After last-minute negotiations over the weekend, Canada was able to join an agreement with the United States and Mexico to form the United States-Mexico-Canada Agreement (USMCA). We see this event as positive for the energy sector in light of the strong dynamics among the three countries.
One of the key weights for the Trump administration closing the final trade negotiations with Canada was the firm opposition of Mexico's incoming president, Andres Manuel Lopez Obrador , to NAFTA becoming only a two-nation trade deal due to the strong footprint that U.S. and Canadian companies have in the Mexican energy sector (upstream, midstream and power). Lopez Obrador had insisted on the trade agreement being a three-way deal and Mexico is sticking to its already-negotiated side of the agreement. Thus, indirectly, Canada got a hand from Mexico to stay in the negotiations.
The American Petroleum Institute (API) released a statement on Monday after Canada joined the agreement The API highlighted key provisions of the agreement related to the U.S. natural gas and oil industry:
* Continued market access for U.S. natural gas and oil products and investments in Canada and Mexico.
* Continued zero tariffs on natural gas and oil products, investment protections to which all countries commit, and the eligibility for investor-state dispute settlement (ISDS) for U.S. natural gas and oil companies investing in Mexico.
* A requirement that Mexico retain at least current levels of openness to U.S. energy investment
* Additional flexibility allowing U.S. customs authorities to accept alternative documentation to certify that natural gas and oil have originated in Canada or Mexico upon entering the U.S.
U.S. and Canadian energy stocks that matter when it comes to USMCA include Marathon Petroleum Corp. (MPC) , Kinder Morgan Inc. (KMI) , ONEOK Inc. (ONE) , TransCanada Corp. (TRP) , Sempra Energy (SRE) and Valero Energy Corp. (VLO) .
On the natural gas midstream side of the business, Kinder Morgan and ONEOK of the U.S. and TransCanada of Canada operate a network of natural gas pipelines that ship U.S.-produced natural gas into northern Mexico. Most notably, ONEOK operates the Roadrunner pipeline exporting heavily discounted, Permian-sourced natural gas from West Texas into Mexico. Kinder Morgan operates natural gas pipelines from West and South Texas connecting into Mexico's gas pipeline system.
On the refined products side, Marathon Petroleum, which recently closed a merger with Andeavor to create the largest U.S. independent refiner, and Valero Energy, the second-largest independent refiner in the U.S., both have leased millions of barrels in storage and transportation capacity in Mexico to import and store petroleum products made in the U.S. across their network of refineries.
As far as liquefied natural gas (LNG) companies go, Sempra Energy through IEnova (IENVF) , its subsidiary listed on the Mexico Stock Exchange, operates regasification terminals and Mexican interstate pipelines, storage and gas-powered generation stations, which makes Sempra one of the most active U.S. companies operating in Mexico's energy sector.
As President Enrique Pena Nieto said, this is a win-win-win for all three countries, and we'll watch closely for U.S. congressional approval toward 2019. For now, there are many stocks to watch as companies play their next trade and investment cards after clearing this important hurdle.