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Sempra Mexican Unit Meets With Resistance

Sempra Energy’s Mexican arm has lost three bids in as many weeks to build and operate natural gas pipelines in Mexico, as the country’s state-owned electricity utility said Sempra’s proposals did not meet its standards.

The Comisión Federal de Electricida (CFE) had approved all three bids’ technical submissions but rejected their economic proposals. The utility said Sempra had suggested using equipment that could not handle enough capacity to make the pipelines economically feasible.

Infraestructura Energética Nova SAB de CV, known as IEnova, said it had never been disqualified from a bid before and may consider legal action.

The CFE claimed IEnova’s economic proposal included required volumes much higher than the volumes detailed in its technical bid. The inconsistency, according to the CFE, meant the pipelines would not be guaranteed to transport the needed volume. The utility issued rejections on March 16, March 29 and April 8, all using similar language.

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IEnova declined to comment specifically on the cause for the discrepancy.

“During the last 20 years, IEnova has participated in Mexico’s energy sector in several bidding processes and has never been disqualified for failure in the integration of its technical or economic proposals or for any other reason,” the company said in a statement after the first rejection.

While IEnova submitted the lowest bid for the first pipeline, about $7 million under the winning bid of about $372 million, its bids would not have been the lowest for the other two pipelines even if they had been accepted.

An analyst from Credit Suisse said the rejections should create “additional pressure” on IEnova’s shares, which fell 4 percent since the first rejection to about 68 pesos. A Barclays research note said the bid disqualifications were a setback that “reinforces a negative precedent” on IEnova’s asset growth potential from CFE projects.

“Although there are numerous natural gas projects in the pipeline in Mexico, approximately $7.4 billion, IEnova’s recent track record is not supportive of an overly optimistic view on asset growth,” Barclays analysts wrote following the third rejection.

Unknown Impact

Despite the CFE’s claims of three separately deficient proposals, analysts reiterated their target prices of up to 90 pesos. They noted IEnova could still win contracts to build a Baja California Sur gas supply project or an underwater pipeline from Texas to Veracruz. IEnova is also trying to wholly acquire gas transport and storage company Gasoductos de Chihuahua, a joint venture with state-owned Pemex, for more than $1 billion.

Andy Smith

Andy Smith, a senior analyst at investment firm Edward Jones, said an additional boon for IEnova is that it is the only publicly traded Mexican energy company, making it the only option for many investors looking to participate in the sector.

“That can help support stock prices,” Smith said. “It’s a scarcity issue.”

He also said the rejections were unlikely to have a major impact on parent company Sempra. Mexican operations accounted for $213 million in revenue last year, about 16 percent of Sempra Energy earnings of $1.3 billion. Sempra has also been conservative in its estimates of how many projects IEnova will win in the next year, according to Smith.

“Mexico is not a primary driver of Sempra earnings as a whole, though there are potentially greater opportunities to grow there compared to (Sempra’s) other businesses,” Smith said. “There are a number of pretty robust projects in Mexico. They are counting on winning at least some of these projects to support their growth.”

IEnova

Company description: Mexico

City-based subsidiary of Sempra Energy

Revenue: $213 million

No. employees: 650

Key factors for success: Invested more than $4 billion in building more than 2,500 kilometers of natural gas, ethane and liquefied petroleum gas pipelines; more than 100,000 customers

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