Pacific Trader: Did the market misread Methanex’s big deal?

The stock: Markets are weird. Oftentimes, when a company faces a choice to fish or cut bait, investors will favour the latter, in the form of sitting tight and buying back its own shares, even though it’s ultimately reinvesting profits in operations, expanding production and improving competitive position that builds shareholder value. This week, Methanex Corp. (TSX:MX, NASDAQ:MEOH) chose to fish. The Vancouver-based chemical manufacturer put up US$2.05 billion in cash and shares to acquire the mostly U.S.-based methanol business of Dutch multinational OCI Global, which should raise its output by around 20 percent.

Material change: The news sent Methanex stock down to its lowest point in a year. It closed Tuesday, Sept. 10 at $50.11 on the Toronto Stock Exchange. The consensus appears to be that Methanex overpaid and will be focused on reducing debt henceforward, instead of returning capital to shareholders.

Analyst sentiment is far from unanimous, however. Management’s supporters argue that the move is consistent with Methanex’s long-term strategy to corner the world market for methanol, a chemical used to make wood binding resins, clothing, carpets, smartphone screens, paint and specialty fuels. (It already has facilities in the U.S., Canada, the Caribbean, New Zealand, Chile and Egypt.) The assets the company is buying are in North America, which has some of the lowest prices and largest reserves of natural gas, the main feedstock for producing methanol.

But the deal comes as Methanex is belatedly bringing its long-delayed Geismar 3 plant in Louisiana online, which begs the question of whether the market can absorb the new supply. Investors need to decide whether there’s a bright long-term future for methanol—even with this week’s stumble, Methanex shares are up 5 percent over the past five years while churning out a 2 percent dividend yield. If the answer is yes, the stock is looking mighty cheap.

Word on the street: Among the fans of the OCI transaction, Piper Sandler analyst Charles Neivert boosted his price target on U.S.-listed MEOH shares to US$68 with an “overweight” rating. Citing the OCI assets’ favourable fit with Methanex’s portfolio, Ben Isaacson of Scotia Capital added, “the opportunity to consolidate the methanol market in low-risk jurisdictions is unlikely to have appeared again any time soon.”

Coming and going: Effective September 3, hydrogen fuel cell maker Loop Energy (TSX:LPEN) has delisted from the Toronto Stock Exchange. The Vancouver-based company’s shares were suspended after falling to 4 cents on July 18. Loop management is making a restructuring proposal under the Bankruptcy and Insolvency Act.