Seek out companies that are currently heavy energy consumers, and/or that will benefit directly from the coming drop in energy prices.
Since the Mexican government first passed sweeping reforms in late 2013, the nation’s energy industry has been busy implementing details of the new laws, which are necessary for Mexico to maximize its true energy potential.
“The U.S. Energy Information Administration has analyzed the potential in the Mexican oil fields and projected they will draw upwards of $10 billion dollars of foreign direct investment and create half a million new jobs for Mexico by 2018,” writes Christi Craddick, chairman of the Railroad Commission of Texas, in an Oct. 13 op-ed for the Houston Chronicle. “In order to reach its full potential, the Mexican energy industry will require significant investments in infrastructure, from roads and pipelines to water and electricity.”
Current President Enrique Peña Nieto’s reform agenda, which also targets Mexico’s banking, taxation, education and infrastructure development, calls for increased efficiency and major funding for the energy sector from foreign producers and investors.
“Energy reform is the most important reform,” says Richard Hall, an emerging-markets sovereign credit analyst at Baltimore-based asset management firm T. Rowe Price, in a recent interview with Institutional Investor. “There’s low-hanging fruit that hasn’t been picked.”
So, how best to invest in Mexico’s energy sector? The answer is multifaceted, with many different avenues of entry, but according to analysts at T. Rowe Price, one way is to seek out companies that are currently heavy energy consumers, and/or that will benefit directly from the coming drop in energy prices as Mexico’s energy reforms bring cheaper oil to the Americas.
“One such sector is cement, which taps into other promising Mexican themes,” writes Institutional Investor. “Cement producers will gain from the huge infrastructure spending, including for production and pipeline facilities, required for Mexico’s increased energy production.”
Cement companies in Mexico are also an attractive option for investors because they present a solid play on the continued economic rebound in the U.S. How? The answer is simple: Cement is the ultimate nearshore manufacturing product, because it must be manufactured in or near the country in which it will ultimately be used.
As a major consumer of oil and petroleum, the petrochemical sector, including firms like Mexichem, offers another opportunity for investors to cash in on Mexico’s energy reforms. Mexichem and other corporations like it are poised to benefit in a big way from cheap gas transported into Mexico from the U.S., as well as from the cheaper feedstock, such as ethylene, that will be generated as a direct result of the increase in foreign direct investment in Mexico’s oil and gas fields.
Paris-headquartered asset management firm Carmigac is also taking a close look at the Grupo Mexico mining company, which is already the world’s third-largest copper producer. Although many investors have been overlooking copper stocks in recent months, Carmigac sees Grupo Mexico as a solid play, forecasting it will weather the temporary lull and citing the fact that it has consistently maintained some of the lowest operational costs in the world, despite its impressive production capacity.