ICA’s Oil Platform Accord With Shell Signals Energy Shift

Empresas ICA SAB’s contract to supply engineering services for Royal Dutch Shell Plc in Canada is signaling to investors that the Mexican construction company is seeking energy projects abroad to cut debt and boost profit.

Mexico’s largest construction company surged 4.6 percent in the past two sessions, the biggest back-to-back increase in more than five months, after announcing a $264 million contract with partner Fluor Corp. to build well pads for heavy-oil extraction at Shell’s Carmon Creek project in Alberta. The worst performer among Mexico’s industrial and construction stocks this year, ICA has tumbled about 10 percent, while global peers gained about 19 percent.

The contract with Shell, Europe’s biggest oil company, will boost ICA’s net income and open the door for increased participation in crude projects domestically and abroad through the joint venture with Fluor, Monex Casa de Bolsa analyst Roberto Solano said.

“This type of contract is like a key that can open opportunities to similar projects in the future,” Solano said yesterday in an interview from Mexico City. “Participating in this project generates a favorable scenario for the company when considering new projects in Mexico as the energy sector opens.”

Mexico’s landmark 2013 energy law opens the country’s energy industry to private competition for the first time since 1938 to help stem declining crude production.

Bitumen Output

The 13 well pads for Shell will be ready in December 2017, Mexico City-based ICA said in an Oct. 30 statement. Shell expects Carmon Creek to produce about 80,000 barrels of bitumen a day, according to its website.

The modules for the well pads will be built in Mexico and shipped to Canada, Eric Krantz, a spokesman for ICA-Fluor, said in a telephone interview from Houston. The venture expects to continue to provide services to international oil producers, ICA Chief Executive Officer Alonso Quintana said in an e-mailed response to questions.

ICA closed unchanged from yesterday in Mexico City at 24.27 pesos.

Income from the Shell project could boost ICA’s net income, according to Monex’s Solano. The company’s net debt ratio fell to 6.7 times earnings before interest, taxes, depreciation and amortization at the end of last quarter, from 7 times Ebitda at the end of last year, Chief Financial Officer Victor Bravo said Oct. 27.

Bravo said in August that the company is considering selling water and highway projects to lower net debt. The proceeds will be used to pay debt and fund investments, Bravo said Oct. 27 on a quarterly earnings call.

The contract with The Hague-based Shell strengthens ICA’s ability to compete for international energy projects, according to Mexico City-based Intercam Casa de Bolsa analyst Sofia Robles.

Asset Sales

“We consider this to be excellent news for ICA at the net income level,” Robles said in an Oct. 31 research note to clients. The contract “is being added to a portfolio of projects that will generate resources quickly to strengthen liquidity.”

ICA is recovering after a housing-market collapse and delays in public spending led sales to plunge. Last year ICA raised more than $600 million in asset sales after credit rating cuts by Moody’s Investors Service and Standard & Poor’s. In May, ICA sold $700 million of bonds due in 2024.

Moody’s rates the company B2, five steps below investment grade, S&P ranks it B+, four steps lower than investment quality. The company reported on Oct. 24 a third-quarter net loss of 769 million pesos ($56.9 million), compared with a profit of 241 million pesos a year earlier.

Pipeline Connections

Though ICA’s contract with Shell signals the company has the ability to form relationships with the oil industry’s biggest players, the payout won’t contribute much to reduce high debt levels, according to Javier Gayol, Mexico City-based analyst at Corporativo GBM SAB.

“There is a lot of leverage that could limit the company from investing in new infrastructure and energy projects,” Gayol said in a phone interview. “The company continues to need to sell assets to return its capital to a balanced level.”

Nine analysts have buy recommendations on the stock, while three say hold and four sell, according to data compiled by Bloomberg.

ICA could bolster its natural-gas pipeline business as Mexico’s government expects $50 billion in private-sector energy investments, Bravo said in August. Mexico’s state-run utility, known as CFE, said in August it will auction $4.9 billion in pipeline and electricity projects by next year.

Pipeline Proposals

ICA has received proposals from companies that seek local associates to construct pipelines in Mexico, and could decide to jointly operate those pipelines if the companies ask them to do so, Bravo said. While the company has never distributed gas before, it signed a contract with TAG Pipelines in April to build the $743 million Ramones II Sur Gas Pipeline in a joint venture with Irving, Texas-based Fluor.

ICA has worked previously with Shell, Marathon Oil Corp, Chevron Corp. and Valero Energy Corp on projects, CEO Quintana said. ICA is working with Petroleos Mexicanos to develop the onshore field of Chicontepec as well as several drilling and production platforms for the state-owned operator, he said.

“ICA has already been active the last two years incorporating energy projects,” Monex’s Solano said. “The company is well positioned to participate in future projects as Mexico’s energy reforms are implemented.”

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