Opportunity Knocks in Mexico

Watch stocks you care about

The single, easiest way to keep track of all the stocks that matter...

Your own personalized stock watchlist!

It's a 100% FREE Motley Fool service...

Click Here Now

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?

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.

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.


Read/Post Comments (0) | Recommend This Article (0)

Comments from our Foolish Readers

Help us keep this a respectfully Foolish area! This is a place for our readers to discuss, debate, and learn more about the Foolish investing topic you read about above. Help us keep it clean and safe. If you believe a comment is abusive or otherwise violates our Fool's Rules, please report it via the Report this Comment Report this Comment icon found on every comment.

Be the first one to comment on this article.

Sponsored Links

Leaked: Apple's Next Smart Device
(Warning, it may shock you)
The secret is out... experts are predicting 458 million of these types of devices will be sold per year. 1 hyper-growth company stands to rake in maximum profit - and it's NOT Apple. Show me Apple's new smart gizmo!

DocumentId: 2979656, ~/Articles/ArticleHandler.aspx, 8/29/2015 5:24:47 AM

Report This Comment

Use this area to report a comment that you believe is in violation of the community guidelines. Our team will review the entry and take any appropriate action.

Sending report...

Dajahi Wiley

Dajahi is a graduate of Cornell University, where he earned his Bachelor of Arts in Government. His work largely focuses on energy. His analyses help readers to identify and understand micro- and macro-level drivers and trends. Follow on Twitter @DWCommentary.

Today's Market

updated 8 hours ago Sponsored by:
DOW 16,643.01 -11.76 -0.07%
S&P 500 1,988.87 1.21 0.06%
NASD 4,828.33 15.62 0.32%

Create My Watchlist

Go to My Watchlist

You don't seem to be following any stocks yet!

Better investing starts with a watchlist. Now you can create a personalized watchlist and get immediate access to the personalized information you need to make successful investing decisions.

Data delayed up to 5 minutes

Related Tickers

8/28/2015 4:01 PM
CVX $80.43 Up +2.79 +3.59%
Chevron CAPS Rating: ****
MUR $30.04 Up +0.56 +1.90%
Murphy Oil Corp CAPS Rating: ***
RDS-B $52.62 Up +0.66 +1.27%
Royal Dutch Shell CAPS Rating: ****