Energy Reform Seen Extending Rally for Ienova: Corporate Mexico

Jan 23, 2014 1:45 pm ET

Jan. 23 (Bloomberg) -- Infraestructura Energetica Nova SAB, the Mexican unit of Sempra Energy, is being forecast by analysts as a winner because of energy legislation that helps it extend last year’s growth and a 53 percent stock gain.

Ienova, as the Mexico City-based company is known, is considering wind and pipeline investment opportunities as soon as the first half of this year, said Tania Ortiz, vice president of external affairs and business development. The company will take advantage of Mexico’s energy market being opened to competition by bidding on three 100-megawatt wind farms scheduled to be auctioned on April 30 by the Comision Federal de Electricidad, or CFE, Ortiz said.

“With increased exploration and production of gas and crude, it is going to require infrastructure,” Ortiz said in an interview at Ienova headquarters. “That is what we do.”

Ienova is expected to be an “early beneficiary” of the energy law enacted by Mexico’s President Enrique Pena Nieto last month that will allow foreign companies to produce crude in Mexico for the first time since 1938, Credit Suisse analysts led by Vanessa Quiroga said in a Dec. 16 note to clients. Opportunities to enter oil and natural gas transportation and storage as well as electricity transmission and distribution will probably keep driving Ienova shares, according to Curt Launer, an analyst at Deutsche Bank AG. He rates the shares a buy with a target price of 67 pesos.

Pemex Venture

The stock is the third-best performer on Mexico’s benchmark IPC since its initial public offering on March 21. Ienova, Mexico’s only publicly traded energy company, was trading at 55 pesos a share as of 12:30 p.m. Mexico City, a 62 percent increase since it began trading last year. Ienova’s third- quarter net income slid 7.9 percent to $57 million from a year earlier, while sales rose 8.9 percent to $188.9 million, the company said Oct. 28.

The second part of Mexico’s energy law will be debated in congress next month. Secondary legislation will determine legal specifics for contracts of foreign oil companies entering Mexico such as Exxon Mobil Corp. and Chevron Corp.

“Energy reform brings in new capital and new drilling and makes Mexico able to grow its own natural gas production,” Launer said in a Jan. 21 phone interview from New York. “Ienova is very well positioned to be the natural gas processor, to be the liquids processor, and the joint venture they already have with Pemex looks like it would be a big winner in any of those circumstances.”

Debt Sales

Ienova is constructing the first stage of the 1,200- kilometer (746-mile) Los Ramones pipeline to import gas into central Mexico from south Texas. The 118-kilometer initial stage, which Ienova expects to be in operation by December, is being developed through a joint venture with Petroleos Mexicanos, the state-owned oil company known as Pemex.

Ienova may be considering further debt sales this year to fund future projects, said Invex Casa de Bolsa analyst Octavio Diaz in Mexico City. The company is investing about $1 billion to construct 830 kilometers of pipeline in northern Mexico to deliver gas to CFE plants. The $300 million construction of a 150-megawatt wind energy plant on Mexico’s northern border is also under way, Ortiz said.

“We don’t consider that Ienova will issue further shares, but likely further debt,” Diaz said in an e-mailed response to questions. “We anticipate an increase in leverage in the next three years to meet the levels of capital required.”

Mexico needs about $13 billion for gas pipelines, according to a Credit-Suisse research note on Sept. 26. Mexico’s gas demand increased 5.7 percent annually during the last 10 years, Pemex has said.

Financing Growth

Prior to the March IPO, Ienova sold $400 million in debt last year, which “allowed us to test the appetite and interest of the market for this type of company,” Ortiz said. The debt sale was well received and the company is “going to have to evaluate how to finance growth,” this year.

Ienova and Mexico City-based Pemex also agreed in October to construct the 441-kilometer first half of the second phase of the Los Ramones pipeline. The project will have an initial investment of $1.05 billion, Pemex said then.

Ienova Chief Financial Officer Arturo Infanzon said on a Oct. 29 earnings call that the company is negotiating with banks to borrow as much as $500 million to fund construction of the pipeline. The joint venture with Pemex is “very important” to future growth in pipeline, gas distribution and storage, and petrochemical projects, Ortiz said.

“The alliance with Pemex provides Ienova with options,” Juan Elizalde, an analyst with Banco Ve Por Mas SA, said in a Jan. 20 phone interview from Mexico City. “It opens up opportunities in pipelines, as well as in the electricity industry in areas such as renewable energies.”

There is “enormous interest” to invest now in Mexico’s energy market, Ortiz said.

“Infrastructure is needed in Mexico and there is going to be a large need for pipelines and storage terminals,” Ortiz said. “We are in a position of leadership to capture many of these opportunities.”

--Editors: Robin Saponar, Will Wade