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Mexican Reforms: Time To Buy These Oilfield Services Titans

2013-08-31
Mexico is gearing up for some significant oil reforms in an effort to revive its economy in general and its oil and gas sector in particular. The country's energy sector has been dominated by Petróleos Mexicanos, also known as Pemex. With the new reforms, one of the world's most restrictive energy markets could open its doors to international energy firms. The oilfield services firms Schlumberger (SLB) and Halliburton (HAL) could be the first to capitalize on this development. The two were already eyeing more than $8 billion worth of large integrated projects in Mexico. Analysts believe that now is the time to buy Schlumberger and Halliburton on these new developments. The new price targets on these firms represent a 30% upside.

Declining Output

The state-owned energy behemoth Pemex has been operating as a monopoly for seven decades. The business has worked under service contracts with foreign firms, as opposed to profit-sharing contracts. The absence of profit or production sharing contracts has kept most foreign energy firms at bay. The country's energy sector has suffered with falling levels of output due to a lack of investment. In the last ten years, Pemex increased its annual investment by five-fold to $20 billion, but its production fell from 3.59 million barrels per day in 2002 to 2.93 million barrels per day in 2012.

The oil reforms could bring an energy revival to the country which holds 15 billion barrels of oil (as much as Kuwait) and could be home to 27 billion barrels of deep-sea crude reserves. Besides conventional crude, Mexico also has the eighth largest reserve of shale oil and sixth largest shale gas resources. However, Pemex doesn't have the necessary skills to develop the technically challenging deep-water and unconventional reserves. The country needs U.S. oil and oilfield services firms to develop its resources.