For the past five years, investment opportunities in U.S. energy have dominated financial-media headlines. This is understandable. The paradigm shift brought about by fracking has been monumental.
South of our border, a less obvious and possibly more monumental shift is occurring. Mexico has opened its oil and gas markets to foreign investment.
This is a big deal – a very big deal. Here in the States technology was the primary obstacle to energy exploration and expansion. In Mexico, government was the primary obstacle. The latter is considerably more difficult to overcome than the former.
For 75 years, Mexico’s energy market has been dominated by government-run monopolist Petroleos Mexicanos, or PEMEX. There was no one else, as any tourist can attest by recounting the ubiquitous, singular presence of the PEMEX gas station.
Allowing foreigners into Mexico’s energy market required the Herculean task of amending the country’s constitution, which occurred on Dec. 23. I rarely do this for a politician, but I must tip my hat to President Enrique Pena Nieto for his tenacity and skill for doing what many thought could never be done.
Now comes the fun part. Over the next two years, PEMEX is required to transform itself into a profitable (though still state-owned) corporation. PEMEX’s revenue and earnings will depend on its own operations and its contracts with foreign partners.
The good news is that PEMEX, its eventual partners, and independent licensees have a lot to work with. PEMEX is the world’s fifth-largest oil producer and third-largest source of U.S. oil imports. But there is plenty of room for improvement. Much of PEMEX’s girth is flab that needs to be transformed to muscle. In 2013, PEMEX pumped an average of 2.52 million barrels a day. In 2003, it pumped 3.5 million barrels a day, such has been the decline.
Potential Exists Everywhere in Mexico’s Energy Market
In short, there is huge opportunity. The Brookings Institute, an economic think tank, estimates oil production could be raised to three million barrels a day by 2018 and 3.5 million by 2025.
Natural gas is another fertile field. PEMEX is estimated to be sitting on approximately 500 trillion cubic feet of natural gas reserves. Despite swimming reserves, Mexico has become a net importer of natural gas.
Mexico’s historical energy reform, if executed as planned, is expected to ratchet up annual GDP to the 4%-to-5% range from less than 2% in 2013. Additional investment opportunities will surely arise in roads, commercial real estate, retailing, home-building, and other infrastructure projects.
More immediately, though, energy production is the focus. Within the next year, we should see significant foreign investment in oil and natural gas development. Offshore drilling and oil-and-gas exploration in northern Mexico offer immediate return possibilities.
In both arenas, PEMEX’s acumen is woefully lacking.
In the U.S.-controlled area of the Gulf, oil companies extract more than 300,000 barrels of crude per day. In Mexico’s area: none. On land, the booming Eagle Ford shale in Texas extends deep into Mexico, and yet there are only 15 wells in Mexico’s territory, and none are commercially viable. By PEMEX’s estimates, it’s sitting on $300 trillion cubic feet of natural gas in its portion of Eagle Ford alone.
Extraordinary opportunity exists for U.S.-based energy companies – thanks to capital, technology, and know-how – to haul Mexico’s energy market into the 21st century. On Monday, I’ll reveal the top U.S. energy income investments positioned to gain a first-mover advantage in the Mexican energy market.
Income From Pipelines: the Safest Energy Investment
Most investors hope to “catch a flier” on small, risky exploration companies who usually don’t have a drop of oil in their wells. But in our experience, people don’t build pipelines until they know when and how much oil they’ll pump. Which makes pipeline stocks the least risky investments in the entire energy sector. No pipes – no oil. Click here to read my full write-up on two American pipeline stocks paying big (and growing) dividends.