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Kansas City Southern Eyes Energy Opportunities In Mexico

Kansas City Southern Eyes Energy Opportunities In Mexico

Kansas City Southern (NYSE: KSU) expects to leverage its operations in Mexico as U.S. and multinational companies take advantage of the country's 2013 energy reform and export crude oil to Mexico.

KSU chief executive officer Pat Ottensmeyer said last week that his company was investing in building terminal facilities to create capacity in Mexico so that KSU can deliver refined product from the U.S. Gulf Coast into Mexico. Volume is up between 12% and 13% year-to-date between Beaumont, Texas, and Monterrey, Mexico, as a result of rising growth in refined petroleum products.

"There's a tremendous amount of interest and a tremendous amount of investment by U.S. and multinational companies getting into that market," Ottensmeyer said on Sept. 12 at an investors' conference sponsored by Morgan Stanley. 

Before 2013, Mexico's oil and gas company PEMEX controlled the supply chain for oil and gas in the country, according to Union Pacific(NYSE: UNP). But the Mexican government opened the country up to imports and private investment to boost national production.

KSU leadership has been trying to cultivate relationships with the cabinet and administration of Mexican President Andrés Manuel López Obrador, who took office on Dec. 1, 2018. Part of the challenge in working in Mexico presently is that the country is undergoing what Ottensmeyer described as a technical recession, which has resulted in some government agencies being understaffed, such as the office handling energy permits. 

But some recent government actions could be beneficial to KSU. For instance, a proposed rule to restrict double tractor-trailer trucks could benefit KSU, although how much KSU will benefit will depend on how the government enforces the rule since Mexico hasn't moved to requiring electronic logs from truck drivers, Ottensmeyer said.

"The question is, how will it impact truck capacity, and that will be really a function of enforcement," Ottensmeyer said. 

Ottensmeyer also saw KSU as recovering even further from the loss of the Mexican fuel excise tax credit sometime in the future, either from regaining some of the credit back or because the government will also remove that tax credit from trucks and "level the playing field," he said. 

Meanwhile, because of the technical recession in Mexico, the growth in foreign investment has slowed even though it's still growing, Ottensmeyer said.

"We do believe that there has been some investment that's been delayed by multinational companies that just want to see how this administration is going to perform over a longer period of time," he said.

In the meantime, some planned projects are still occurring, such as two auto plants in Mexico that are expected to come online soon. Both Toyota Motor Corp (NYSE: TM) and BMW are constructing plants that will each have an output of roughly 300,000 to 400,000 vehicles annually, Ottensmeyer said.

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