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Sempra Energy Wins $115M Deal to Build Liquid Fuel Terminal

Sempra Energy’s SRE Mexican unit, Infraestructura Energética Nova, S.A.B. de C.V. (“IEnova”) has secured a liquid fuels project worth approximately $155 million from the Mexican authority. Per the terms, IEnova will construct a receipt, storage and send-out liquid fuels marine terminal on the Mexican Gulf Coast.

Details of the Project

The project is a 20-year contract awarded by Mexico’s Veracruz Port Administration. Under the agreement, IEnova’s responsibilities will include gaining permits, engineering, procurement, construction and financing of the terminal. In addition, the unit will supervise maintenance and operations of the project.

On completion, the terminal will have a capacity to supply 1.4 million barrels of gasoline, diesel and jet fuel to the central region of Mexico. IEnova expects to start operations at the project in the second half of 2018.

Apart from providing a significant amount of petroleum products, this project will also create employment opportunities for local dwellers.  It is estimated that for the construction site, approximately 500 direct and 2,000 indirect workers will be needed.

Our View

With the global energy sector still in a state of flux to some extent, governments across nations have been undertaking various reformative initiatives to keep their energy companies profitable. Mexico was no exception. In fact, the nation’s energy sector has turned around in recent times, catalyzed by the comprehensive Energy Reform implemented in 2013, after it suffered a major setback a few years back owing to its declining oil-production.

Toward this end, the new liquid fuels terminal project reflects an expansion of business operations for IEnova in Mexico, where it already enjoys a strong presence. In fact, realizing the booming energy market in the region, IEnova has been making significant investments and project plans lately. In this line, in Sep 2016, the company took over the 50% equity interest that Petróleos Mexicanos (PEMEX) Transformación Industrial had in Gasoductos de Chihuahua. Notably, Gasoductos de Chihuahua builds and operates the energy infrastructure in Mexico.

On top of this, it has been announced yesterday that a reservoir with an estimated capacity of 1.4–2 billion barrels has been discovered by explorers in the country, other than state-owned Pemex. This will further encourage IEnova to make more investments in Mexico’s energy sector.

Going ahead, over the next five years, Sempra Energy’s projected compound annual growth rate (CAGR) for EPS is in the range of 10–11%, with a total capital investment assumption of $14.2 billion. Considering the above-mentioned developments, we believe the recent liquid fuel terminal project further strengthens Sempra Energy’s confidence in the IEnova unit as one of its major growth drivers over the next several years.

Price Performance

Sempra Energy has lagged the Zacks categorized Utility- Gas Distribution industry in the last one year. During this period, the company’s shares have lost 1.4% compared with the industry’s gain of 2.7%. This might have been caused due to the nuclear industry facing difficult times, given the availability of low-priced natural gas and the government-subsidized wind sector. It also faces stiff competition from peers like Just Energy Group, Inc. JE, NewJersey Resources Corp. NJR and ONE Gas, Inc. OGS.

Zacks Rank

Sempra Energy currently holds a Zacks Rank #2 (Buy). You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.

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