Mexico's natural gas production has not kept up with demand. In 1999 Mexico's imports of U.S. natural gas were close to nothing, but in 2012 the country was importing more than 1.6 billion cubic feet per day. The EIA estimates that Mexico has 545 trillion cubic feet of technically recoverable shale gas, signaling that there is more than enough gas below the ground for Mexico to meet its domestic needs.
Mexico needs help
Geology does not respect national boundaries and shale formations are no exception. Texas has seen the rapid development of Eagle Ford, and the field does not stop on the U.S.-Mexico border. The Mexican senate recently approved energy reforms that allow concessions to foreign firms. While the reforms still need to be passed by other branches of government, Mexico's fiscal pressures from falling oil production will continue to push the reforms forward.
Frackers to the rescue
Unconventional drillers like Chesapeake Energy (CHKA.Q) struggle because some formations are oil-rich with high margins and some are mostly natural gas with low margins. Drilling in Mexico would help remove some of risk related to fracking a new field because oil can be sold profitability overseas and natural gas can be sold domestically to replace expensive Mexican LNG imports.
Chesapeake is already active in the Eagle Ford formation with Q3 2013 production of 95,000 barrels of oil equivalent per day. In the short term Chesapeake is focused on U.S. plays like the Utica and reducing its capex through more efficient operations, but as we move closer to 2020 it will make sense for the company to move into new markets like Mexico. It has a high total debt to equity ratio of 0.97, and it needs to keep growing if it wants to make its debt load more manageable.
EOG Resources (EOG 1.07%) is a hot stock to watch. It is the biggest acreage holder in the South Eagle Ford oil window with 569,000 net acres. Thanks in part to strong performance in the Bakken shale, EOG Resources has been able to reorient its production from 29% NGLs and crude oil in 2008 to 86% in 2012. Seeing as Mexico would like to increase both crude oil and natural gas production, EOG Resource could become an integral part of expanding Mexican shale production.
The company will have a flexible future as it does not face Chesapeake's debt pressures. EOG Recourse's long-term debt load is just $5.9 billion.
Big Oil
ConocoPhillips (COP 1.23%) was a big integrated company until it spun off its refining operations into Phillips 66. Now ConocoPhillips is a pure E&P with onshore, offshore, conventional and unconventional fields. It is quite active in Texas' Eagle Ford. Over the next five years it hopes to put $8 billion into the field, adding 130 mboe/d of production by 2017.
Once the Eagle Ford has been drilled out it will make more sense for ConocoPhillips to head south and start developing new unconventional plays. The firm's big balance sheet means that it should not have any trouble footing the bill for new development in Mexico. The company expects to spend $16 billion per year to grow its production at a 3% to 5% compound annual growth rate (CARG) until 2017, at which point it will need to look for new markets. By that time there is a good chance that Mexico's legal reforms will have been pushed through.
Chevron (CVX 1.54%) is a huge company with a large amount of experience with fracking and Latin America. Since Chevron is willing to consider drilling contracts without explicit concessions, it has already looked at working with Pemex. Back in 2012 submitted bids on the mature Arenque field to help boost production, but in the end it was awarded to Petrofac.
In North America Chevron's growth opportunities are focused on the Utica, Marcellus, and Permian basins. It hopes to use to these fields to help offset declining conventional production, just like Mexico hopes to do with its shale assets. Chevron has almost no debt and a total debt to equity ratio of 0.13, but it needs to use its assets to grow production. Over the next decade Chevron's falling existing production, big balance sheet and Mexico's legal reforms will make America's southern neighbor increasingly more attractive.
Final thoughts
Mexico's economy is booming with a growing manufacturing industry, but the nation needs more energy. Importing substantial amounts of natural gas from the U.S. and Qatar makes little sense when Mexico has substantial shale gas resources right below its feet.
Smaller independents like Chesapeake and EOG Resources will find Mexico to be a good place to grow after U.S. plays have been developed. Big companies like Chevron and ConocoPhillips will not be left out. Given the success they have had U.S. shale formations Mexican shale will not be too risky.
