The Darling of Mexico's Gas Market Is Suddenly Getting Shut Out

  • Company's latest gas pipeline bids have been disqualified
  • Ienova shares down 5% this year even as Mexico stocks gain

For 20 years, Sempra Energy bid and won contracts to build natural gas pipelines in Mexico without a hitch. And then, within a month, three of its offers were rejected.

Infraestructura Energetica Nova SA, the Sempra Mexico unit known as Ienova, had its third bid disqualified last week. TransCanada Corp. ended up winning the project, to build a gas line across central Mexico that the state-run utility estimated will cost $336 million. Just as it did in denying Ienova’s previous two bids, Comision Federal de Electricidad said the company had proposed using equipment incapable of handling the amount of gas required by the project.

The rebuffs mark a potential shift in the relationship between Mexico and Mexico City-based Ienova, the country’s only publicly traded energy company and its biggest private operator of gas lines. It threatens to stifle the unit’s business just as Mexico’s gearing up for its biggest-ever pipeline expansion. The rejection “reinforces a negative precedent on Ienova’s asset growth prospects” and may have investors questioning whether it’s capable of cashing in on the build-out, according to reports by Barclays Plc. The news has weighed on Ienova’s shares, down 5 percent this year.

“It is surprising that lately the auctions have not been in favor of Ienova,” Ana Sepulveda, equity analyst at Invex Casa de Bolsa SA, said by phone from Mexico City. “It has surprised us given the fact that Ienova hasn’t been chosen when in the past they were” for several projects, she said.

Challenging Rejections

Ienova has challenged the rejections. At the end of the April 8 pipeline auction, a representative of the company stood to protest the disqualification, arguing that its proposal met the requisites of the contract and had been previously deemed valid by Comision Federal de Electricidad, known as CFE. Sempra’s business in Mexico generated $568 million in revenue in 2015, making up almost 6 percent of the company’s total for the year, data compiled by Bloomberg show.

“Ienova has participated during the last 20 years in the Mexican energy sector, in multiple public bidding processes, and has never been disqualified for flaws in the integration of its technical nor economic proposals, nor any other reason,” Ienova said in a statement last month.

The company declined by e-mail to elaborate on the reason for the rejections. CFE cited an “inconsistency” between the economic and technical proposals submitted by Ienova for the projects. The company’s technical designs didn’t meet the characteristics required to carry the volume of gas proposed in the economic parts of its bids, the state-run utility said in a statement.

Share ‘Pressure’

Ienova’s three consecutive losses on pipeline projects in central Mexico may add more “pressure on Ienova’s shares,” Vanessa Quiroga, a Latin America equity analyst at Credit Suisse Group AG, said in a March 29 research note. Ienova’s stock fell to as low as 67.97 pesos on April 5, a 26 percent decline from its peak in April 2015. Shares traded at 68.72 pesos at 9:03 a.m. in Mexico City.

“The disqualification of the company generates doubts about its ability to accomplish its long-term growth plan,” Gerardo Cevallos, an analyst at brokerage firm Vector Casa de Bolsa SA, said in an April 8 research note. If the company’s bids continue to get rejected, he said Vector will lower its recommendation, which is currently to buy the stock.

Moody’s Outlook

Ienova’s troubles were compounded last week as Moody’s Investors Service lowered the company’s outlook to negative from stable, given its “strong linkages” to the Mexican government, CFE and oil producer Petroleos Mexicanos, an April 4 report shows.

Ienova’s exposure to Pemex and CFE will increase as new pipelines under construction begin operations in 2016 and 2017, according to the report. The company’s $1.3 billion acquisition of Pemex’s stake in Gasoductos de Chihuahua, expected to be approved this year, will mean about 60 percent of the company’s revenues will be linked to government entities, the ratings company said.

Analyst Optimism

Ienova’s shares may rally as much as 25 percent if the company is able to successfully bid in future auctions for a gas supply project in Baja California Sur and a $3.1 billion plan to build an underwater pipeline system from South Texas to Tuxpan, said Credit Suisse’s Quiroga, who has a buy recommendation on the company’s stock. In fact, 16 of the 17 analysts that monitor Ienova have rated it a buy, forecasting an average 27 percent return in the next 12 months.

“There is still a lot of confidence because it is a very good company,” BBVA Research analyst Jean-Baptiste Bruny said by phone. “The upcoming projects will be key though. If they can deliver, there should be a recovery by the end of the year.”

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