Benefiting from Mexico's hunger for infrastructure 

As specialist investors in infrastructure, we like sectors that provide essential services. One of these sectors is energy infrastructure. In this edition of Under the Radar, we explore the dynamics of Mexican pipeline and storage infrastructure, following recent meetings with IEnova, one of Mexico’s largest energy infrastructure companies.

IEnova — building Mexican infrastructure

IEnova is one of the largest energy infrastructure companies in Mexico, with over US$7 billion in assets. It has operated in Mexico for over 20 years and has built up a very successful track record in the construction and delivery of large scale infrastructure assets in Mexico. The company builds, owns and operates a mixture of liquid & natural gas energy infrastructure as well as having a portfolio of power generation infrastructure assets.

About Mexican Infrastructure — pipelines and storage

There has been substantial underinvestment in gasoline pipeline and storage infrastructure in Mexico. This infrastructure has remained largely unchanged since 1990, despite a fairly large increase in gasoline and diesel demand over the same period.

Gasoline and diesel demand vs. storage and pipeline capacity

Gasoline and diesel demand vs. storage and pipeline capacity

This lack of development has led to an infrastructure shortage that is now so acute that if Mexico’s external gasoline/diesel supply is disrupted for any reason (e.g. storms/weather) then Mexico would run out of gasoline/diesel in 3 days. This compares with the mandated (by SENER, Mexico’s Ministry of Energy) minimum storage buffer of 11 days, which is still well below storage levels in many other nations around the globe.

Current and forecast storage capacity

Current and forecast storage capacity

Deregulation and the promotion of private-public partnerships is a key tool that the Mexican government is considering to address this infrastructure shortfall. This is positive news for IEnova, given its long track record of delivering projects on time and on budget in the country. As investors we are increasingly confident that the company will win its fair share of the new opportunities.

The growth opportunities

Given the historic underinvestment in Mexican infrastructure in the past we believe the growth opportunities are substantial. At a recent investor day held in NYC attended by Barry Klein (NY based utility analyst) and Jonathon Ong (PM) the IEnova reviewed US$45bn in potential market opportunities through to 2025 from all of their 3 core areas of interest:

  • Liquids — storage, pipelines, gathering, processing
  • Natural Gas — pipelines, storage, LNG, distribution
  • Power — Renewables, transmission, generation

Investing in IEnova

The Macquarie International Infrastructure Securities team have followed IEnova since its IPO in 2013. Interestingly, prior to this point it was a wholly owned subsidiary of a US utility Sempra which the team has covered since May 2013.

In our view this gives IEnova three key advantages:

  • IEnova despite being listed in Mexico, is to all intent a US company. It has US management, that we have known for over 5 years and we know they have a strong focus on shareholder value and a strong discipline when investing shareholder funds.
  • Secondly, we are also very attracted to the nature of the contracts that support IENova’s cash flows with the majority of their contracts around 20-25 years long with inflation protection as well.
  • Finally, despite being in Mexico the majority of IEnova’s contracts are denominated in US$.

Valuations

We believe that the listed market is too short term in nature when looking at listed infrastructure and the Mexican equity market is no different with most sell side analysts focused on short term multiples. In our view, IEnova’s current market valuation gives the company little credit for its growth opportunities beyond the next 1-2 years. Therefore we believe iEnova represents good value based on our long-term valuations.