Consolidated Energy – Progress, even if slow
All,
Please find our slightly updated analysis here.
Consolidated Energy's (CONSEN) performance is improving, but methanol demand fell in Q2 due to concerns about the Trump tariff and the forward scheduling of a planned turnaround, which further weighed on EBITDA. However, the underlying demand for methanol remains strong, and UAN pricing is better than we expected. Liquidity is more than adequate, and we expect 2026 maturities to be met through free cash flow generation, along with some RCF drawings. The relationship with Proman (the parent entity) means that a portion of the economics at CONSEN will be passed upwards.
Investment Rationale.
We are maintaining our 5% long position in the EUR625m 12% 2031 SUNs; we entered the trade at 92c/€; the bonds are now trading at 94 c/€ 14.4%. We see 10 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 this would be temporary; the expectation of an extension is already reflected in the price, and any immediate reaction would be retraced quickly. Also, there is headroom in the $200m RCF facilities.
- We expect leverage of below 5.5 x by the end of 2025. The company has said that $700m is a reasonable EBITDA target; we view that as on the high side (our 2025 forecast is $636m).
- 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 OC; this arrangement removes the marketing costs and risk that would otherwise fall on Natgasoline, but could reduce the cash flow at Natgasoline and the DCF valuation.
- Lower oil prices will lead to lower methanol margins, and the recent weak oil prices will dampen margin growth in 2025. The level of correlation is not clear from publicly available 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.
Q2 25 saw methanol demand fall on tariff-driven economic fears:
Overall, Q2 25 results were below our expectations. EBITDA of $110m vs $124m (margin of 17% vs 24% forecast) was driven by lower methanol prices and demand than we expected. Also, CEL began a turnaround in Trinidad and Tobago earlier than expected. EBITDA is rising, and we now expect 2025 EBITDA to be around $630m (2026 at $820m). The turnaround works reduced production by 200kmt, and cost $30m => $150 per MT in EBITDA contribution from the Trinidad and Tobago plants. Our forecast for 2025 OCF is $682m => FCCR of 2.2x and net leverage of 5.2x (LTV 83%). There are no further turnarounds due in 2025, but an unexpected outage is always a possibility (albeit usually insured).
Our projections show that the $227m SUNs maturing in May 2026 can be repaid through cash on hand and RCF drawings. Management will want to keep the 6.5% coupon as long as possible. The 2031 12% EUR bonds are trading at 14% so we would expect a non-capital market solution to be more likely. We are still expecting the bonds to trade inside 11%, but this is taking more time than we expected. We expect the Proman loan will be extended; this should already be priced into the SUNs, but there would be some initial markdown when the extension is announced.
I look forward to discussing this with you all.
Aengus
T: +44 203 744 7055