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Mexico's Alfa takes quick loss on oil ventures as price sinks


The oil market has been unkind to Alfa SAB as it gets deeper into the business.

Six weeks after the Mexican food and auto-parts maker disclosed a 17 percent stake in Colombia 's Pacific Rubiales Energy Corp. (PREC) , oil prices are hovering near a 17-month low and the price of its newly acquired stock has tumbled 17 percent. In dollar terms, the value of Alfa's stake in Pacific Rubiales has fallen $180 million to about $860 million.

Alfa, whose products include bacon strips, plastic bottles and car-engine parts, says it will vie for lucrative oil-drilling contracts in Mexico as the country opens its energy industry to private investment for the first time since 1938. While there's speculation the Pacific Rubiales stake might be a precursor to a joint venture or full takeover, a growing number of analysts have expressed concern that the oil company's reserves may be inflated, a potential problem made more acute by the tumble in oil.

“It is still very difficult to determine Alfa's strategy at this point,” said Marimar Torreblanca, an analyst at UBS AG in Mexico City who last week cut her rating on Alfa to hold from buy. “Our initial assumption when Alfa began to announce the buying of Pacific Rubiales shares was that the intention was to eventually form a joint venture. When they began to buy more and more, it became a bit more difficult to understand.”

Pacific Rubiales President Jose Francisco Arata told the Bogota-based newspaper La Republica in an interview published yesterday that the company and Alfa are signing a joint venture to bid on oil projects in Mexico.

Equity Stake

The company's general counsel, Peter Volk, declined to comment on the possibility of a joint venture or to confirm Arata's remarks. In an e-mailed statement, Alfa also declined to comment on the article.

“Alfa is analyzing opportunities to participate in the Mexican hydrocarbon industry, whether alone or with other businesses,” according to the statement.

Alfa first disclosed a 10 percent stake in the Colombian producer on May 20, triggering a month-long, 20 percent rally in Pacific Rubiales's shares as some investors bet that a takeover was in the offing.

“We thought those purchases were a little weird, because a joint venture could be more appropriate for what Alfa wants,” said Victor Benavides, a London-based Latin America analyst at Mirabaud Asset Management Ltd. Benavides said the fund sold its Pacific Rubiales shares amid the rally.


Oil Prices

WTI crude sank below $90 on Oct. 2 after Saudi Arabia , the world's largest oil exporter, cut its prices to Asia . U.S. production is the highest since 1986, while OPEC output expanded to the most in a year. The International Energy Agency last month reduced its projections for demand growth this year and in 2015, citing a weakening economic outlook.

Meanwhile, Alfa shares have gained 23 percent this year, partly because investors saw it as one of only a few Mexican companies with oilpatch experience. The company's Newpek unit has drilling partnerships outside of Mexico, in such areas as Texas 's Eagle Ford .

Even so, Newpek generated just $42 million of revenue in the second quarter, or 1 percent of Alfa's total. Chief Executive Officer Alvaro Fernandez said May 21 that it's time for the San Pedro Garza Garcia-based company to come up to speed as “real oilmen.” The company sold $1 billion in bonds earlier this year to finance energy investments.

Thus Alfa's interest in Pacific Rubiales, which is run by a group of Venezuelans who in 2007 started drilling what would become Colombia's largest oilfield. At the start of this year, Pacific Rubiales's stock had 27 analyst buy ratings and zero sells.

Oil Reserves

Since then, five analysts have changed their recommendations on the Colombian producer to sell.

Ian Macqueen of Paradigm Capital Inc. wrote in February that Pacific Rubiales's reserves were “generously booked,' with about 46 percent of year-end 2012 reserves coming from mostly non-producing assets. Pacific Rubiales has booked reserves from a field that its partner wasn't ready to count, Credit Suisse Group AG said in a June report.

Just last week, Credit Suisse analyst David Phung slashed his 12-month price target on Pacific Rubiales's Canadian-traded shares to C$11.50, implying they still have a potential downside of 36 percent.

‘‘We believe that those that have cut their price targets or recommended a sell, they just don't fully understand our business model and future outlook,” said Volk, the Pacific Rubiales general counsel.“We definitely do not agree that our reserves are in any way overreported or inflated.”

Toronto Law

Under Canadian securities law , a company must start a takeover bid in most cases if it reaches or seeks to obtain a 20 percent stake in another company. Pacific Rubiales trades in Toronto and is incorporated in Canada .

Some investors are doubting their earlier assumption that Alfa would make a takeover bid, said David Ross , a Paris-based consultant to Financiere de l'Echiquier, a money manager with $10 billion under management.

“As of right now, Alfa is not really making lots of money on its stake,” Eric Conrads, who helps oversee about $500 million in Latin American stocks as a money manager at ING Groep NV, said in a telephone interview. “Sometimes you don't know the rationale why someone is marrying someone else.”


Story by Christine Jenkins and Adam Williams; Editing by Brendan Walsh and Bradley Keoun from Bloomberg.

-;;|Oct 06 2014

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