because the timing that they come online is different so I was hoping to have that kind of connection, connecting the dots but I understand, thanks.

Maybe we will take that off-line, Paul, and provide some guidance.

Appreciate that.

Thank you. The next question is from Steve Hansen with Raymond James. Please go ahead.

Hi John, just a follow-up. I know you mentioned that Egypt is really unchanged in terms of guidance but I was hoping you could at least talk around some of the things that you might be expecting through the summer months here. As heating demand does ramp up and whether or not we might see the possibility of outages. And just as a derivative to that, is there any progress on the ground being made in terms of the gas distribution infrastructure?

There were some announcements in the upstream in the last couple weeks on further exploration in Egypt. I can't really provide any more than I have. We do anticipate the run for the year and we do anticipate on average to be at 70%. If I look at the first quarter and I look at April we've operated higher than that, but on average, we think that's still good guidance. Again, Egypt is really difficult to predict, but we don't anticipate at this time that we will be shutting down due to lack of gas.

Okay, thank you, very helpful.

Thank you. The next question is from Chris McDougall with Westlake Securities. Please go ahead.

Hello, John, thanks for taking the question here. First, what do you expect your maintenance CapEx will be once both of the Louisiana plants are up kind of on a pro forma basis in 2016?

So how I look at maintenance capital and we're going to be up at six sites and quite a few plants, so I think how I would characterize it is, for every million tons of installed capacity, you should be thinking $10 million. That's how I would guide you on that.

Okay. Great. And then on the fuel blending in China, what is your thought on how much demand that is for the gasoline blending, and then the DME, and the other energy applications with the bio diesel?

So right now the fuel blending which includes some cooking is probably 6.5 million tons. The DME is just north of 3 million tons. There's quite a bit of MTBE growth in China, it is probably 1.5 million tons. Then we've got MTO. So the MTO non-integrated, you've got one in inner China, which is around 800,000 tons of methanol. The Skyford plant is 1.7 million tons of methanol at full rates, and the one I mentioned Wison, which is in Nanjing, which is coming up here in the summer is another just around 1 million tons. And these are merchant, or buying methanol to make olefins, not integrated.

Okay. And what's your -- aside from the MTO, what's your read on the kind of year-over-year growth and the fuel blending?

Around 10%.

Okay.

I will remind you, it is growing outside of China, right? It's not being used in Iceland, the UK, Holland, it is allowed in the European pool up to 3% in the current fuel spec, there's trials going on in Australia, and New Zealand is looking at it, Trinidad -- Israel's got a full-blown program, Iran has announced they're going to be blending. So it is a little hard to predict how much people are going to use, but it is getting quite a bit of traction outside of China, and we've got this company, Stena, looking to use it on board their ships, which is a huge demand just in that Baltic area.

If it all went to methanol, which it is not going to, it is 40 million tons. If a third of it goes to methanol, it's 10 million, these are large, large numbers that -- methanol, I said, is a fairly small market, olefins is larger, and energy is exponentially larger so these are huge applications. One ship will use 40,000 tons of methanol.

Thanks a lot.

Thank you.

(Operator Instructions)

The next question is from Duffy Fischer with Barclays. Please go ahead.

Yes, good day. Question on the unintegrated MTO -- you walked through kind of what's coming on line in the near-term, but as you look over maybe the next two, three and four years, how much unintegrated MTO do you see coming online in China?

That's a little bit, again, hard to predict. I think we are comfortable with the projects that I've spoken about. There's others that are under construction, or under consideration. Numbers I've seen are 6 million, whether that all happens, it's really, really early days to predict that. I'd say the economics are there, today makes sense. Usually economics drive things, but the numbers I would be comfortable with is 6 million.

Okay. And are those folks looking at those plants, are they looking to lock in longer-term contracts on our methanol, or are they comfortable just kind of playing it with spot as they go forward?

That's a great point, and one of the key issues of maybe why some of this won't go forward is they're having a real difficult time in securing the methanol for these plants. We are in discussions with a number of these players that are either operating, or about to operate, or want to operate, and their biggest concern is not the capital, it is not the affordability, it is all procuring the methanol going forward, because obviously if they don't have raw material, they can't make olefins. That's their biggest concern, and I think there's companies from China that will be looking to invest in methanol if they can't secure merchant from somebody else. So I think it is a big watch out for that industry. I'm glad to see things like Lyondell coming on stream because the industry certainly needs the molecules.

Okay. So fair to say that the bid ask right now between what you'd want for a longer-term contract, and what they are willing to pay is still fairly wide?

Our contracts are structured such that it is our marker, less a discount, so I think we do have a small contract with Skyford, and we are learning as we go. It's a market related contract. We are not interested in entering into contracts that are not market related. But I think it is really a shortage of molecules at this time. So one of the things that's really great about our industry is you've got all this demand growth, and not a lot of supply growth at the same time, and we're bringing on 3 million tons of low-cost capacity to meet this demand growth. So I think as others have echoed, that executing these projects quickly and on time, on budget, very safely, with a high quality is what we're focused on. Adding 3 million tons by early 2016 in an industry that really needs the product is just great, great business for us and that's what we will be focused on.

Great, thank you very much.

The next question is a follow-up question from Charles Neivert with Cowen Securities.

Just quickly, you talked about the couple of turn arounds you guys have scheduled for later this year. Are you guys looking at building, or are you actively building, some inventory to try and take care of that, or are we just going to have substantially lower sales because we won't -- you won't have the tonnage to supply during the downtime?

No, you won't see our sales change, Charles. They will be what they are around 1.8 to1.9 per quarter. We have a lot of flexibility in our supply chain. You have seen our inventories over the quarter build a little bit, and it is a lot of is -- some of it is produced products, so that's good news for the future as well.

No, our sales won't change, and we'll just manage these outages as we usually do in our supply chain, and they are well planned for, and our teams do a really, really good job in making sure our customers are kept whole, whether they're planned or unplanned outages. So I don't think you should see any sales impact at all.

Okay, so what we will see is the production dip, but not necessarily a sales dip, and the sales conceivably could come out of produced inventory?

Yes, partially. We are building some produced inventory. You can see that in the quarter. How the inventory flows through the FIFO layers, et cetera, is a little bit more complicated than I can even understand, so we've got a lot of smart people here that do that.

But I think we are building some inventory ahead of some of our own turnaround, just to have a little bit more buffer in our system and because we do see the markets as being extremely tight for the next period, so having a little bit more flexibility I think is good business. And allows us, for example, to take advantage of this arbitrage today between the two basins which is around $100 a ton. I think you've seen that in our results as well.

Great.

It's good business to have a bit more inventory right now.

Thanks very much.

Thank you. The next question is also a follow-up question from Chris McDougall with Westlake Securities. Please go ahead.

What is your expectation, or belief, that the new build CapEx for a methanol plant on the US Gulf Coast is? I know when you originally were planning the move, you thought it saved you about 30%, and I was curious if costs per new build have also increased along with the rest of the EPC world?

Yes, that's a great question. Obviously we are looking to our next project beyond Geismar II, and we've done some work on capital for new build in North America. We've looked at capital in the Gulf Coast, as well as in Alberta. The numbers we are seeing are quite shocking. It is around $1,000 a ton for new build, and that's at a site like Medicine Hat, where we think there's about $100 million in savings because it is a brownfield site. Probably to build down in the Gulf it is a little less than what it would be in Medicine Hat because the labor rates are a little higher there.

But we are continuing to do quite a bit of work on this. I'd say our view today is probably like 20,000-foot view. We need to get more granularity in it, but we are quite surprised about the new build capital, and our view is, and our team's view is, it is only going to escalate as you get this increase in activity, especially in the Gulf Coast for olefins and methanol and other things that have been announced by Sasol, et cetera.

Yes. And then internationally, it sounds like most of your work has been on new construction, in North America, but internationally there've been a number of large gas discoveries, and then maybe some other more midsize ones that would be more appropriately sized for a methanol plant versus an LNG plant. Is there anything there you are looking at? And as I recall, kind of high CO2 was good for you, but bad for LNG, so that might be the perfect spot. Is there anything there? Is it mainly North American focused?

We got a group of people looking everywhere. We are looking for projects. We see the industry environment as being quite attractive. We need to add capacity to keep our leadership position, but it has to add capacity that makes sense. I mentioned that $1,000 a ton number.

We are trading today at a replacement cost around $650 with not any value for a Chile assets, which I'm still pretty optimistic one day they will run at a much higher rate. So I think to spend $1,000 a ton when you are trading at $650 is not very good business, so we will see where we are about this time next year to see what we do with new build. But we have a team that's scouring around the world for projects.

What I would say, North America is a great place to build. We wouldn't build a greenfield site without a long-term gas contract so that's a bit of a challenge in North America today. In addition, where there is gas, whether that be Mozambique or Papua New Guinea or some of those places, we are really competing with LNG, and LNG is still selling into Japan and Korea in markets like this that over $10 in MMBTU, and even at the low methanol price today we cannot afford to pay, compete with that type of gas when we are thinking about methanol.

So I think methanol prices will have to go up quite a bit before we can compete with LNG at the current LNG selling prices. But again, it's hard to predict the future. When we build a greenfield site it's 20 years, we start getting our money back in somewhere year 7 or 8, so a bit more risky than what we are doing with relocations and restarts of the idle capacity. So that will be a bit bigger decision for us.

Okay, great. Thanks a lot.

Thank you.

(Operator Instructions)

The next question is from Brian Lally with Barclays. Please go ahead.

Hi guys, good afternoon. Question from the fixed income side if I may. Just given your comments in the press release of around feeling comfortable with your current liquidity, and also cash generation. How do we extrapolate that to future funding plans, and to that extent, would that mean there maybe aren't any in terms of plans to come with any new issuance in the future?

Again, I just spent quite a bit of time talking about a new build so as we execute these 3 million tons of low-cost capacity at a price even lower than what we are seeing today for methanol, around $400 a ton realized, you get to that 2016 period we're generating over $1 billion in EBITDA. Of that if we don't do anything on the new build side, quite a bit of that is free cash, probably $600 million. We do have those bonds that are coming due in 2015.

So it is early days, but our strategy will be the same as always been, we will stay focused on methanol. We will invest in growth opportunities if they make sense, and add shareholder value. We want a sustaining, growing dividend. You saw us increase the dividend again today to $0.80, and also it's --we will continue to look at that, I think shareholders like a sustainable growing dividend. And with that excess cash if we don't have good ways to invest it that are positive for shareholders, we will return it and what we've done in the past is return it through share buybacks. So I think it is early days to see what we're going to do, but funding fixed is probably not in our short term or medium-term plans.

We feel very good about our balance sheet and the funding of the 3 million tons of new capacity we have in front of us. So from a balance sheet point of view we fell very, very good.

One follow-up if I may -- and appreciate that there might not be a perfect answer to this, but of the three agencies, only one, Moody's, doesn't rate you guys fully investment-grade. Last time that they put out an opinion on you guys it was before the Chesapeake announcement, obviously before today's announcement around Geismar II, methanol prices have moved up -- from your perspective, what do you think those guys need to potentially move you guys up to fully investment-grade, and is that something you are actively pursuing this year as part of the plan? Thanks for the time.

First of all, we do have two of the three rating agencies at investment-grade, and certainly in terms of the metrics of our Company, we are clearly investment-grade. Moody's, it's been very difficult to push them over the line. They've had a positive outlook on our rating for a long time. It is unusual. Typically when you have a positive outlook on a rating, you make an adjustment within a few months, and as I say it is been up and down for probably 18 months. So we're in constant contact with them.

I think the robust cash flow is the high price environment. The fact that we do have the Chesapeake deal in place, are certainly positive in terms of having impact on that rating. Having said that, at the end of the day these rating agencies are independent, and it is very, very difficult to influence them. But certainly from a rating point of view we feel very comfortable that you should think of us as an investment-grade company.

All right.

Thank you. I would now like to turn the meeting back over to Mr. John Floren.

Thanks very much for all the questions and all the interest in the Company. Certainly with our expectations for Q2 at this point, our production numbers are looking quite good, we anticipate sales volumes to be quite healthy, and in a higher price environment our earnings in Q2 should be higher than they were in Q1. Look forward to speaking to you in about 90 days. Thanks very much.

Thank you. The conference call has now ended. Please disconnect your lines at this time. We thank you for your participation.