Methanex Corp. was upgraded to outperform from market perform at Raymond James on Wednesday in anticipation of price dislocations within the United states methanol market fading.
Analyst Steve Hansen also raised his price target on the stock to US$40 from US$32 around the expectation that the broader methanol market will improve in the other half of 2016, along with both oil along with other energy products.
“While North America continues to trade at a steep (atypical) discount to China, most industry stakeholders believe this will prove a relatively short-term (2 to 4-month) phenomenon,” Hansen said inside a research note.
Industry stakeholders at Raymond James’ recent Methanol Forum also suggested demand will remain healthy, an unexpected to a lot of investors given ongoing woes in the oil patch.
For example, Argue anticipates the roughly six per cent compound annual rate of growth for global methanol demand will continue for the next five years. It also sees just one new greenfield project reaching the start-up phase prior to the end of the decade.
“Probably the most striking takeaways from this year’s forum was hearing precisely how quickly C and dramatically C that new supply prospects are fading,” Hansen said.
With Methanex poised to take advantage of the pricing recovery, the analyst sees potential upside to both its earnings and free income as oil prices recover.
Acknowleging the stock doesn’t look excessively cheap, he added that if oil prices remain lower-for-longer, Methanex’s health free cash flow ought to provide support for the stock, as well as its history of share buybacks and dividend increases.