Strategic partnerships more important than ever for Mexico energy sector investors

By Antoine Marchand
Managing Director

Private and foreign investors saw a notable policy shift in Mexico’s energy reforms over the past year under President Andrés Manuel López Obrador (AMLO), who recently completed the first year of his six-year term.

Mexico’s move toward increased private and international investment in its energy sectors under former President Enrique Peña Nieto shifted under AMLO toward what the country historically knows best: an energy policy geared toward federal ownership and control.

Nevertheless, foreign and private investment in Mexico’s energy sectors remains viable, practical and vitally necessary. Furthermore, U.S. Congress’s expected ratification of the U.S.-Mexico-Canada Agreement by early next year (the trade deal that replaces NAFTA) should stabilize markets for the three countries and help mitigate capital risk.

Certainly, private and international investors may view AMLO’s inward stance as one that has increased risk and uncertainty over the future of Mexico’s energy reforms. The good news is that the door remains cracked open for companies and investors who take a strategic approach.

By strategic, we mean it is more important than ever for investors to partner with Mexico-based companies on energy deals to get through the door. Those partnerships could take a variety of forms, such as joint ventures, public-private partnerships, special purpose vehicles, and build-lease-transfer projects.

In addition, a multidisciplinary team approach with a seasoned consultant that understands Mexico’s business climate, operating environment and ever-changing regulatory framework will be paramount for success whether the goal is a merger or acquisition, capital raising, debt restructuring or a strategic alliance.

Here’s a case in point that just crossed my desk — an example of how companies are partnering up to move forward: Stabilis Energy of Houston just announced the expansion of its Mexican liquefied natural gas (LNG) business with the opening of an LNG transportation hub in Colombia, Nuevo León, to serve northeastern Mexico. How did this happen? Interestingly, Stabilis said it recently formed a joint venture with CryoMex Investment Group, which is led by Grupo CLISA, a Monterrey, Mexico-based energy company.

Mexico needs foreign investment

Mexico, on its own, won’t be able to meet its own country’s energy needs in the coming years due to a variety of factors, which include operational, growth and capital challenges at PEMEX, its state-owned petroleum company and at the Comisión Federal Electricidad (CFE), the state-owned electric company.

Global companies have the capability — and the desire — to help Mexico expand and improve its energy assets. We firmly believe these opportunities still exist.

In terms of the electricity market, the Mexican government recently disclosed that it needs 70 gigawatts of additional electrical generation capacity in the market over the next 15 years — roughly double what it has now. We also know other sectors, from oil & gas production to renewables, are under-supplied.

Here’s where we see opportunities during the remainder of AMLO’s administration:

  1. Electrical generation: CFE plans to build more generation plants, but roadblocks such as lack of public funds could prevent it from producing enough capacity without more involvement by the private sector. As a result, we expect AMLO’s stance on CFE being the dominant provider of new generating capacity, without private sector support, to soften over time.
  2. Electrical transmission/distribution: Mexico has a bottleneck in its transmission/distribution system and the lack of public funds, again, requires collaboration with the private sector. We believe AMLO’s plans to build more natural gas power plants will place further strain on the country’s distribution system.
  3. Hydrocarbons: The deepwater auctions were hugely popular among the majors and foreign entities and brought a ton of positive press to Mexico’s energy reforms. AMLO halted additional auctions until 2022. Still, the country needs additional oil & gas supplies and it appears PEMEX investments will be insufficient to meet the country’s needs. We believe there could be further opportunities for foreign E&P development participation down the road even though things may look bleak now.
  4. Renewables: Foreign investors have helped Mexico advance its renewables sector. We see this continuing via cross-border partnerships.

Invest in a strategy

Companies must be strategic to move forward. Case in point: Canada-based ATCO has been investing in hydroelectric power stations in Mexico for a number of years while at the same time it has faced immense challenges in getting a gas pipeline built.

In a sign that the company remains committed to Mexico, it named a new managing director overseeing Latin America in November. Pierre Alarie’s role will include leadership over the company’s Mexico assets, with a goal of “fostering an open dialogue.” I don’t personally know Alarie. However, he recently served as Canada’s ambassador to the United Mexican States and that background meshes with our belief that companies need to tap experts well-versed in navigating Mexico’s business and political climate to increase their chances of success.

Capital Alliance has been helping companies navigate cross-border deals in Mexico for years. We are currently representing companies in nearly a dozen cross-border transactions. In Mexico, our activity has included providing advisory services for investments into power generation (renewable energy) projects, electricity transmission and distribution, and oil & gas-focused construction services.

Foreign investment isn’t for the faint of heart, to be sure, but establishing strategic alliances and tapping experts well-versed in doing business abroad can increase one’s likelihood of success. Viva Mexico!

Capital Alliance Corporation is a Dallas-based investment banking firm with a four-decade history and deep operational and M&A experience across many sectors, including energy infrastructure, oilfield services and oilfield manufacturing/supply chain. Capital Alliance is affiliated with Oaklins International, the world’s most experienced mid-market M&A advisor, with 800 professionals globally and dedicated industry teams in 40 countries worldwide. We have closed over 1,500 transactions in the past five years.