Grupo Mexico SAB (GMEXICOB) is set to benefit this year from an energy overhaul that will allow the country’s largest mining company to tap new opportunities in oil and gas.
Billionaire German Larrea’s holding company is seeking to expand operations after President Enrique Pena Nieto last month enacted a law that will allow foreign companies to produce crude for the first time since 1938. Grupo Mexico is looking into forming alliances and joint ventures for shale oil and gas projects, said Xavier Garcia de Quevedo, who heads the Mexico City-based group’s Southern Copper Minera Mexico unit.
The drilling unit is shaping up as an early beneficiary of the new legislation, Credit Suisse Group AG analyst Santiago Perez Teuffer said in a Dec. 16 note to clients, reiterating the equivalent of a buy rating on the stock. Dismantling the 75-year-old barrier to investment in Mexican oil fields could increase foreign investment by as much as $15 billion annually, JPMorgan Chase & Co. said in a Nov. 28 report.
“We’ve been looking with much interest into some opportunities,” Garcia, who sits on Grupo Mexico’s board, said in a Jan. 7 telephone interview. “We have a lot of enthusiasm to invest and develop in energy.”
Grupo Mexico has gained 5.3 percent in the past three months compared with a 1.7 percent average decline by 15 global peers tracked by Bloomberg. The stock, down 12 percent in the past year, trades at 13.1 times estimated profit versus a peer group average ratio of 16.3, the data show. Thirteen of 20 analysts have a buy recommendation on the shares.
Copper Prices
Southern Copper Corp., controlled by Grupo Mexico, operates two of Mexico’s largest open-pit copper mines, La Caridad and Cananea. The company forecasts copper production of 650,000 metric tons this year and 859,000 tons in 2015, up from an estimated 630,000 tons last year, Chief Financial Officer Raul Jacob said on an Oct. 28 conference call, according to a transcript.
Production gains and prospects for stable metal prices led Citigroup Inc. to call Southern Copper “our preferred play in global copper,” in a Dec. 18 research report. Copper fell 7 percent in New York last year.
The opening of the oil industry will allow companies to explore for Mexican crude reserves estimated at 45 billion barrels, according to state-owned Petroleos Mexicanos, or Pemex. Mexico may also contain as much as 460 trillion cubic feet of shale-gas resources, according to Pemex. Supporters of the energy law say the overhaul could propel Mexico into the top five crude-exporting countries.
Secondary legislation, which will provide further clarification into how companies can invest, is expected to be finalized in congress in the first half of the year, according to the energy law.
Longer Wait
“I don’t incorporate any concrete effect for Grupo Mexico from the energy reform this year,” Julio Martinez, senior analyst at Signum Research, said in a phone interview from Mexico City. “The investments made by the national companies will take some time to bear fruit and won’t be seen until at least 2015.”
Grupo Mexico, which operates contracts on six shallow-water jack-up rigs worth $1.2 billion, hopes to use its drilling experience in shale ventures, Garcia said. Shale and natural gas are the “low-hanging fruit” of the energy reform and may be explored as soon as the second half of this year by foreign companies, according to Victor Herrera, Standard & Poor’s Latin American managing director.
Fracking Ventures
“We have been looking into joint ventures in the area of fracking,” Garcia said. “We are waiting to see how final legislation is structured and if it permits alliances and joint ventures to be able to offer a range of services.”
Grupo Mexico is also still planning initial public offerings for its infrastructure and railroad units, as well construction of a 250-megawatt electricity plant, which could be funded with a bond sale, Garcia said.
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