Ever since Mexico nationalized its oil industry in 1938 private investment in its oil sector has been off limits. Multinational oil companies have therefore been absent from one of the biggest oil producers in the world for longer than in virtually any other major oil producing country.
Enshrined in its constitution, that policy has led to major underinvestment and declines in production and reserves. There has been a 20% decline in production in the last decade and a decline of a third in reserves, as well as a rise in energy imports. Pemex, the state oil company, is riddled with corruption and inefficiency, overstaffed and overtaxed.
Among Pemex’s shortcomings its lag in exploration technologies has been one of its most damaging. As a result of this weakness, and of a lack of financial resources, taxed away by a ravenous and insatiable central government, Pemex has not been able to perform deep-sea drilling in the Gulf of Mexico or to conduct hydraulic fracturing, commonly known as fracking. It is estimated that huge oil and gas reserves would be available, both in the Gulf of Mexico and onshore, if the appropriate exploration and drilling technologies were brought to bear.
Despite the obvious drawbacks of a nationalized and monopolized oil industry, this assertion of national sovereignty was something of a holy cow in Mexican politics and in many circles permitting the participation of private oil companies, especially foreign ones, was considered taboo.
Nevertheless, the government of President Peña Nieto, to everyone’s surprise, was able to push through an epoch making energy reform bill through the Senate in December. The bill approved a wide ranging reform to the oil industry that ended the state oil monopoly exercised by Pemex, by allowing private oil companies to subscribe contracts enabling them to explore and drill for oil and gas, and also to register reserves for financial statement reporting purposes or the income stream derived from them.
Although some questions remain regarding such things as the quality of regulators, exactly what kind of contracts for which types of oil and gas fields will be on offer and the amount of taxes and royalties, this sea change in the Mexican oil industry presents a huge investment opportunity to U.S. oil companies such as Marathon Oil.
This is particularly true as so-called “resource nationalism” has swept oil producing countries around the world whereby their oil reserves and industry are nationalized, depriving private oil companies of the largest and most accessible oil and gas reserves. As a result private oil companies have been faced with the ever increasing difficulty of acquiring more reserves and those that they do acquire are increasingly either in geographically challenging terrain, such as deep under the sea or in tar pits, or in politically unstable and unpredictable places.
Marathon Oil Corporation (NYSE:MRO)
Mexico’s conventional oil reserves are declining. Although it may well be that further investment in exploration could yield significant reserves, it is more generally acknowledged that big finds are more likely to be of the unconventional kind. This is particularly true of deep-sea finds thousands of feet below the surface of the sea and of shale rock oil and gas that requires the technology of fracking, to be exploited. Only companies that have the technological know-how to do such exploration will be able to take advantage of what is virtually virgin territory in unconventional reserves in the newly opened Mexican oil and gas industry. One such company is Marathon Oil Corporation (NYSE:MRO).
Marathon Oil is a mid-sized multinational oil company that explores drills and distributes oil and gas in several locations around the world including the Gulf of Mexico. It has a market capitalization of over $24 billion and a P/E ratio of 14.9. During the last year its share price has fluctuated between $29.47 and $38.18 with a December 27th close of $35.63.
Marathon Oil has been at the forefront of innovation and use of technologies to exploit unconventional sources of oil and gas reserves. Along with fracking techniques it has pioneered deep-sea oil drilling, the use of horizontal drilling and multistage fracturing systems.
Marathon Oil has a below median capital investment track record (compared to peers) as well as below peer median return on capital. On the other hand it has an above peer median growth in revenues and earnings (see chart below), as well as a privileged leverage and liquidity position which could enable it to borrow extensively, both of which give it a great capacity to invest. Combined with its technological know-how it could reap extraordinary returns from investments in the newly opened Mexican oil and gas industry.
Lastly, oil companies such as Marathon Oil in the U.S. that have started exploiting shale rock reserves have found themselves facing an ever diminishing price for gas as more and more supply is generated by fracking. So much so that the price of gas is three to four times higher in Asia than it is in the U.S. If Marathon Oil was able to secure large reserves of gas in Mexico it could sell that gas at a much higher price than in the U.S. domestic market by exporting it as Liquefied Natural Gas (LNG); this would be in addition to any oil reserves it were able to exploit and sell in the U.S. or the world oil market.
The views and opinions expressed above are those of the author and do not necessarily reflect the views of CapitalCube.com, AnalytixInsight, Inc., its affiliates, or its employees.