Earlier this week, Mexican President Enrique Peña Nieto said he will sign legislation, perhaps as early as next week, that will finally end the 75-year run of control over the country’s energy industry by state-owned oil company Pemex.
Nieto’s energy reforms were announced last year as a way of stemming the tide of a decade’s worth of falling production by Pemex and as a way of attracting needed foreign investment to Mexico’s energy industry.
Some of the biggest names in the international oil business are eager to tap Mexico’s lush reserves. “With reserves holding $1.3 trillion of crude at yesterday’s prices, Mexico offers a new opportunity for deep-pocketed producers as well as pipeline and power companies,” reports Bloomberg.
The allure of Mexico’s oil riches could prove to be a boon for exchange traded funds that offer combined exposure to U.S. and international oil companies. Those funds include the iShares Global Energy ETF (NYSEArca: IXC) and the SPDR S&P International Energy Sector ETF (NYSEArca: IPW), the latter of which holds no U.S.-based companies. [Don’t Forget International Energy ETFs]
Global oil giants from Exxon Mobil (NYSE: XOM), the largest U.S. oil company, to Royal Dutch Shell (NYSE: RDS-A), Europe’s largest oil company, are eager to get to work in Mexico and it is easy to understand why.
In the search for new reserves, global energy giants often face geopolitical risks and tensions with local governments that are hostile to Western firms. Exxon is paying tens of billions of dollars to partner with OAO Rosneft to tap Russia’s Arctic region while Shell has a long-standing history enduring attacks on its people and assets in Nigeria.
Those are just two examples. Exxon and Shell combine for over 21% of IXC’s weight. BP (NYSE: BP), Europe’s second-largest producer, has a checkered history of dealings in Russia and is still trying to repair its image in the U.S., making Mexico an attractive destination for the British oil giant. BP and Shell combine for nearly 28% of IPW’s weight. [International Energy ETFs Top U.S. Rivals]
Chevron (NYSE: CVX), the second-largest U.S. oil company, and France’s Total (NYSE: TOT), Europe’s third-largest oil major, are also among the companies with their eyes on Mexico.
Fresh “foreign investment could help double daily output to 5 million barrels a day, a figure that would rank Mexico the world’s fourth-largest producer,” reports Bloomberg. Mexico’s crude output has been floundering even as production in Canada and the U.S. has reached record highs.
IXC, the iShares offering, is a global ETF combining both U.S. and foreign companies. The $1 billion ETF allocates over 38% of its combined weight to Exxon, Chevron, Shell, BP and Total, giving fund plenty of potential leverage to a new-look oil industry in Mexico. [Stick With Energy ETFs]
As an ETF that holds no U.S. energy firms, IPW comes with its own set of advantages. Shell, BP and Total combine for about 38% of IPW’s weight, giving the fund plenty of exposure to Mexico, but Mexico is not the only reason to consider IPW.
For starters, global energy stocks are less expensive than their U.S. counterparts. IPW’s P/E ratio is just over 13 compared to 15.3 on the Energy Select Sector SPDR (NYSEArca: XLE), the largest energy ETF.
Shell, BP and Total also sport higher dividend yields than their U.S. equivalents. The average yield for Exxon and Chevron is 2.95%, but average yield on Shell, BP and Total is 4.6%. IPW’s dividend yield is 3.2% compared to 1.76% on XLE. [Attractive Dividends, Valuations With Energy ETFs]
SPDR S&P International Energy Sector ETF
