Consolidated Energy – Peering into the mist - Initiation
All,
Please find our analysis here.
Consolidated Energy has had a terrible run of luck operationally but has well-invested assets and should see significant improvements in cash flow over the coming quarters. Methanol and fertilizer, are both commodities, so profitability is also a factor of the underlying feedstock prices. Our model may need adjusting to reflect changes in the oil price, which influences the natural gas price. CEL’s relationship with its parent company (Proman SA) is murky. We do not know the purpose of the loan to the parent and fear it may not be repaid on time. For now, we are sitting on the sidelines without a spectacular return of profitability, the Proman loan maturity will drag on the bonds.
Investment Considerations:
- We are not taking a position in the Consolidated Energy (CE) bonds. The yield of over 10% on the 2028 bonds has some attraction but;
1. The relationship with the owner (Proman) is opaque, with CE providing loans and guarantees to its parent whilst financial disclosure at the parent level is poor, and the bond documentation is weak.
2. Cash flow is volatile due to planned and unplanned outages => Even in strong markets, the bonds will be volatile.
3. Lower oil prices will lead to lower methane margins, and the recent Saudi messaging about seeking prioritising market share over price is a negative for the bonds.
- The assets are well invested, but selling assets in a restructuring would be a challenge in Trinidad & Tobago and Oman.
- The SUNs will benefit from the reduction in rates, but any uncertainty over the timing of the Proman loan repayment will damage the bonds.
- Falling oil prices hurt methanol margins; the level of correlation is not clear from the public data
What is the issue at CEL:
CEL is one of the largest Methanol producers, albeit with a 6.4% share in a fragmented market. It produces methanol via natural gas (coal is used in methanol production in China). The company also has a Nitrogen facility. Most of the assets are in Trinidad & Tobago, with further methanol plants in the US (two facilities) and Oman (one facility).
CEL suffered several operational issues in 2023, as a result, revenue fell 42% to $1.3bn, and EBITDA margins fell to 9% (from >40%). Simultaneously, CEL paid $347m for the 60% of an Omani Methanol facility it did not own. The vendor was CEL’s parent company, Proman AG (a privately held Swiss company). Additionally, CEL lent $253m (maturing December 2025) to Proman and is a guarantor on a $218m loan to the same entity. The operational and governance issues are balanced against the $4.5bn valuation of the assets and the significant cash flow generation capabilities of CEL. We forecast a substantial rebound in 2024 and 2025, but the repayment of the Proman loan in 2025 will be a drag on bond performance until then.
- CEL’s largest facilities are in Trinidad & Tobago, and in 2023, the company suffered gas supply problems due to contract issues. CEL has three to four new contracts with the national gas company to secure supply to the company's methanol and nitrogen plants in T&T.
- On top of this, CEL suffered an extended turnaround (maintenance shutdown) at Nat Gas. This facility has reopened and was operating at near nameplate capacity in 24Q2.
- Finally, a major unplanned outage at the Nitrogen (fertilizer mainly) plant took that facility offline for a quarter. This outage was insured, and a $60m payment is expected by early 2025. This facility returned to production in Q124
There is asset coverage:
- Our DCF calculations are based on only a limited improvement in underlying pricing and production despite the challenging environment in 2024. Even on this basis, we find the recovery on the SUNs is 76c/$
- Trading multiples are closer to 10x, which would see the debt covered with at least $500m in equity beneath the SUNs.
- The volatility in cash flow will not go away, hedging helps smooth costs, and long-term sale agreements reduce the exposure to spot prices. However, underlying market prices for its commodities will fluctuate depending on the oil price.
Restructuring would be very messy:
- We do not see a restructuring as likely or imminent, but it would be lengthy and costly.
- The recent increase in the oil price, due to the Middle East conflict will help margins, but the Saudi announcement that it is seeking market share over price will have the opposite effect eventually. CEL facilities are in the upper quartile for efficiency. - On a consolidated basis CEL has $214m in liquidity (mostly at the subsidiary level); CEL has access to $25m in RCF and will be due $50m+ in dividends from its affiliates in Q4. Along with improved production, we expect stronger liquidity into the year-end.
- The issuer is a HoldCo, and the Guarantors are also HoldCo’s. SUN investors would be subordinate to CEL bank debt and any debt at the asset companies.
- The bulk of the assets are in Trinidad and Tobago and are considered strategic. The government would not prevent a sale but would want to ensure that production was uninterrupted, as the plants are a major customer for the T&T national gas company.
-Nat Gas in the US is 50% owned by OCI, which would need to be involved in any sale, and the Oman facility would also require state approval before changing hands.
- Proman is deeply embedded in CEL’s delivery of products in the US and Europe and would need to be involved in any discussions.
I look forward to discussing this with you all.
Aengus
T: +44 203 744 7055