Popularity of Pig Launchers Helps to Tackle Uncertainty

Q: How has the current uncertainty created by the Energy Reform impacted Octopus’ operations and projects?

A: We underwent one of the worst years in our history in 2013 as our sales dropped by 50% over the previous year. 2014 was a little better, with most of our successful projects last year being linked to pipelines. We expect this demand will continue throughout 2015 and that these projects will act as a bridge for us to capitalize on more post-Reform opportunities. In addition to pig launchers, receivers, and other related products, pipeline projects need other equipment that we manufacture such as filters and separators. We recently supplied equipment to the Los Ramones project and worked on huge pig launchers for Dragados and AOT, and we will continue to work on these types of products. It will be interesting to see what happens in Round One. We are hoping that by 2016, the industry will come around, but 2015 will be somewhat similar to 2014.

Q: What are the tendencies in the procurement of the products that Octopus commercializes?

A: The construction habits of Mexican companies are characterized by wanting to carry out a large portion of their processes at the site, which sometimes includes pig launchers. Such companies usually build all general products and will only acquire high-specification products from external sources. This way of doing things has been the standard in Mexico for many years. While using prefabricated piping saves 60% of the welding on site and provides much better process and cost control, it is not a standard practice for Mexican EPC companies to acquire prefabricated products. This is starting to change as a result of very high specifications and norms required by PEMEX. This is a good thing for any well-established company here, including Octopus. Many companies that used to be strong players in this market have halted operations, and strong companies from Houston have become the preferred suppliers for projects in Mexico. With respect to the separation services we offer, about three to four years ago, PEMEX expressed its interest in acquiring separation services from companies like Octopus that would host facilities and charge PEMEX for each cubic foot of gas separated. Unfortunately, this idea never really materialized.

Q: What is the difference for PEMEX between procuring separation services and owning separation equipment?

A: The difference lies in the efficiency of the process. A service provider offers advantages since it is an expert in offering separation services while it also has its own separation equipment. While PEMEX is on a journey toward becoming more efficient, hiring a company to handle separation services rather than doing it on its own would be a good route to take. Q: What role do you expect local content requirements to play in the competition between international suppliers and companies like Octopus? A: The impact of local content requirements will undoubtedly push the development of the local supplier industry in Mexico. There will be more customers, more players, and more projects. At the same time, as new players begin operating in the country, they will probably stick to their existing suppliers. While they will want to get to know the Mexican providers, they will feel more comfortable with companies that are already familiar with their operations, which usually means our competitors in the US or Canada. One positive aspect to highlight is our quality-driven business model. Most of the projects that Octopus gets involved with in Mexico are acquired because of the quality standards needed. By meeting very tight norms, we are able to deliver high-quality products and services. For example, Etileno XXI works under very high standards that allow an error margin of 1mm. Therefore, equipment must be manufactured under rigid standards to be delivered accordingly. Adhering to such norms has been tough for our competitors, the quality of their products might be fine but the precision might not up the standard. On another note, Mexican labor is very good, hard-working, and creative, which gives us an advantage.

Q: What are your biggest hopes and fears for 2015?

A: My biggest fear as of today is securing cashflow. A company like Octopus usually belongs to an important EPC group. However, we are working independently and remain relatively small. In my experience, this is a very difficult market to tackle alone so it may be a good idea for Octopus to eventually find the right partners to attain stable margins.