by Aaron Levitt | October 8, 2013 6:30 am
There’s lot to love about the Mexican economy. Juicy free-trade agreements, low wages and a close proximity to the United States and Canada are helping transform the nation back into an export powerhouse.
But Mexico’s economy is about to get a whole lot better. That’s because after nearly 75 years, Mexico might finally re-open up its abundant oil and natural gas assets to foreign energy firms.
Since 2004, Mexico’s overall crude production has fallen roughly 23% as the nation’s legacy wells are beginning to dry up. Giving new life to these old assets will require a dose of high technology and more complex drilling techniques — the kind that American energy firms have in spades. According to newly elected President Peña Nieto, foreign investment is the only way to increase Mexico’s production.
The opportunity could be huge: Mexico has 13.87 billion barrels of proven oil reserves according to data compiled by state-controlled oil firm PEMEX. But that number could be a drop in the hat, considering the country’s vast, unexplored regions which could see new life from hydraulic fracturing and shale-gas resources — to the tune of 460 trillion cubic feet. Deepwater drilling could add another 27 billion barrels of crude.
For investors, it could represent the untapped opportunity of a life time. That is, if they bet on the right firms.
Exxon’s (XOM) production problems are well known at this point. Output at the integrated giant continues to fall as costs for drilling and a badly timed bet on natural gas have hurt margins at the firm.
Which is why Mexico could be huge win for the company.
Exxon is a massive player in the Gulf of Mexico. So the natural extension of drilling past U.S. borders and down into the Latin American nation makes perfect sense. But more importantly, its drilling technology is some of the best in the world — thanks to that ill-timed purchase of XTO.
Since August — when President Nieto first began his quest to unlock Mexico’s energy — Exxon has been quite busy making deals with PEMEX. The latest of which is a five-year technical agreement that will see the two collaborate on drilling technology and human-resources training. While the agreement is “non-commercial” in nature, it’s still a big win for E&P giant.
Like Exxon’s deals in Russia, this deal with Mexico could give XOM the first-mover edge needed to get at the vast hydrocarbons before its competitors. That’s a key win for XOM as could finally boost its floundering reserve replacement ratios and future oil production.
The story at offshore driller Noble Corp. (NE) continues to get better for investors.
Aside from the firm’s proposed spilt — which will separate the company into deep- and shallow-water drillers — Noble is already the largest and most active offshore driller in Mexico. Partnering PEMEX, NE has 11 jackup rigs operating in the Bay of Campeche. That number could explode upwards as energy liberalization takes place.
Analysts estimates that only 552 wells have been drilled off the coast of Mexico during the last 10 years. That compares to more than 4,600 tapped in the U.S. portion of the Gulf of Mexico. Given that Mexico’s holdings of the waterway feature similar geology and hydrocarbon pockets, the potential for expansion is a salivating opportunity.
For Noble, the play is monstrous.
Most of the newly tapped wells will appear in shallow seas first, then move further and further offshore. This will benefit NE’s current shareholders and carry them through the pending spilt. And given that the offshore drilling rig market is already “tight” and will be that way for years to come, any growth in stemming from Mexico will cut rig supplies and help drillers raise day rates.
It’s no secret that China has an oil addiction. It’s also no secret that China is willing to go to great lengths to secure the supplies its needs to fuel its torrid growth. The various state-controlled energy giants within the nation have plowed billions into deals spanning the globe — from Canada to Egypt — in order to gain access to reserves and production.
China Petroleum & Chemical (SNP) — or Sinopec — has been one of the biggest spenders, and those huge dollar amounts are flowing into Mexico as well.
When Mexico’s Congress first began tinkering with energy policies back in 2009, Sinopec was granted limited access to the nation’s offshore waters in order to prospect for oil. More recently, the Chinese firm signed agreements to provide more energy services to PEMEX and its subsidiaries.
However, the biggest deal could be the agreement to strengthen trade relations between the two firms and send a larger volume of crude exports — via Sinopec — into the Asian Dragon. Due to this deal, it’s almost guaranteed that SNP will be getting a huge slice of Mexico’s energy pie and could get first crack at joint ventures or land leases when drilling finally begins.
After a bad run in Argentina, Spanish energy firm Repsol (REPYY) is looking for other deals in North and Latin America to fuel its production. While the firm is planning on tackling U.S. shale via an acquisition, Mexico could be a prime destination for the firm.
That’s because PEMEX has been a major shareholder in the oil group since it was privatized in the late 1980s. Currently, PEMEX owns about 9% of the outstanding shares.
Already, Repsol has a few projects in the U.S. portion of the Gulf, so extending downward into Mexican waters is an easy bet. More importantly, the two companies have already intended to collaborate on upstream and liquefied natural gas projects in the Americas, and downstream activities in the Americas, Spain and Portugal. REPYY has also indicated that it has interest in Mexican oil fields onshore.
Naturally, using Repsol’s resources and drilling technology makes a lot of sense for PEMEX, given that it owns a hefty amount of shares. I expect the relationship to grow stronger as the new drilling rules take hold. Investors in the beaten down Spanish firm could be handsomely rewarded.
While there are plenty of oil service firms, Schlumberger Limited (SLB) might already be winning the battle for Mexican oil production. The company was a major winner of the few production-enhancing contracts issued back in 2009 during the first round of energy reform.
Like many of the others on this list, that puts Schlumberger in the driving seat when it comes to future deals versus rivals like Halliburton (HAL).
Given that PEMEX lacks the technical expertise needed to drill in the deep waters of the Gulf or tap the large deposits of oil and gas trapped in shale, analyst estimate that Mexico will need to spend about $10.5 billion on drilling and completion services over the next two years. This will put some serious coin back into SLB’s pockets over the longer term.
For investors, Schlumberger could be the best way to position future oil service gains in the sector.
As of this writing, Aaron Levitt did not hold a position in any of the aforementioned securities.
Source URL: http://investorplace.com/2013/10/how-to-profit-from-mexicos-oily-bonanza/
Short URL: http://invstplc.com/1fqgsRD
Copyright ©2015 InvestorPlace Media, LLC. All rights reserved. 700 Indian Springs Drive, Lancaster, PA 17601.