Last week in Income & Prosperity I presented a thesis for investing in Mexico’s energy market. My thesis was predicated on the fact you CAN invest in Mexico’s energy market, which for 75 years was closed to foreigners.
Details regarding the Mexican energy reform still need to be hashed out, such as which regions will be available for development and how the contract and licensing procedures will work. Nevertheless, it’s possible to intelligently game where foreign business will first arise and which U.S. energy companies stand to benefit.
Offshore drilling in the Gulf of Mexico and oil-and-gas exploration in Mexico’s portion of the Eagle Ford shale (which extends from Southern Texas into North Mexico) offer immediate opportunity.
The Gulf is home to one of the world’s great unexplored reservoirs of oil and gas. The state energy company Petróleos Mexicanos (PEMEX) estimates that 50 billion barrels of oil reside in the deep waters off Mexico’s shores. This is more than all PEMEX’s proven reserves on land and in shallower waters.
The problem for PEMEX is that it lacks the money and expertise to exploit this offshore bounty created by the Mexican energy reform. Fortunately for PEMEX, plenty of money and expertise resides north of the border. ExxonMobil (NYSE: XOM), BP PLC (NYSE: BP), and Chevron (NYSE: CVX) all have the wherewithal to lend an immediate hand.
That said, there are better opportunities. These behemoths report annual revenue in multi-billion-dollar increments. Expanding into Mexico’s deepwater fields will help their bottom line, to be sure. The impact, though, would be more meaningful to a smaller, more-concentrated enterprise.
I refer specifically to offshore oil drillers. These companies supply the large integrated oil companies with the platforms and rigs to drill for oil and gas in deep water.
Mexican Energy Reform: 3 Great Income Opportunities
In the offshore drilling space I like High Yield Wealth recommendation Diamond Offshore Drilling (NYSE: DO). For one, it’s one of the larger offshore drillers. Diamond also has a significant presences in the Gulf, with 12 rigs. What’s more, six of these rigs are already contracted to PEMEX for its shallow-water drilling operations. Diamond has aggressively expanded its ultra-deepwater fleet in recent years, so it has the capacity to move quickly into the Gulf’s deeper waters.
Best of all, Diamond is value priced and already high yield. Its shares trade at only 10 times next year’s EPS estimate of $5.15, while its $3.50 annual dividend per share generates a 6.8% yield.
On land, I like energy companies that have an extensive presence in Texas Eagle Ford shale. These companies can easily expand across the Rio Grande into Mexico.
Chesapeake Energy (NYSE: CHK) is one such company.
Chesapeake’s oil production from Eagle Ford shale has grown by 44% over the past two years, elevating it to the second-largest oil producer in the region. A move into Mexico would be logistically and geographically feasible… and potentially very lucrative.
From an income investor’s perspective, Chesapeake doesn’t provide an exceptional yield, at only 1.3%. But its exceptional growth and low payout ratio – less than 30% – means it has the potential to turn into a strong dividend grower as it expands into new markets.
Energy Transfer Partners LP (NYSE: ETP) is another High Yield Wealth recommendation well positioned to exploit Mexico’s vast energy resources.
Like Chesapeake, ETP has an extensive Texas presence. The partnership owns 7,800 miles of natural gas pipeline in Texas alone. Much of this network is associated with Eagle Ford shale. Also like Chesapeake, ETP is well-positioned to move into Mexico’s side of Eagle Ford shale.
ETP is already a high-yield investment, with a 6.8% yield. A move into Mexico could transfer ETP into not only a high-yield investment but a high-distribution-growth investment as well.
The Mexican energy reform will offer abundant opportunity for U.S. investors, but some opportunities will materialize before others. The Gulf of Mexico and Eagle Ford shale are the most likely to materialize first, which is why investors should first look at companies with a significant presence in these regions.
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