Methanex Corp (MEOH) 2015 Q4 法說會逐字稿

Ladies and gentlemen, thank you for standing by. Welcome to the Methanex Corporation fourth quarter 2015 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.

Thank you, good morning, ladies and gentlemen. Welcome to our fourth quarter conference call. Our 2014 fourth quarter report, along with presentation slides summarizing the Q4 results, can be accessed from the Events tab of the Investor Relations page on our website at www.methanex.com. I would like to remind our listeners that our comments and answers to your 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 forecasted projections which are included in the forward-looking information. Please refer to our latest MD&A and to our 2014 annual report for more information. I would also like to caution our listeners that any projections provided today regarding Methanex's future financial performance are effective as of today's date. It is our policy not to comment on or update this guidance between quarters.

For clarification, any references to revenue, EBITDA, cash flow or income made in today's remarks reflect our 63.1% economic interest in the Atlas facility, and our 50% 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 the impact of certain items associated with specific identified events. We report our results this way to make them a better measure of underlying operating performance, and we encourage analysts covering the Company to report their estimates in this manner.

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

Thank you, Sandra. Q4 2015 adjusted EBITDA was $80 million, and adjusted net income was $15 million or $0.16 per share on a diluted basis. This compares to adjusted EBITDA of $95 million and adjusted net income of $23 million in Q3. The lower EBITDA in Q4 is primarily the result of lower average realized pricing which decreased from $323 per tonne in Q3 to $277 per tonne in Q4.

The current methanol industry environment is quite challenging. We posted our prices for Asia and North America for February at $255 a tonne, and $249 per tonne respectively; levels that we have not witnessed since 2009. The main factor behind the price decline has been continued decline in oil pricing, which has lowered the affordability for methanol into methanol to olefin, MTO, and other energy applications.

We estimate that during the quarter, approximately 6 million tonnes of annualized methanol demand did not occur due to low methanol affordability for MTO; methanol dipropylene, MTP; dimethyl ether, DME; and methanol to gasoline, MTG. Q4 industry supply was also robust. The methanol market is experiencing an adjustment period as the new supply is working its way into the marketplace, which has led to some very low spot prices, especially in North America and Europe.

Recently price volatility in the spot markets in North America and Europe have gained the attention of many, and it is important to bear in mind that these markets are thinly traded, and the reported pricing represents very few trades with limited volume. Spot pricing in China today is in the range of $210 per tonne. We estimate the current cost curve to be in the similar range with some producers estimated to be at million tonnes of annual methanol production with higher cash costs than $210 per tonne still operating.

The cost curve has moved lower in part due to the continued devaluation of the Chinese yuan and lower natural gas prices in China. We believe that over time, high-cost production should rationalize. However, this process sometimes takes longer than expected. Our average realized discount relative to the weighted average Methanex posted price was approximately 15% in Q4 and roughly 16% in Q3. These realized discounts were wider than those achieved in the prior quarters of 2015 and 2014.

Our effective discount tends to widen periods when methanol prices decline quickly, as we experienced in the second half of 2015. Overall, methanol demand grew during Q4 was relatively robust at approximately 2%. Traditional demand growth was healthy despite concerns over economic growth, and MTO demand grew as one plant came back from maintenance, and a new plant capable of consuming up to 1.8 million tonnes of methanol started up late in the quarter. There are now a total of 12 completed MTO and MTP plans that have capacity to consume just over 12 million tonnes of methanol at full operating rates.

We continue to expect an additional four MTO plants will be completed in 2016, with the capacity to consume up to 6.5 million tonnes of methanol. While MTO demand has shown strong growth, currently we believe the profitability of this demand segment to be only marginally positive, and most plants are not operating at their full potential. We estimate the operating rate for existing MTO plants was approximately 70% in Q4, while MTP plants were for the most part idle due to challenging economics. Our total production grew in Q4, with 10 of our 11 plants producing methanol during the quarter.

This is the highest number of plants we have had operated simultaneously during any quarter in the Company's history. Total production was 1.389 million tonnes in Q4 compared to 1.259 million tonnes in Q3; our highest quarterly production level since Q1 of 2006. We had a modest produced inventory build of 15,000 tonnes during the quarter. We successfully started up our Geismar 2 plant on December 27th, 2015. The plant has operated high rate since start-up.

Our estimated combined capital costs for the two Geismar plants is unchanged at $1.4 billion. I am extremely pleased with the excellent responsible care and safety performance achieved during this project. The start-up of G2 is a major achievement, and the final milestone of our three year commitment to grow our operational capacity by 3 million tonnes. In North America, our Geismar 1 plant operated at near-full rates during the quarter.

Our Medicine Hat plant also operated extremely well and produced 155,000 tonnes in the quarter. Because of the recent upgrades made to Medicine Hat have proven to have expanded that plant's production capability, we have rerated the plant's annual capacity from 560,000 tonnes to 600,000 tonnes per annum.

We have fully completed all repairs for our previously-identified mechanical issues in New Zealand, and all of our New Zealand plants are once again capable of operating at full rate subject to natural gas composition. The New Zealand facilities lost approximately 175,000 tonnes of production in Q4, due to the down time taken for repairs.

We restarted our Egypt facility midway through the quarter, and that plant contributed 58,000 tonnes of methanol in Q4. We continue to expect that future gas supplies to the plant will be significantly curtailed, especially during the summer months and the periodic shutdowns will be required until the country's gas deliverability is fully restored.

On January 24th, in what we believe was an act of sabotage, a large gas pipeline in the Damietta area was damaged, resulting in a curtailment of gas supply to large gas-consuming facilities including our plant. We have been told repairs to the pipeline will take about a month. We expect the plant to be idle until the pipeline is repaired.

Our Chile 1 plant, which was idled in May due to insufficient gas supply, was restarted on September 27th, 2015. That plant produced 88,000 tonnes of methanol in Q4, which represents approximately a 40% operating rate.

The majority of the gas supplied to our Chile plant in Q4 was sourced from Chile, and we remain optimistic that progress made by ENAP in bringing on new unconventional gas supplies to market may translate into higher gas supplies for our Chile assets in the future.

The Trinidad site experienced gas restrictions of approximately 15% in Q4. Slightly better in Q4 versus Q3. We expect similar rates of gas curtailment to persist during 2016.

During Q4 we returned approximately $33 million to shareholders. We paid $25 million in dividends and repurchased 210,000 shares, for a total of $8 million. As of the end of 2015, we have repurchased 1.6 million shares under our normal course issuer bid which commenced on May 6th, 2015; or about 33% of the 4.6 million shares allowable under with the bid. In the current uncertain methanol price environment, we are focused on prudent cash and cost management. We have reduced our budgeted capital spend for 2016 and now expect to spend approximately $50 million during 2016.

Our estimated remaining cash spend to fully complete the Geismar 2 project is $30 million, for a total cash outlay in 2016 of $80 million. Other than capital, we have very limited cash requirements or financing commitments in the near term, giving us strong confidence in our liquidity position. Based on our current view of methanol prices in the first quarter of 2016, we plan to maintain our dividend. We would expect not to have to reduce the dividend unless we came to a view that methanol pricing will be much lower than the current pricing for a significant period of time.

With the Geismar 2 start-up, we expect our produced sales volume to be higher in Q1 2016 than in Q4 2015. We expect average realized pricing to be lower than we achieved in Q4. As well, due to the declining methanol price in Q1, our margins are expected to be lower than they would be in a stable price environment, because of higher cost inventory from prior periods being sold in the quarter. As a result, we expect EBITDA to be lower in Q1 2016 than Q4 2015. I would now be happy to respond to any questions.

Thank you. (Operator Instructions). The first question is from Hassan Ahmed from Alembic Global. Please go ahead.

Good morning, John.

You know, it is a tough environment in terms of pricing and the like and, you know, you talked about the cost curve and the cost curve kind of being around $210 a tonne, so I would imagine there is a fair bit of capacity out there that is you know call it a break even or below break even levels. So are you beginning to see some early signs of capacity rationalization or, you know, at least a reduction in operating rates?

Not really, Hassan. I think we are a business surprised we have not seen a bit more rationalization in China. Some theories around that, you know, are not clear to us, certainly Chinese New Year is coming up and there is an anticipated increased demand in MTO, so there could be reasons why people continue to operate below their cash cost positions.

Fair enough. Now, on the MTO side of it, even in this environment, you talked about how one facility came online, and you know there is obviously a lot of chatter about, you know, 2016, at least the first half, being a very heavy, sort of turnaround period for the ethylene side of things. So, you know, what is your view with regards to some of these other facilities sort of starting up, you know, through the course of this, you know, turnaround period and the like on the ethylene side of things?

Yeah, we expect as I mentioned, four more plants to come on in 2016. If history is repeated, then they tend to come on and operate quite well when they do start up. I think I mentioned also there is latent capacity in MTO and MTP that did not run during the quarter because of economics, so if you do have a large amount of turnarounds in naptha-produced olefins, you could expect these plants could operate at higher rates. But again the future is very difficult to predict.

Very good. Thanks so much, John.

Thank you. The following question is from Daniel Jester from Citigroup. Please go ahead.

Good morning, John.

Good morning, Daniel.

If we look at the February posted prices, you know, Asia is higher than North America, which I think is the first time since 2012. I guess my understanding is that North America is still an import market. So maybe you could just provide some color about how you are thinking about the regional price differentials and, you know, shouldn't the North America look more like the Asia market going forward?

Again, the future is hard to predict. We are kind of surprised how quickly the North American and European spot prices have moved down. Again, it is mainly small volumes between consumers of methanol that do not have a lot of financial capacity in the industry or financial stake, and traders. So, you know, it is really surprising how low it is gotten. So, you know, I would have said some months ago that we would expected the Atlantic to still remain at somewhat of a premium to the Asia-Pacific basin, but in the current environment it is really tough to call what is going to happen. I would say that some of the competitors that were importing product into the United States have been, you know -- had some molecules displaced because of increased production, probably have not really landed on where those molecules are going to go, which is really leading to a lot of messiness in the marketplace right now.

Okay. And then I guess it is a bit early days, but could you share with us your take on the impact of Iran on the markets in a post-sanctions environment? Thanks.

So really no change to our view. In a post-sanction environment, probably starting in 2017, you might see more contracted volume flow to places like Europe and Korea. That is what we saw prior to the sanctions. So if the consumers of methanol in those two regions get more comfortable that sanctions are lifted on a more permanent basis, you would expect, you know, volumes to go to those markets at the expense of China and India.

The actual amount of production, we do not expect to change until there is a significant investment in the infrastructure upstream to allow the current plants to run at higher rates during the wintertime. There has been a number of new plants, you know, on the books for, you know, a long, long time. Will some of those go forward and get completed? Probably, but it is probably some years away, 2018, 2019. So I would say in the next few years, the only change we would expect in a post-sanction environment is maybe a return to seeing methanol show up from Iran into Europe and markets like it.

Okay. Thank you.

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

Yes, good morning. You mentioned the sloppiness kind of in the U.S. around the startups. Is that something that you can help cure, you know, maybe by offering some swaps to some of those guys who do not know where to place their displaced product from the U.S. or is that something that they are going to have to, you know, figure out over time; and if so, roughly how long do you think it will take before we get to some stability about which molecules need to go where?

Well, we always talk to, you know, competitors about swaps. Swaps make a lot of sense. You know, I think there is still further opportunities for swaps, and that certainly will help the situation. How long it is going to take, it is hard to predict. What I would say is, we have seen a lot of shipping inquiries for molecules to move from the U.S. Gulf Coast to Asia-Pacific, namely China, so that is, to me, a positive sign which has occurred in the last few weeks. We are also aware of our large competitor in Trinidad shipping full ships up to 90,000 tonnes a month to China starting this year. So I think, you know, we expected some, as you called it, sloppiness in the first quarter. We have been a little surprised how much there has been.

Okay. And I know it is difficult but can you put a little more color around how ardently you would support the dividend if things got weak? Is it a couple quarters, a full year? What is your, you know, desire, I guess, to use that to support the dividend if we go through a tough period that lasts more than a couple quarters?

Well, our dividend policy has not changed, and there is three pillars of it; sustainable, growing, and meaningful. It is pretty meaningful right now, above 4%. We have grown it every single year except for the years of the financial crisis in 2008 and 2009, and sustainable. So we stress test that dividend at the low end of the cycle, which is where we are now, so as I mentioned in my comments, we do not expect to have to cut the dividend unless we see a lot lower prices for a very long time.

Okay. Great. Thank you.

Thank you. The next question is from Joel Jackson from BMO Capital Markets. Please go ahead.

Thanks. Maybe I will follow up on that last question, John. Is there a level of sort of safety or buffer-free cash flow above your dividend payout that you would want to maintain sort of over -- in your projections over maybe the coming year or a few quarters?

Well, we think we need about $100 million in cash to run the business on a day-to-day basis.

Okay. Maybe just on G1 and G2, so if I look at some of your commentary in the release, you talk about five days of outages because of mechanical issues. Can you maybe talk about, at G1, what those issues were? And then also, you suggested that you may be able to increase the production capabilities of G1 and G2 from one to 1.1 million tonnes on 250 to 275 a quarter. Some of your commentary suggests you're still sort of guiding to 250 a quarter at G1. Can you maybe talk about some of that?

We have been running G1 at about 3,000 tonnes a day. Again, you know, we are keeping an eye on the catalyst to see how it performs. Usually as catalyst gets older, you start to produce a little less per day. We have not seen that yet with G1. So, you know, 3,000 tonnes a day, assuming no outages, you get to that 1.1 number pretty close. So we had a small little problem in G1, nothing serious, so, you know, I really do not want to comment more on that.

The plant came back up and has been running at high rates since. So, you know, I think, you know, the -- we have had an outstanding performance on G1 considering we relocated a plant thousands of miles, sat it down, started it up, it started up really well, and has performed outstanding in 2015.

So we should be modeling, assuming everything stays about the same, about 3,000 tonnes a day from G1 and hopefully G2, is that right?

I am not going to tell you what to model but I can tell you how the plant has performed.

Okay. Thank you.

Thank you. (Operator Instructions). The following question is from Laurence Alexander from Jefferies. Please go ahead.

Good afternoon. First on shipping, can you discuss how shipping costs are following and how that affects your business; and secondly, sort of an update on marine blending demand? Any progress there?

Yes, so as the bunker fuel prices go down, then the shipping rates go down. So a couple years ago it might have cost $90 a tonne to ship product from the U.S. Gulf to Asia. It is probably more in the $60 to $70 a tonne range. So a good part of shipping cost is fuel, and the lower the fuel price, the lower the shipping rates. Sorry, the second question?

Just an update on the marine blending experiments and any progress there.

Sure. So Stana converted the Germanica engines and they plan to complete the conversion in the first quarter of 2016. The ship has been running well on methanol. I would say in the current environment, it is difficult to expect a major uptick in new methanol for on-board ships, other than our own ships, the seven ships that are going to be delivered in 2016, which will have the dual fuel capacity of running on bunkers or methanol, depending on where the ship is calling.

Thank you.

Thank you. The next question is from Cherilyn Radbourne from TD Securities. Please go ahead.

Thanks very much and good morning. So your latest investor presentation refers to 5.5 million tonnes of incremental supply out to 2018. I just wonder if you could comment on what you foresee starting up in 2016 and 2017, and how you see that total number changing over that time horizon based on where we are from a pricing perspective.

Sure. So in 2016 we have JS Ammonia and CIS, which is the old Soviet Union, a couple hundred thousand tonnes. In 2017, we have just plugged in maybe a Libya restart, and an (inaudible) to bottleneck and probably something in Iran.

In terms of the total 5.5 million tonnes, do you foresee a change in that based on where we are from a pricing perspective?

No.

And then I do not mean to what were on the dividend but I did just want to clarify, when you said that it would be sustainable unless you had a view that current pricing was going to be lower for a long period of time, are you referring to your posted prices in February?

I am referring to what we think we are going to realize in Q1 of 2016, which includes our posted prices in February.

Okay. That is helpful. And then just a last one, this is a bit of a housekeeping question, but you did indicate it to your investor day back in May that the tax rate varies based on methanol prices, and I just wondered where we should be thinking about the tax rate given this pricing environment.

I will ask Ian Cameron, our CFO, to answer that one.

Yes, John, and I think when we have talked before, and I have talked on these calls before; when we get to these lower price environments, it is very, very difficult to give guidance on tax rates. You get -- you get unusual tax rates. So it is very hard to model. So I really prefer not to give any guidance. My -- you know, I think we should be focusing on EBITDA line, things like that.

Okay. Thank you. That is all my questions.

Thank you.

Thank you. The following question is from Steve Hanson, from Raymond James. Please go ahead.

Yes, hey, guys, good morning. Just a quick one on the New Zealand complex, and just trying to understand what has been done, what has been completed and whether there are any residual challenges there. Maybe if I understood your commentary at the outset, John, it sounds as if there was actually a bridge of that turnaround between Q3 and Q4 that led to some of the down time. Should we understand that that is entirely completed and fixed now and we can expect a return to more normal operating rates?

Yes, we did not have any planned turnarounds in New Zealand, as I mentioned in the previous couple of calls, that I recall, we had some technical challenges with the plant that would take us the balance of 2015 to fix. The technical challenges we had are fixed. The plants are up, all three plants are back up and operating. We do not expect to have any other planned or unplanned outages in 2016. So we would expect the plants to operate at fairly high rates during the year.

Okay. Great. That is very helpful. And then just as a follow-up, just curious about the current market environment and whether or not -- you described your position as being prudent in managing cash closely, which I can respect. I am trying to understand what that means for the buyback cadence here as we look forward to the next quarter or two. You have got an existing MTB, in which you have actually got a fair bit of room left. I am trying to understand whether we can expect you to accelerate through the period here or whether or not you maintain a more cautious view.

Well, I think what we have said with the buyback is that any excess cash, we believe we have on the balance sheet, we will use to buy back shares. I think in the current environment, you should expect us to be quite cautious, until we see where methanol prices end up.

Okay. Very helpful, guys. Thanks.

Thank you. The next question is from Jacob Bout from CIBC. Please go ahead.

My first question is on G2. Maybe talk a bit about locking in gas. Have you done any of that?

Yes. No change from what we announced on the last quarter, Jacob, where we have locked in about 40% of the G2 requirements using financial hedges. So we are 60% exposed to the spot market in the Gulf Coast.

Maybe as a follow-up, remind us what your debt covenants are right now.

I will ask Ian Cameron to answer that.

Jacob, we do not make public, you know, covenants, details around our debt covenants; so we do not comment on that.

Anything on EBITDA at all?

Pardon me?

Are the covenants tied to EBITDA?

You know what, what we can say is that, you know, our bonds do not have any covenants, you know, there is no -- there is no interest coverage to ask for, things like that. Typically in bank arrangements, there is an EBITDA coverage ratio. Yes, I am sorry. I am sorry. So we do disclose in our financial statements the covenants, Jacob, so, at a high level, so the interest coverage tests for our bank line is two times, as defined in the agreement.

So it is a two times interest coverage ratio. And there is a debt-to-cap ratio as well that is -- again, it is a defined -- it is a defined ratio in the agreement, but it is at a 55% leverage and that leverage number today as defined would be significantly below that number.

Thank you. (Operator Instructions).The following question is from Robert Kwan from RBC Capital Markets. Please go ahead.

Good morning.

Good morning.

If I can just continue on the credit side of things, you have highlighted kind of about three times that the EBITDA is the threshold from the rating agency is, and in your presentation I guess that $350 average realized price, you are a little under that and we are obviously lower. How are you thinking then, I guess, about that? Obviously the rating agencies are not necessarily going to move on something that is short-term, but, you know, how are you approaching kind of where you are debt to EBITDA at these levels and trying to get at the debt?

I will ask Ian to comment on that.

Yes, so, the way the rating agencies think, and I think you have to ask the rating ages, to be honest with you, but they tend to look through the cycle. And, you know, the typical business. When they are -- we are providing guidelines on coverage, it is based on a cycle. So that is really all I can offer at this time.

Okay. And I -- sorry --

We do not have an intention to use cash to reduce debt, if that is the question.

Okay. And I guess because of that, there has been no kind of behind the scenes conversations from them, kind of prodding you to shore up that metric?

Yeah, Robert, I think it would be inappropriate to discuss the issues behind the scenes.

Fair enough. Okay. Just last question. You had inventory builds throughout 2015 -- they have not been huge but you have been building inventory. Is there something we can read into as to that? Is it operational? Were you building inventory kind of globally in anticipation of G2? And to some extent as for what happened to you when you were building inventory for a bit, might that be the case that we will not see that for G2 here in the first quarter?

I think when I said inventory build, it was on produced molecules. If you look at the actual inventories themselves, they remain quite stable. I mean, as our sales volumes go up globally, we will need a little bit more inventory to underpin those sales. What we have guided to as well, as we get these 3 million tonnes of our own product capacity online which we have achieved, we will be buying a lot less purchased products, spot products and that is what we are doing today.

We are buying a lot less and our sales have not gone up; the 3 million tonnes that we have increased the productive capacity. So our inventories will go up a little bit to underpin increased sales, but our produced inventory is what is really increasing, as we substitute produced molecules for spot molecules.

All right. That's great. Thanks, John. Thanks, Ian.

Thank you. The following question is from Charles Neivert from Cowen and Company. Please go ahead.

Good morning, guys. Quick question. The CapEx number is obviously -- it is really low this coming year. And typically you guys have talked about, you know, 10 million per million tonnes of capacity. Is that $50 million sustainable, and is it atypical in that it does not include any real turnaround work, it is just straight, normal, very normal maintenance, in a year when you have got turnarounds, that number should come back up a bit? And to what degree, you know, how far might it come up? Is it back to $80 million or would it go a little higher if you had to have one or two turn-arounds during the course of the year?

I think the guidance we have given, you are right, is about $80 million per 8 million tonnes of operating capacity over a three- to four-year period, which is a normal turn around cycle for our 10 plants. So in any given year, you should think we are going to have two to three turnarounds per year. I have never said in that number that we are not going to have to any turnarounds in 2016 so I would not want to leave that impression in the marketplace.

As well, I think we, you know, in the current environment, we have looked at our maintenance capital very severely and have cut appropriately, but it is not on a sustainable basis. I think on a one-year, we can get away with $50 million, but I do not think you should be reading into that that we will be doing $50 million going forward on a sustainable basis.

Okay. That is it. Thanks very much.

Thank you. The next question is from John Roberts from UBS. Please go ahead.

Thanks for taking my call. You have got your gas, majority of it on base plus variable, some at fixed, some at spot, some at various contracts around the world. Do you have a long-term mixed target that you are going to try to get to? Gas stays low here, will we start to see you shift over time? Because a lot of those contracts, I think that base plus variable was a concept for a higher gas environment than what we have seen recently.

Yes, we still like the base plus variable concept, it gives us certainty over a 20-year life of an asset. We like it because, during very good times for methanol, the gas suppliers are doing better; and when we are operating in certain countries, I think it is good that the gas suppliers, which is sometimes involves the government, that they are achieving higher gas prices when we are achieving higher methanol prices.

If you are talking specifically around North America, you know, we like to have those similar type of arrangements which we have achieved with Chesapeake, but in the current environment, we have not been able to achieve those kinds of arrangements, so we have gone out and did a 10-year financial hedge, you know, with -- where all the upside would be ours.

We like to have certainty around our gas supply, especially the economics. In places like North America, we are not opposed to having some portion of our production exposed to spot, and that is what we have today. So we are very comfortable with the mix that we have today. If we add more capacity in North America, I think you should expect us to look to tie up gas on a more permanent basis before we would make that decision.

If you tie -- if you did add more capacity, you probably would tie it up if it were today at the same as G2, is that the way you would think of your mix evolving?

Yes, I think it is premature to even speculate on that, so, you know, we are working on a couple of projects in North America, obviously in the current environment, you know, we are not looking to execute any new growth projects. So, you know, the market in western Canada is well below $2. So I do not think you will see gas suppliers in this environment willing to tie up for 10 or 20 years at those kinds of prices. So I think they still look at the forward curve, and I think those are the numbers you should look at, if you are thinking of long-term gas contracts and today's environment for North America.

Thank you.

Thank you. The next question is from Chris Shaw from Monness Crespi. Please go ahead.

Yes, good morning -- or good afternoon, here, really. If I could follow up on the natural gas contracts, the base plus variable, at this point with, you know, where methanol pricing is at, are any of those contracts just -- are you just paying the base now, has the variable component just gone to zero?

I think what we guide to, you Chris, is on average, we do not talk about specific contracts, but above 185 methanol realized is a sharing formula of approximately one-third. That guidance is still viable in today's market.

Okay. And then also a question on clarifying some things you said earlier about you like to have or need to have $100 million cash to run the business on a daily basis. Is that on the balance sheet or just in liquidity that you sort of say you need?

I will ask Ian to answer that.

It is just to work the mechanics of working capital, et cetera, et cetera, we would need to have $100 million roughly on our balance sheet.

Okay. Great. Thanks a lot.

Thank you. (Operator Instructions). The next question is from Riz Hussain from Morgan Stanley. Please go ahead.

Hi, good afternoon. Just a quick question. Can you disclose if there would be any adverse impacts for you should you lose another one of your ratings from investment grade from one of the agencies? And I guess maybe as a follow-up to that, if there was an adverse impact of any sort, are there any actions that you would be willing or able to take to protect those ratings?

Thanks for the question. We are very, very disciplined around this topic, and ensuring that we do not have rating triggers, et cetera, so we do not have any -- there are no implications, practical implications of a ratings adjustment.

Great. Thank you.

For future debt, that there would be an implication on the rates, we would be able to achieve possibly. So --

Sure. That makes sense. Great, thank you.

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

Oh, hey guys, just a quick follow-up. In past cycle downturns there have been assets that have traded hands, although intermittently; and even in, you know, some recent events we have seen some of your financial partners or JV partners look to potentially divest. Just curious if you have got any window of visibility at all as yet as to whether anyone throughout the landscape is looking to divest assets, and/or trade off some assets, given the current macro environment. And if so, I suppose, whether you would be interested in picking up some additional capacity via that route.

We are not aware of any, anybody looking to shed assets at this point. We are always interested in acquiring good assets at the right price. So I think you are right to point out in this type of environment, could create opportunities, where companies that are not focused fully on methanol or where methanol is just a real small part of their overall portfolio, that they may want to consider monetizing some assets, including methanol assets, but I am not aware of any discussions or any overtures at this time.

Okay. That's it for me guys, thanks. Appreciate it.

Thank you. The following question is from Laurence Alexander from Jefferies. Please go ahead.

Hi, I just want to return to the discussion around the step-up in demand that you have been seeing. Clearly, you know, winter is the worst time for this kind of discussion, but are you seeing any evidence yet that lower methanol prices are triggering or -- or incentivizing demand for the non-energy applications?

No, not really. I mean, those non-energy applications grow at GDP/IP, and I think if you look around the world, that is pretty modest growth today; and you are right to point out, the winter months, if there is any seasonal lull, that that would be it for methanol into those applications. So we saw approximately 2% growth in Q4 versus Q3, you know, we are not expecting to see similar growth in Q1, mainly because of, you know, some of the seasonality related to these regular chemical derivatives.

And in prior down cycles, how long did you typically need to see below cash margins or right around cash margins to incentivize rationalization?

Well, in China, where the high cost capacity is today, we would have expected to see rationalization by now, so we are -- again I mentioned we are a little surprised we have not seen as much as we expected, and we are not really sure why. We speculate around Chinese New Year and the anticipation of increased demand around MTO, but that is just speculation.

Thank you.

Thank you. The next question is from Brian Lalli from Barclays. Please go ahead.

Hey, good afternoon, guys. I knew you stated earlier that there are no specific triggers should you get another downgrade, but if you do not mind, could you maybe just discuss your views on the importance of investment-grade ratings? I mean, just how should the credit market sort of think about that? And then I have a follow-up.

Well, we prefer to have an investment-grade rating, you know, for sure, it gives us better access to the credit markets. It gets us lower interest rates, things like that. But other than that, from a day-to-day perspective, really, there is no practical implications of a rating adjustment or a lower rating.

There is nothing in terms of your dealings with counter-parties where you think that that is an important aspect of who you are?

No, obviously we would prefer to have an investment-grade rating, but as I said, I do not -- I do not believe there is any practical implications of a rating adjustment.

Sorry, go ahead.

You are able to tap into the 30-year market for the first time. So, you know, we certainly do what we can to protect an investment-grade rating.

Got it. And then just quickly, my one follow-up, on the -- you mentioned before, you know, you are comfortable with liquidity in limited near-term financial commitments. You said you have no plans to reduce debt with excess cash. But maybe I guess, Ian, if you could, could you help us maybe reconcile why or maybe why not you would not think about looking at your bonds given where they trade as compared to your dividend yield? I mean, just look at surety prices and you can not help but notice your bonds are trading at yields higher than your dividend yield; just maybe how you think about that from a capital allocation standpoint, if that would actually be something that is attractive for you guys.

You know, our dividends, I will reiterate our policy around our dividend or our strategy, it has three pillars; meaningful, sustainable, and growing. So, you know, we would like to protect the dividend and we will do whatever we can to protect the dividend, so I think you should see us using our free cash first and foremost for the dividend. And we have always said that our second use for free cash beyond growth dividend would be share buyback. That has not changed in the current environment. We do not have any bonds coming due till the end of 2019 and I do not think you should expect us to be repurchasing those bonds early.

Thanks, guys.

Thank you. The next question is from Edlain Rodriguez from UBS. Please go ahead.

Thank you. Good afternoon. Just one quick follow-up on the dividend issue. You have mentioned that for you to take any action, methanol prices would have to be, you know, significantly lower from where it is now. Have you ever said at what that price would have to be for you to take action?

No, I think I have said everything I wanted to say on the dividend. To speculate at what price that might be is not somewhere I am going to go today.

Okay. That is fine. And just one quick follow-up, so methanol prices have been coming down quite a bit. What do you think is the key driver? Is it primarily because oil prices are coming down or is it just that the market is somewhat oversupplied?

Well, I think oil price has a lot to do with it. I mentioned 6 million tonnes of demand that did not occur in the quarter because of affordability issues, which is directly related to oil. You have had quite a bit of new supply coming in the Atlantic Basin, and I think there is a process underway for marketers to figure out where to send their molecules now that you have this new production in the United States; 3 million tonnes in the last 12 months. So that will take some time to work its way through. But I think the reason for the lower pricing is really related to the oil price, and the lack of affordability for methanol in some of these energy applications, which have really been driving methanol demand growth for the past few years.

That makes sense. Thank you much.

Thank you. The following question is from Owen Douglas from Robert W. Baird and Company. Please go ahead.

Hi, guys, and I can assure you, first of all, that this is not a question on the dividend, so hopefully a little bit of relief there. I wanted to actually kind of look in a little bit into, in this environment with the lower pricing, can you give us a sense for what amount of flexibility you think you have in terms of shifting production from certain plants to the other, and whether you think that, you know, that will be something that could be used to help improve your profitability at this time?

Well, we examined everything in our business on a regular basis to improve profitability, so we have a lot of flexibility in our system because of our logistics, so we look at these things on a regular basis, and if we think certain actions will improve profitability, then we would pursue those actions.

Okay. So I guess, actually, I was thinking about on a geographic basis. So on that basis, thinking about North America, Europe, Asia, can you give a sense of the breakdown in terms of where your molecules are going?

Sure. We sell about one-third, one-third, one-third, so maybe a bit more today in Asia. So let us say one-third in North America, 25% to 30% in Europe, and the balance in Asia.

Okay. Thanks a lot. That is it for me.

The last question is from Joel Jackson from BMO Capital Markets. Please go ahead.

Hi ,thanks; one more question. I think, John, you said earlier that you would be -- you need about $100 million as a cash component of your working capital. I think in the past you have maybe given a higher number for the acquired cash and even part of the working capital. Can you maybe talk if that is true, and is that because now you will be selling more of your tonnes from G1 and G2 and purchasing less tonnes from third-party sales?

Yes, I think what we have said is when we were having our heavy-capital program around restarting idle plants plus the relocation of two plants; you know, we never relocated plants before, so there is a lot of uncertainty around doing that. So we wanted to have a little bit more cash on the balance sheet, you know, just in case things did not go as planned.

So now that we have completed all of our capital program, and we are going to have more of a steady state operation, we are going to reduce the cash on the balance sheet to a level to what we think we need in order to run the business. So that is really the change, Joel.

Okay. John. Thank you.

Okay. Well, thanks for all the questions, especially around the dividends. I feel like I have repeat myself a lot more today than I usually do, so I appreciate that. Well, the current -- sorry, current environment is challenging and we are well positioned to manage through the period of uncertainty. We are entering 2016 with a strength in asset portfolio, a low cost structure, and an excellent team in place to manage the uncertainty we are experiencing in the methanol market.

We are poised to benefit from any rebound in the oil price, as this could allow the roughly 6 million tonnes of idle DME, MTO, MTB, and MTT methanol demand to return to production. Our asset portfolio is in fantastic shape with 10 of our plants producing methanol in Q1, almost all of our plants recently refurbished, and our Geismar assets fully operational. We are committed to maintaining a solid financial position, while allocating excess cash in a manner that we believe is optimal for shareholders. Thank you for your interest in Methanex.

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