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As if we needed anymore convincing, TransCanada Corporation (NYSE: TRP) is very serious about the Mexican oil and gas industry. In yet another move into the country, TransCanadaannounced a joint project with Sierra Oil and Gas to build oil and gas storage and transportation infrastructure. Here are the details of the latest investment and how TransCanada's bullish view of Mexico could help deliver consistent long-term returns.
The latest venture
The $800-million proposal between TransCanada and Sierra would deliver refined petroleum products to central Mexico. The company holds a 50% interest in the venture. The infrastructure includes a marine terminal near Tuxpan, a 165-mile pipeline, and an inland storage and distribution hub. The pipeline will have a capacity of 100,000 barrels per day, and the distribution hub will provide connectivity to the surrounding market.
Perhaps more importantly, the newest pipeline will parallel the recently awarded Tuxpan-Tula natural gas pipeline, providing synergistic opportunities to cut costs such as utilizing the "right-of-way" access permits. Additionally, it expands TransCanada's growing footprint Mexico in order to capture more of the oil and gas import market Mexico requires.
This new infrastructure shows that TransCanada is intent on pursuing opportunities to capitalize on Mexico's need to import 55% of its petroleum needs. In addition to the two pipelines mentioned above, the company's growing footprint also includes the recently awarded Sur de Texas to Tuxpan Pipeline and the Tula-Villa de Reyes natural gas pipeline. Although it has not signaled intentions for additional deals, TransCanada has positioned itself to benefit from Mexico's growing oil and gas consumption, which is expected to grow by 50% by 2025.
How it will benefit
TransCanada will benefit from its bets on Mexico in three ways.
First, the three previously awarded pipelines are supported by 25-year contracts, ensuring long-term returns. They are expected to come online in 2018, giving the company solid growth prospects down the road. The latest storage and pipeline infrastructure, although unconfirmed, will likely begin initial operations in 2018 as well.
Second, TransCanada is leveraging its interests in its Mexican assets -- as well as monetizing its U.S. Northeast power assets -- to purchase additional infrastructure elsewhere. For example, it recently purchased the Columbia Pipeline Group for $13 billion, significantly expanding its footprint in the eastern U.S. To fund the acquisition, TransCanada announced that it would sell minority stakes in its Mexican pipeline projects. Although this will cut into its returns from Mexico, it allows TransCanada to take advantage of the growing Mexican petroleum demand as well as already established infrastructure to expand its footprint.
And third, by adding another pipeline into its Mexico portfolio -- and utilizing those assets to expand into additional markets -- TransCanada is strengthening its assets through diversification. The majority of TransCanada's assets are in Canada and the U.S., but it now has over $5 billion worth of investments in Mexico. The value of diversification is that if one market begins to struggle, the company now has a new sources of long-term revenue. This puts it in a great position to ensure long-term returns.
TransCanada has placed great emphasis on asset expansion over the past year, and it has now made another move to capitalize on the growing oil and gas market in Mexico. TransCanada will not see returns from several of these projects until 2018 at the earliest, but selling off minority stakes will help it pay for its Columbia purchase that will provide short-term cash. The company's bullish view of Mexico is well defended by 25-year contracts, and the expanded diversification should hopefully help build cash flow stability in the long term.
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