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As the Mexican government moves to reform the slumping energy industry, a whole slew of firms in the US stand to benefit. According to a Merrill Lynch report , analysts estimate that Mexico spent about $8 billion on drilling and completion (D&C) services in 2012 and expect that number to jump another $2.5 billion in the next two years.
Merrill Lynch lists a slew of stocks that will benefit from the hydrocarbon surge in Mexico. The firms include the typical large oil service and equipment providers, as well as offshore drilling specialists. Remember that a prime reason for the decline in oil output from Mexico has been a lack of expertise in drilling complicated offshore wells. While this might be a scenario where a rising ship raises all boats, a few stocks stand out to benefit the most.
Offshore rig demand already high
As evidenced by the recent Seadrill market comments during its second quarter earnings report, the offshore drilling rig market is already tight and is poised to remain that way for years. Any movement by Mexico that would require 20 more floaters significantly reduces the supply in the market. In fact, Seadrill estimates that in the last 10 years only 552 wells were drilled offshore Mexico while 4,653 wells have been drilled in the US Gulf of Mexico. The offshore market is a global one, and increased demand will lift all ships or rigs in this case whether working directly with the Mexican oil industry or not.
Both Ensco and Noble would benefit directly from having operations in the Gulf of Mexico and from dealing directly with PEMEX with existing rigs. The move by a friendly government in a local market could provide more consistent demand.
Ensco lists an offshore drilling fleet of 10 drillships, 19 semisubmersibles, and 46 jackups. According to the August fleet status report, the company lists four jackup rigs working for PEMEX until at least mid-2015. Although, these rigs are working in shallow water of 250 feet and for low day rates of around $90,000, a good working relationship with PEMEX could lead to additional work with the potential for the industry to open up significantly.
As of the end of June, Noble has a fleet of 79 offshore drilling rigs including three ultra-deepwater drillships and seven high-specification jackup rigs under construction. In total the company has 69 rigs working with 10 under construction. In the August fleet status report, the company lists 11 jackups working for PEMEX in the Bay of Campeche. In addition, the company has 12 semisubmersibles and drillships working in the US Gulf of Mexico providing significant experience to transition to drilling the Mexico side.
Weak Mexico service revenues
Weatherford has the potential to benefit the most from being one of the weakest oil service firms especially among the majors. Anything that increases the demand in the sector will help alleviate margin pressures. Income in the case of this Weatherford can be used to de-leverage the balance sheet that now includes nearly $9 billion in net debt.
More importantly, Weatherford sourced weakness in Mexico for a 6% decline in second quarter Latin America revenues compared to last year. Latin America had become the second largest region for generating revenue behind North America.
Oil service firms should benefit immensely if Mexico does move forward with reforms in the energy sector. With oil prices sitting above $100, one can only imagine that the Mexican government is scrambling as fast as possible to increase spending to capture these high oil prices.