Mexico’s energy industry is open for business

Enrique Peña Nieto © Getty images
Enrique Peña Nieto got his energy reforms

If you want a good laugh, type Mexican president Enrique Peña Nieto’s name into YouTube. You’ll find that internet-savvy young Mexicans have made a cottage industry of posting embarrassing videos and memes.

It’s fair to say that Peña Nieto divides local opinion. He may have won a controversial election two years ago, but a large chunk of the population still hasn’t been won over. In fact, his approval rating has slumped this year to 37% from 54%.

Less scientific, but perhaps just as telling, is the amount of respectable people that believe bizarre conspiracy theories about him. I spent a few months there earlier this year and these are just some of the ones I heard.

The tragic death of his wife? “Oh, Peña Nieto murdered her”. His rapid rise in politics? “Oh, that’s because he’s the puppet of an ex-president”.

But now it looks like Peña Nieto will end up having the last laugh. After a year of wrangling and horse trading he has finally passed the legislation for his landmark energy reform.

This might not stop the conspiracy theories or the funny videos, but it will mark him down as one of the most influential Mexican presidents. And, more importantly for us, it opens the door to one of the most exciting investment opportunities of the decade.

Mexico’s energy revolution is now underway

Regular readers will know that I’ve been bullish on Mexico for a while now.

I wrote my first article on the country shortly after Peña Nieto came to power. I liked the country’s manufacturing base, integration with the recovering US economy and demographic strengths enough to recommend a stock market tracker.

But while I was happy to buy in then, I believed the real catalyst would come with the reforms to the energy industry. You see, at the end of last year, Peña Nieto managed to change the constitution to allow the energy reform to happen.

But important though it was, it remained meaningless until he managed to pass the legislation that gave companies a legal framework to take advantage of the reform.

Even though I was optimistic it could happen, I didn’t think that the reforms would be passed so soon. But that’s what Peña Nieto has achieved this month and the path is now open for the private sector to get involved. And that’s good news for investors.

The stock tracker is already up 16% since I tipped it, but now that this reform has been made into law, I expect much bigger gains for key stocks with exposure to the energy story.

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Mexico’s energy potential: 87 billion barrels of oil and gas

What’s striking about the reform is the scale of the opportunity. Mexico has an estimated 87 billion barrels of prospective oil and gas resources – that’s more than twice as much ast Britain has taken from the North Sea over the last half a century.

Of course, as we’ve seen with the Scottish independence debate at the moment, these figures are just estimates. But the fact remains that there’s clearly a lot of oil and gas.

Pemex, Mexico’s state-owned energy giant, has come up with four packages of opportunities for private firms. The first looks for companies with the technology and money to help it boost production and mature fields.

The second requires almost $7bn of investment and focuses on fields with technically challenging extra-heavy oil.

The third package is made up of two giant deepwater gas fields in the Gulf of Mexico. And the fourth and final package is for two deepwater oil fields.

In total, Pemex is looking to sign $32bn-worth of partnership deals over the next 15 months. Of course this is just the first stage, which involves areas where Pemex knows there is oil and gas. Private firms will also be able to explore new areas and bring shale gas online.

How to invest in Mexico’s energy revolution

There are also opportunities in other parts of the energy sector. The petrochemical industry has been opened up completely, with foreign companies allowed to start 100% privately-owned operations. Private players in electricity generation will also be allowed to sell directly to business customers.

This liberation of the electricity market will boost gas transportation – which was privatised in the ’90s. With more freedom to negotiate prices, there is more incentive to build pipelines that can bring cheap natural gas from the US.

These moves in petrochemicals and gas pipelines don’t attract as much attention as the oil exploration, but they’ll have a quicker impact on the Mexican economy. Cheap gas and a more efficient petrochemical industry will give Mexico’s competitive manufacturers yet another advantage.

Lower energy prices would also help to shore up public support for the reforms and convince sceptical Mexicans that this is not just a wheeze to enrich a bunch of foreigners and the elite.

So, how to play it? Well, until we see who bids for what, we can’t take a punt on any of the oil and gas firms yet. Some names, such as Pacific Rubiales, Total and Noble Energy have already declared an interest, but nothing confirmed yet.

However, in the meantime, we can still play it indirectly. The first aspects of the reform to take effect will be felt in petrochemicals, gas distribution and electricity generation.

I tipped US listed Mexican chemical conglomerate Mexichem back in September last year. It’s about flat since then, but the quicker-than-expected delivery of this reform should bode well for its future.

This article is taken from The New World, MoneyWeek's FREE regular email of investment ideas and news from Asia and Latin America. Sign up to The New World here.

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