Consolidated Energy - Resiliance - Positioning
All,
Please find our updated analysis here.
Despite an unscheduled two-month outage at Natgasoline in Q4, the insurance settlement was swift, and Natgasoline was able to refinance its bank debt in the first quarter of 2025. Pricing and production can be volatile, but Consolidated Energy has maintained adequate liquidity. We continue to like the assets, even if we are concerned about the opaque governance. We expect 2025 EBITDA to grow on the back of higher prices, due to limited new capacity. The $253m loan to Proman will be extended, but we see this as being reflected in the price of the bonds in the price.
Investment Rationale:
We are taking a 5% long position in the EUR625m 2031 SUNs at 92c/$, which gives a YTW of 14.4%. We see 12 points of upside (with the bonds trading at 10.5%) in the next 12 months. If the global economy weakens, there are five points of downside with the bonds trading to previous wides of around 16%. The extension of the $253m Proman loan would initially lead to a drop in the bonds, but the impact is in the price, and there is headroom in the $500m RCF facilities.
- We expect leverage of below 6.0 x by the end of 2025. The company has said that $700m is a reasonable EBITDA target; we see that as on the high side (our 2025 forecast is $600m).
- There is significant asset coverage here. Our DCF EV is $4.7bn, and with $3.4bn of net debt, the LTV is 70%. However, the entire Natgasoline production is sold at a discount to subsidiaries of Proman and OCI, which reduces the cash flow at Natgasoline and the DCF valuation.
- Falling oil prices harm methanol margins; the level of correlation is not clear from the public data.
- The relationship with the owner (Proman) is opaque. CE provides loans and guarantees to its parent, but financial disclosure at the parent level is poor, and the bond docs are weak.
- Cash flow is volatile due to planned and unplanned outages => Even in strong markets, the bonds will be volatile.
- Lower oil prices will lead to lower methane margins, and the recent weak oil price will dampen margin growth in 2025.
Key Insights:
- The assets have significant value even if Consolidated Energy became liquidity impaired. Our DCF has the LTV at 68%. However, the Natgasoline asset is undervalued as 100% of production is sold to subsidiaries of OCI and Proman at a discount to the market price. OCF from the plant would be higher if the offtake agreements were not in place.
- OCI is selling its share (50%) of Natgasoline to Methanex (as part of a wider disposal of its Methanol business). We expect Methanex will eventually want to operate the plant and own it, but we do not expect this to happen in 2025. We value the Natgasoline stake at over $1.1bn. Consolidated Energy currently consolidates Natgasoline as it operates the plant, but that would change if Methanex negotiates to become the operator (and pays compensation)
- We are not concerned with liquidity at Consolidated Energy; there is >$100m of RCF ability within the structure and $168m in cash on hand. There is a loan receivable of $253m from Proman due in December 2025, but we expect the loan will be extended. We do not expect this to cause cash flow problems.
- The industry is commoditised, but Consolidated Energy’s plants are at the lower-cost and more efficient end of the spectrum. In addition to turnarounds every four years, production can be shut off through failures (Natgasoline was down for two months in Q4). The events are usually insured, and payments smooth the cash flow shortfalls.
- The current tariff issues should not impact the company severely, but general weakness in the economy will hurt performance. A lower oil price usually hurts the Natural gas price, and lower natural gas means a lower margin on methanol in the spot market. This is balanced by the lack of new capacity coming on board over the next 18 months.
Q1 2025 was strong and supports our forecast for 2025/2026:
- Q1 25 Revenue of $535m was lower than our forecast as the Oman plant was in a planned Turnaround for 43 days of the quarter. Q1 Adjusted EBITDA was $158m (IFRS16 Adjusted), and this should be a good proxy for the rest of the year, giving around $650m in Adjusted EBITDA.
- Oman was the only planned turnaround for 2025, so there are no planned outages for the rest of the year. Additionally, $90m of insurance proceeds are expected in Q2/Q3. Leverage forecast to be below 5x by year-end 2025 (in line with our model).
- The Proman loan maturity has been extended to 2030 as part of the Proman audit; management still expects it to be repaid during 2025, but we doubt this. If Proman extends the loan, the $ 6.5% Mar 2026 bonds ($277m outstanding) may be repaid from a mixture of cash flow generation and new issuance.
Natgasoline ownership model unlikely to change soon:
- Methanex will imminently replace OCI as the 50% owner of Natgasoline. We do expect much change in 2025. We expect Methanex will eventually want to take control of the asset.
- Our conservative estimate for the 50% share held by Consolidated Energy is $1.1bn.
Natgasoline was offline for two months in Q4 due to a ruptured pipe. Unexpected outages are insurable events, and Consolidated Energy received $50m in Q4, with a further $25m received in Q1 2025.
Our 2025 forecast expects EBITDA to improve:
- We expect EBITDA of just over $640m, OCF of $670m and FCF of $485m.
- FCF/Interest will be around 2.5x, and for leverage of 4.7x.
- Results will continue to be volatile, and persistently low Henry Hub Nat Gas prices and/or oil prices could dampen profitability.
I look forward to discussing this with you all soon.
Regards
Aengus
T: +44 203 744 7055