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Current Views

August 16, 2013: Recharging Mexico’s Energy Industry

Thoughts from our Domestic Equity Team

Mexican President Pena Nieto has proposed constitutional amendments to end the state’s monopoly on energy production by allowing foreign participation in the oil, gas, and electricity generation industries. Should Congress pass the bill, this has the potential to be a sizeable opportunity for private sector energy companies and could also have a material impact on the Mexican economy. Currently there appears to be sufficient support for the bill to pass when it is voted on in September. With regards to the magnitude of the opportunity, consider that onshore shale deposits in Mexico have almost completely been ignored. There have been only 3 gas wells drilled in the country compared with nearly 10,000 in the US. Additionally, the ultra-deep Gulf of Mexico has been largely unexplored in Mexican waters. This would mark a great opportunity for many US based energy companies due to their familiarity with the geological conditions in the region. They would also likely welcome the relatively benign political environment compared with many of the world’s other international energy hotspots.

There are many potential beneficiaries to consider in this regard. Clearly the major exploration and production (E&P) companies immediately come to mind. However, the payoff for this group is likely years away. In our opinion, this opportunity will be more meaningful for the energy service companies. Moreover, they stand to start generating revenues much sooner than the E&P companies for which they will be providing their services. The impact of these changes could ripple beyond just the energy sector and proliferate throughout the Mexican economy. That being the case, one might make the case that a whole host of non-energy companies may see benefits as well. Railroad operators and infrastructure focused companies are just two examples which come to mind, both of which we already have exposure to in our client portfolios.

As is often the case, the devil will be in the details. The bill of course has to pass, and it must be written in such a way that the private sector can see attractive returns on investment. Key issues include tax rates and other fees, as well as whether publicly traded companies can claim reserves that legally remain owned by the state for accounting purposes. While all of this remains to be seen, it certainly behooves the Mexican government to structure their regulations in a manner which is compelling to new entrants. Should this be the case, we believe that many exciting investment opportunities will arise in the wake of this historic change.

Submitted by: Jason Sheer, CFA and Robert Meyer, CFA



This information is intended solely to report on investment strategies and opportunities identified by Roosevelt. Opinions and estimates offered constitute our judgment and are subject to change without notice, as are statements of financial market trends, which are based on current market conditions. This material is not intended as an offer or solicitation to buy, hold or sell any financial instrument. References to specific securities and their issuers are for illustrative purposes only and are not intended to be, and should not be interpreted as, recommendations to purchase or sell such securities. Please contact us at 646-452-6700 if there is any change in your financial situation, needs, goals or objectives, or if you wish to initiate any restrictions on the management of the account or modify existing restrictions, or if you would like to request a copy of our Code of Ethics. Our current disclosure statement is set forth on our Form ADV Part II, available for your review upon request, and on our website, www.rooseveltinvestments.com.

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