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Far from ordinary, our roots lie on the investment side, but we have been around the startup block a few times. This helps us bring a unique perspective to markets and stocks. We look for under-covered ideas in markets outside the U.S., while also focusing on bringing to light the short case for... More
  • Playing Mexico's Natural Gas Deficit  0 comments
    Nov 3, 2013 10:59 AM

    It's a relatively safe bet that 95% of investors have never heard of Infraestuctura Energetica Nova S.A.B. de C.V. (IENOVA.MX), and why would they? It has minimal analyst coverage and operates in a very "unsexy" market in the unloved Mexican market.

    We are big fans, and owners, of Chesapeake Energy. This stock reminds us a lot of that company. Not so much the management issues, but more so the company's portfolio and exposure to the natural gas market.

    You see, IENOVA is a play on the Mexican energy market, but a bigger play on the Mexico natural gas market.

    IENOVA now the largest natural gas pipeline company in Mexico, behind only Pemex. The company owns 29% of the market share. Meanwhile, IENOVA owns over 50% of the market share for LNG terminals in Mexico.

    Quite simply, it's the largest private operator of natural gas pipelines in Mexico. IENOVA won over 50% of the projects offered up in for 2012 and the first quarter of 2013. The company just completed its IPO earlier this year and it hasn't been too disappointing so far; up nearly 25% over the last seven months. Compare that to the 15% or so the S&P 500 is up over the same time period.

    It's relatively new to the markets, having completed its IPO earlier this year, offering 98 million shares for MXN 34 per share.

    One of the real beauties is that the company is not just a growth story, but also a cash flow story. The company has long-term contracts. IENOVA should start churning out recurring FCF of around $270mm/year by 2015. It also has some $700mm in "firepower" for new projects. Given its ability to turn out a 10% plus IRR on its projects, $700mm investable capital has the ability to add $10/share of value for the company.

    The company has the management to get it done. At the helm as CEO is Carlos Sacristán. Carlos took over as CEO in June 2012, when the company was still Sempra Mexico. He whipped the company into shape for its IPO. Carlos also serves founded Proyectos Estrategicos Integrales in November 2001, and has situated himself as one of the most prominent businessmen in Mexico. Before Proyectos, Carlos served as a Secretary of Communication and Transportation of Mexico. He also received his MBA from Northwestern University of Chicago.

    One of the biggest drivers for IENOVA is that Mexico's energy infrastructure build out is only just getting started. This comes as the country has a very large, untapped, hydrocarbon resources.

    Mexico's energy generated by fuel type - notice that natural gas dominates

    Mexico's supply-demand dichotomy - notice that demand outpaces supply by about 25% currently, but by 2025, the difference will grow by 40%

    The company should manage to hit $270mm in recurring FCF by 2015, putting its recurring FCF yield at

    Ultimately, the stock should be trading closer to $60 to $65, and what's more is that the stock has a 4% dividend yield. This is based on a combination of a DCF and multiple valuation.

    Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it. I have no business relationship with any company whose stock is mentioned in this article.

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