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Mexichem targets ventures, acquisitions following energy policy reform

05.08.2014  | 

Mexichem, which has acquired more than 15 companies since 2007, is a candidate for further ventures with companies such as state-run Petroleos Mexicanos, better known as Pemex.

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By ADAM WILLIAMS
Bloomberg

Mexichem is planning to pursue more joint ventures as Mexico opens its energy industry and returns from existing partnerships help the company beat petrochemical peers in the stock market.

Mexichem, which has acquired more than 15 companies since 2007, is a candidate for further ventures with companies such as state-run Petroleos Mexicanos, Fernando Perez, an analyst with Corporativo GBM SAB in Mexico City, said in an interview. 

Pemex, as the oil producer is known, on May 6 said it plans to quadruple petrochemical investment to 50.4 billion pesos ($3.89 billion) over the next four years to boost output. The companies formed an alliance to revamp the Pajaritos petrochemical plant last year.

“One of the strategies that Mexichem has carried out is successful growth from acquisitions looking for vertical integration,” Juan Francisco Sanchez, director of Mexichem’s investor relations, said in an e-mailed response to questions. “This strategy is part of our DNA and one which we will continue to carry out.”

Latin America’s biggest plastic pipe maker partnered in 2013 with Occidental Petroleum’s chemical unit to build a $1.5 billion ethylene plant in southern Texas and is producing vinyl chloride with Pemex. Teaming up with other companies positions Mexichem to benefit from petrochemical growth fueled by energy reforms approved in December, said Jean-Baptiste Bruny, a BBVA Research analyst.

“Mexichem is a company that has grown organically and inorganically by making good purchases at low prices,” Bruny said by telephone from Mexico City. “There are several more options available to establish joint ventures with other companies in the mid- to long-term.”

Expansion Options

Mexichem sees “multiple options” for petrochemical expansion after Mexico’s secondary energy laws are approved, Sanchez said. Secondary legislation to energy overhaul approved last year by President Enrique Pena Nieto was presented April 30 to Mexico’s congress. The laws, which could be approved as soon as next month, will determine tax rates for private companies that set up energy project in Mexico as well as Pemex’s participation in projects such as cross-border fields.

Pemex’s petrochemical branch is pursuing three alliances with private companies to increase fertilizer and ethylene production that will probably be announced this year, Manuel Sanchez Guzman, general director of Pemex Petrochemical, said in an interview last month in Mexico City. Pemex is actively seeking alliances with private companies as the energy overhaul opens an “enormous market” for petrochemical output, he said.

Electricity Project

Mexichem will consider further acquisitions for petrochemical expansion, Sanchez said. The company is analyzing the creation of a 500-megawatt co-generation project that would be used to sell electricity to third parties, he said.

Mexichem’s sales rose 8.5% in the first quarter from a year ago, exceeding analysts’ estimates. Revenue was boosted by the Pemex venture and higher sales of vinyl chloride monomer known as VCM, CEO Antonio Carrillo said during a April 30 earnings conference call.

Mexichem’s credit rating was lifted to BBB from BBB- on Nov. 15 by Fitch Ratings, which cited the company’s “continued business position strengthening through organic growth and acquisitions” and further growth opportunities.

Braskem, Alpek

Shares rallied 17% in the past two months, the steepest gain among 15 similar stocks tracked by Bloomberg. In the previous year, the Tlalnepantla, Mexico-based company was the worst performer with a 36% loss.

“It seems feasible that the company has the potential to return to a historic level of 15 to 20 percent growth,” said BBVA’s Bruny, who has a hold rating on the stock.

Mexichem’s higher sales came after last year’s company restructuring and increased demand in Latin America and Europe, CEO Carrillo said on the earnings call. Company sales in Latin America and Europe gained 13% in the first quarter from the previous year.

For the past two months, Latin American peers Braskem of Brazil rose 10% while Mexico’s Alpek was little changed. Mexichem gained 18% in the period. Sixteen of 18 analysts surveyed by Bloomberg have either a buy or hold rating on Mexichem’s shares.

Falling Fluorine

Mexichem’s first-quarter profit of $51.4 million missed analysts’ forecasts, partially on a 36% decline in earnings before interest, taxes, depreciation and amortization, or Ebitda, in the company’s fluorine unit as output fell, according to an April 30 research report led by Credit Suisse analyst Vanessa Quiroga, who rates the stock neutral.

First-quarter Ebitda slid 7.4% to $198 million, the company said April 29 in a regulatory filing. Ebitda is seen improving in the second half of the year on better prices expected in the fluoride chain and the start of new fluorite contracts, Mexichem’s Sanchez said.

Mexichem is the world’s biggest producer of the fluorine- rich mineral used in refrigerants, unleaded gasoline and toothpaste, and owner of the largest fluorite mine in the world, located in San Luis Potosi state in central Mexico.

“Mexichem’s shares look good over the last two months, but that is not the case if you look at them over the last six months,” Fernando Bolanos, an analyst with Monex Casa de Bolsa, said in an interview from Mexico City. “The returns are still very small and this year is likely to continue to be rather complicated.”

Pemex Project

The company in March formed Mexichem Energy to participate in projects such as electricity generation as the country’s energy industry opens to allow increased private investment.

“The solid balance that Mexichem has allows them to continue acquiring and remain effective in regards to mergers and acquisitions,” Perez, who has a hold rating on the stock, said in a phone interview. “They would definitively be able to acquire another company soon to maintain inorganic growth.”



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