Enterprise and Valero Are Eying This Growing Export Market

There's a problem south of the border, and it isn't drug cartels... it's oil. Mexico's production has been falling for years. Meanwhile, the United States has increasingly been exporting energy products to our southern neighbors. You don't have to look overseas to find a big export opportunity in the energy business.

The government did it!
The Mexican oil industry has historically been tightly controlled the country's government. It's no wonder then that production has been falling since the middle of the last decade. Mexico isn't alone in this problem, either. The Mexican government is making big changes so it can get private enterprise in to reverse the current downward trend.

Source: EIA

What's clear, however, is that Latin America is an increasingly important export market for U.S. refined products. According to the U.S. Energy Information Administration, "U.S. exports of petroleum products to Mexico have increased 152% in the past decade." Last year, the biggest exports were gasoline at 46% of the total, distillate fuel oil at 22%, and liquefied petroleum gases at 10%. Mexico isn't the only end market to our south, either.

Big business for Enterprise Products Partners
Giant pipeline company Enterprise Products Partners (NYSE: EPD  ) specifically highlights exporting to Mexico as a "demand-side opportunity." In fact, about 35% of the propane that Enterprise exports goes across our southern border. The partnership essentially supplies half the market for propane in Mexico, the Caribbean, Central America, and South America.

While some industry watchers have been questioning the longevity of the U.S. oil and natural gas boom (which is supporting Enterprise's exports), the patnership says there's growth ahead. It recently highlighted the "potential years of drilling" for key domestic energy regions; the Barnett region had the shortest lifespan at 30 years, and the Marcellus the longest at 110 years.

Clearly, Enterprise doesn't think the opportunity to move products over its 50,000 miles of pipes is ending anytime soon. That increasingly includes sending products like propane to Mexico. This, in turn, should help keep the company's streak of 39 consecutive quarterly distribution increases growing.

Valero's refining opportunity
Propane, a byproduct of refining oil and natural gas, is actually a small player in this trend. Gasoline is the big boy, and on that front Valero (NYSE: VLO  ) is a refiner to watch. Like Enterprise, Valero highlights demand from our Southern neighbors as a key opportunity. The company has stated that, "Strong demand from Latin America, including Mexico, [has] kept gasoline exports elevated." According to the company, Mexican demand is roughly equal to the demand from the rest of Latin America.

Source: EIA

With about a half dozen refineries located on the Gulf Coast in Texas and Louisiana, all of which are capable of producing gasoline, Valero is well positioned to send its products to Mexico and beyond. That said, Valero is a refiner so its profits depend on the difference between the cost of what it refines and the value of what it sells.

That's a benefit today, though, because oil and gas production in the United States is growing. That's led to a price advantage for Valero compared to competitors in other countries. As Enterprise Products Partners pointed out, domestic production isn't likely to fall off a cliff anytime soon. Valero is particularly positive about its natural gas costs: "Prices are expected to remain low and disconnected from global oil and gas markets for foreseeable future."

It's no wonder Valero's earnings have been heading higher since back-to-back loses in 2008 and 2009. The nearly $5 a share in earnings in 2013 was an over 30% year-over-year advance. The over $8 a share earned in 2006 and 2007 also suggest there's still room to go. That's particularly true if the refiner can get its margins back into the high single-digits again from the recent 3% range.

Not the big story, but big anyway
Mexico and Latin America aren't the big story when it comes to exporting U.S. energy. However, that doesn't mean that our southern neighbors aren't important. Enterprise and Valero are both well aware of the opportunity and are working to take advantage of it for you.

Here are some more pipeline opportunities to watch

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