Opportunity Knocks in Mexico

Which companies are best positioned to capitalize on the denationalization of Mexico's oil and gas sector?

Jun 2, 2014 at 2:59PM

In 1938, Mexican president Lázaro Cárdenas led Mexico to become the first country to expropriate foreign-owned oil assets and nationalize them under a government-owned oil company, Petróleos Mexicanos (Pemex), due to labor strife with foreign oil companies.

In December 2013, President Enrique Peña Nieto led a successful effort to end Pemex's 75-year monopoly, opening Mexico up to foreign exploration and development of its oil and gas fields.

The reform permits Pemex to establish partnerships with foreign companies and allows for profit-sharing and production-sharing between the companies and the Mexican government. Pemex's laundry list of problems prompting the reform include unprofitable business divisions which have generated a devastating debt load of $60 billion, a bloated work force, poor investments, lagging innovation, and plummeting production. It is hoped that, through the partnerships with foreign companies, Mexico will get the technical know-how to properly develop its oil and gas sector and increase revenues.

Mexico is a major oil producer with an estimated 10 billion barrels of proven oil reserves. It is also a potentially major natural gas producer, with an estimated 17 trillion cubic feet of proven natural gas reserves. The country's hydrocarbon wealth makes the denationalization a tremendous opportunity for international energy companies. But who is in the best position to capitalize on this historic opportunity?


Mexico Gas Production

Source: Mayer Brown LLP, Houston via Oil & Gas Financial Journal


Before we tackle that question, let's consider where Mexican oil production is concentrated. 75% of Mexico's crude oil production comes from the Bay of Campeche, where the Cantarell and Ku-Maloob-Zaap fields are. The Cantarell field produced a high of 2.1 million bbl/d in 2004, but was down to 440,000 bbl/d in 2013. On the other hand, the Ku-Maloob-Zaap field tripled production between 2004 and 2013, producing 864,000 bbl/d last year. One of Mexico's most significant onshore oil fields is Chicontepec, which has 637 million barrels of proven crude oil reserves and perhaps as many as 15 billion barrels of unproven reserves. However, Chicontepec's potential has been unrealized to date due to technical challenges. Foreign investment and technical help would help turn this around.


Mexico Natural Gas Map

Source: EIA Country Report


Mexico's wealth of natural gas is concentrated in the country's east. Part of the Burgos basin is contiguous with the United States' Eagle Ford shale, one of the major plays whose production has enabled the American shale gas boom. With the right infrastructure and technical knowledge, Mexico can create a Ford Águila that replicates the success of its northern neighbor.

Based on geospatial-economic analysis and/or established relations with the Mexican government, Chevron (NYSE:CVX), Murphy Oil Corporation (NYSE:MUR), and Royal Dutch Shell plc (NYSE:RDS-B) may be among the biggest winners of the denationalization of Mexican oil and gas.

The case for Chevron
This month, Chevron became the first major foreign oil company to announce collaborations with Pemex since denationalization was approved. The energy giant is negotiating deals to explore deepwater, shallow water, or shale sites. Chevron already has a strong presence in the Gulf of Mexico, with five rigs drilling. It is moving to operate even more aggressively in the Gulf, with two new deepwater platforms expected to enter commission by the end of this year. Chevron backed this expansion in the Gulf with $12 billion. This combination of government relations and regional presence positions Chevron well to benefit greatly from the new opportunity in Mexico. It will be easier for Chevron to successfully operate in the country, with sophisticated operations nearby and a warming relationship with the Mexican government.

The case for Murphy
Murphy is committed to developing its capabilities and presence in the Gulf. The company is looking to sell its Malaysian assets to focus more on its core plays in the Gulf and the Eagle Ford. Earlier this year, Murphy won bids for 16 central Gulf blocks and began producing natural gas from one of its Gulf fields. Murphy's strategic focus on the Gulf and the Eagle Ford means that they are carefully considering opportunities south of the border. The company's deepwater, shale, and natural gas experience would be especially useful in helping Mexico develop its productive capacity in these areas.

The case for Royal Dutch Shell
Shell has an existing relationship with Pemex and the Mexican government through a joint refinery in Deer Park, Texas that dates back to 1993. Pemex, which buys half of the oil refined at the location and sends it to Mexico, negotiated the arrangement to increase supply for the Mexican market. Shell is the top oil producer in the Gulf of Mexico and began producing from its largest deepwater platform, the Olympus, this year. Although it is divesting U.S. shale assets to limit its exposure to the shale space, Shell can offer Mexico significant technical expertise and capacity for deepwater operations.

What's the Foolish conclusion?
When an industry or sector is historically as closed off as Mexico's oil and gas sector was for so long, it is difficult to assess where it is headed when it opens up. However, geospatial-economic realities and existing relationships give clues as to what relationships would be most easily facilitated and who may end up benefiting most from Mexico's oil and gas denationalization. Chevron, Murphy, and Shell are poised to take advantage of this historic opportunity.

Do you know this energy tax "loophole"?
You already know record oil and natural production is changing the lives of millions of Americans. But what you probably haven’t heard is that the IRS is encouraging investors to support our growing energy renaissance, offering you a tax loophole to invest in some of America’s greatest energy companies. Take advantage of this profitable opportunity by grabbing your brand-new special report, “The IRS Is Daring You to Make This Investment Now!,” and you'll learn about the simple strategy to take advantage of a little-known IRS rule. Don't miss out on advice that could help you cut taxes for decades to come. Click here to learn more.

 

Dajahi Wiley has no position in any stocks mentioned. The Motley Fool recommends Chevron. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.

1 Key Step to Get Rich

Our mission at The Motley Fool is to help the world invest better. Whether that’s helping people overcome their fear of stocks all the way to offering clear and successful guidance on complicated-sounding options trades, we can help.

Feb 1, 2016 at 4:54PM

To be perfectly clear, this is not a get-rich action that my Foolish colleagues and I came up with. But we wouldn't argue with the approach.

A 2015 Business Insider article titled, "11 websites to bookmark if you want to get rich" rated The Motley Fool as the #1 place online to get smarter about investing.

"The Motley Fool aims to build a strong investment community, which it does by providing a variety of resources: the website, books, a newspaper column, a radio [show], and [newsletters]," wrote (the clearly insightful and talented) money reporter Kathleen Elkins. "This site has something for every type of investor, from basic lessons for beginners to investing commentary on mutual funds, stock sectors, and value for the more advanced."

Our mission at The Motley Fool is to help the world invest better, so it's nice to receive that kind of recognition. It lets us know we're doing our job.

Whether that's helping the entirely uninitiated overcome their fear of stocks all the way to offering clear and successful guidance on complicated-sounding options trades, we want to provide our readers with a boost to the next step on their journey to financial independence.

Articles and beyond

As Business Insider wrote, there are a number of resources available from the Fool for investors of all levels and styles.

In addition to the dozens of free articles we publish every day on our website, I want to highlight two must-see spots in your tour of fool.com.

For the beginning investor

Investing can seem like a Big Deal to those who have yet to buy their first stock. Many investment professionals try to infuse the conversation with jargon in order to deter individual investors from tackling it on their own (and to justify their often sky-high fees).

But the individual investor can beat the market. The real secret to investing is that it doesn't take tons of money, endless hours, or super-secret formulas that only experts possess.

That's why we created a best-selling guide that walks investors-to-be through everything they need to know to get started. And because we're so dedicated to our mission, we've made that available for free.

If you're just starting out (or want to help out someone who is), go to www.fool.com/beginners, drop in your email address, and you'll be able to instantly access the quick-read guide ... for free.

For the listener

Whether it's on the stationary exercise bike or during my daily commute, I spend a lot of time going nowhere. But I've found a way to make that time benefit me.

The Motley Fool offers five podcasts that I refer to as "binge-worthy financial information."

Motley Fool Money features a team of our analysts discussing the week's top business and investing stories, interviews, and an inside look at the stocks on our radar. It's also featured on several dozen radio stations across the country.

The hosts of Motley Fool Answers challenge the conventional wisdom on life's biggest financial issues to reveal what you really need to know to make smart money moves.

David Gardner, co-founder of The Motley Fool, is among the most respected and trusted sources on investing. And he's the host of Rule Breaker Investing, in which he shares his insights into today's most innovative and disruptive companies ... and how to profit from them.

Market Foolery is our daily look at stocks in the news, as well as the top business and investing stories.

And Industry Focus offers a deeper dive into a specific industry and the stories making headlines. Healthcare, technology, energy, consumer goods, and other industries take turns in the spotlight.

They're all informative, entertaining, and eminently listenable ... and I don't say that simply because the hosts all sit within a Nerf-gun shot of my desk. Rule Breaker Investing and Answers contain timeless advice, so you might want to go back to the beginning with those. The other three take their cues from the market, so you'll want to listen to the most recent first. All are available at www.fool.com/podcasts.

But wait, there's more

The book and the podcasts – both free ... both awesome – also come with an ongoing benefit. If you download the book, or if you enter your email address in the magical box at the podcasts page, you'll get ongoing market coverage sent straight to your inbox.

Investor Insights is valuable and enjoyable coverage of everything from macroeconomic events to investing strategies to our analyst's travels around the world to find the next big thing. Also free.

Get the book. Listen to a podcast. Sign up for Investor Insights. I'm not saying that any of those things will make you rich ... but Business Insider seems to think so.


Compare Brokers