Tuesday, September 27, 2016

New Wind Blows for Mexican LNG Distributor

Investors have a new reason to consider a stake in Mexico’s natural gas distributor Infraestructura Energetica Nova (IENOVA:  MX).  In early September 2016, IEnova agreed to buy the Ventika Wind farm for 16.1 billion pesos (US$850 million).  The project was originated by a partnership between Cemex and Blackstone’s subsidiary, Fisterra Energy.  Ventika is composed of two sets of wind turbines standing about thirty-four miles south of the U.S.-Mexico border.
The project is a first for Mexico on several levels.  With eight four wind turbines capable of generating up to 252 megawatts of electricity, it is by far the largest wind energy project in Latin America.  Ventika wind farm was designed and constructed by ACCIONA Energia using the Nordex/ACCIONA turbine technology.  Each turbine has the capacity to produce three megawatts.  Unlike most wind towers made from metal alloys, the Ventika towers were each composed of twenty-two concrete sections that were manufactured and assembled in a central plant.

Ventika’s developers secured off-take agreements for the project’s electricity output.  Some of the power will go to one of the original partners, Cemex, for one of its production facilities.  FCA Mexico, a subsidiary of Fiat Chrysler Automobiles, FEMSA, DEACERO and Technologico de Monterrey will also receive power.
With the heavy lifting has been completed  -  adequate financing, construction and commissioning, and securing sufficient customer demand  -  IEnova can simply clip coupons.  Risks in the Mexico energy company have been confined to the natural gas market.  Adding wind energy to the mix helps diversify revenue and income streams and puts the company in elevated competitive position in Mexico’s energy industry. 
The 2013 energy reform measures in Mexico opened the door to smaller companies like IEnova, as Pemex lost its monopoly over oil and gas distribution in the country.  IEnova has also benefitted from the fall in oil prices as Pemex has been forced to sell some of its assets to make up for lost cash flows.  IEnova is buying out 50% of Pemex’s stake in the pipeline operation of Gasoductos de Chihuahua.  
To help pay for the Gasoductos and Ventika deals, IEnova is planning a public offering in October 2016, to raise as much as 18.9 billion pesos (US$1.0 billion) in new capital.  The stock is trading at 39.35 times trailing twelve months earnings.  The company has paid a dividend in the past, but does not have a consistent quarterly dividend.  The offering circular should provide an interesting view on how management plans to take advantage of the shifting sands in the energy market in Mexico.
IEnova is the first publicly traded energy infrastructure company in Mexico.  For those investors who are not keen on a stake in a foreign listed company there is an alternative. IEnova is a majority-owned subsidiary of Sempra Energy, which is a California-based company listed on the New York Stock Exchange under the symbol SRE.  No small-cap, Sempra boasts a market capitalization of $26.8 billion.  The stock trades at 28.3 times trailing earnings and offers a dividend yield of 2.8% at the current price level.  Analysts following Sempra have estimated potential growth near 7.5% in the next five years, well above GDP growth rates.  That is a good reason to shout olé! 

Neither the author of the Small Cap Strategist web log, Crystal Equity Research nor its affiliates have a beneficial interest in the companies mentioned herein.

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