- Round 0. This is what has been happening over the course of 2014 and was essentially wrapped up this month. Pemex was required to present to SENER the economics and technical aspects of the projects they wanted to keep. Pemex also provided a list of likely private company partnerships. Pemex requested 100% of proved reserves, 83% of proved and probable, and 70% of proved, probable and possible, as well as 31% of prospective resources. SENER effectively ended Round 0 by issuing a resolution in which Pemex was declared to keep certain projects where they are considered a competitive operator and a list of projects where a private partner could improve production or efficiency. Of those projects requested, Pemex has been granted all of the reserves requested which is about 20.6 billion proven barrels of oil equivalent (boe) and 22.1 billion boe of possible reserves. In the Round 0 disclosure only a small fraction of the prospective resources were awarded to Pemex. Hardly any of those already small prospective resources correspond to deep sea and shale gas fields. The lower initial allocation should be seen as a desire for SENER to be flexible and allocate broadly to private enterprise.
- Round 0.5. This round should take place over the remainder of 2014 and into the Q1’15. It is in this round where farm-outs and JVs will be announced. SENER will auction projects in which Pemex has solicited or been assigned a private partner. This round is unlikely to involve any meaningful transfer of assets as Pemex was granted most of the reserves requested already in Round 0. Projects that will be farmed out will be the deep sea, heavy crude oil in shallow waters and mature fields. There are approximately 10 sites fitting these descriptions that have been identified.
- Round 1.0. This round is likely to play out in H2’15 and will focus most attention on the auction process. SENER, CNH and the Treasury will auction oil and gas projects in which Pemex and private companies can compete head-to-head. The bidding process currently includes 109 blocks in exploration and 60 blocks in production, leading to 28k sqm. Blocks include fields in deep water, extra heavy crude oil and shale resources. Nearly $13B p.a. in additional spending is expected to be invested in the sector over the next six years. Pemex has been spending about $23B p.a. in capex in recent years.
What You Should Remember
In the country of Mexico, Energy Reform will create a significant number of new jobs, lower the cost of energy, increase the manufacturing competitive advantage, ignite a strong infrastructure build-out country wide, bring significant foreign investment, all adding up to increased economic growth to as much as two percentage points higher. It is not just in the energy sector where benefits will be seen, but across the entire economy with important benefits to society as a whole.
Investors will find it difficult to uncover any pure-play investment vehicles focused on energy reform. However, all asset classes should be considered for increased exposure. The Mexican stock market is not cheap currently, but it has always traded at a premium to EM and should not discourage long-term investors from building positions. Mexican sovereign debt should see relative price improvement through spread compression given potential rating-agency upgrades. This would include the quasi-sovereign entities, CFE and Pemex. Pemex is currently rated A3 by Moody’s and BBB+ by both S&P and Fitch. All three services have the credit as “Stable”. Pemex disclosures all abide by US SEC standards and most of the USD-denominated bonds are eligible for major investment grade indexes. A broader base of investors will be holding the bonds going forward. Corporate credits in Mexico also can see spreads narrow. Much of the fixed-income sector of the market has not seen the improvement yet that can be expected. Exposure to MXN is also a likely beneficiary of energy reform and should be sought through local fixed-income instruments.
Sources: SENER, Credit Suisse, UBS, Morgan Stanley
This article was written by Accuvest Global Advisors, a California-based RIA and sub-advisor of the AdvisorShares Accuvest Global Opportunities ETF (ACCU) and the AdvisorShares Accuvest Global Long Short ETF (AGLS).