Companies to Invest in Before the Coming Mexican Energy Reforms

Mexico is working to introduce a number of new reforms designed to boost its declining energy industry, and some US firms are set to benefit greatly. A new Merrill Lynch report estimates that in 2012 Mexico spent nearly $8 billion on drilling and completion services, and that the figure should increase to $10.5 billion during the next couple of years.

The report lists a number of stocks that will receive a boost from the increased activity in Mexico’s energy sector. The main reason that Mexico’s oil output has been in constant decline for years, is due to a lack of expertise in drilling deep offshore wells in complicated geological regions. US firms that can provide these services are set to bet the most.

In a recent article the Motley Fool analysts have identified three stocks that would enable investors to benefit greatly. These are: offshore drillers Ensco, and Noble Corp., and oil services company Weatherford.

Ensco and Noble both operate in the Gulf of Mexico, and will benefit directly from dealing with PEMEX.

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The offshore drilling rig market is already tight, and any increase in demand will cause a decrease in supply the world over. If Mexico does make a large demand for offshore drilling ships and rigs, then companies working in the sector around the world will be able to charge higher rates.

Seadrill claim that during the last 10 years Mexico only drilled 552 offshore wells, whereas the US managed 4,563 in that time. In order to dramatically increase there number of offshore wells, Mexico may well ask for an extra 20 drilling rigs.

As of the end of August, Ensco had a drilling fleet of 10 drillships, 19 semisubmersibles, and 46 jackups, with four jackups currently working for PEMEX under contract until 2015. Noble has a fleet of 79 offshore drilling rigs, including three ultra-deepwater drillships and seven high-spec jackup rigs, with 11 jackups under contract to PEMEX in the Bay of Campeche. By building good working relationships with PEMEX, the two could earn extra work as the Mexican energy industry begins to open up.

Weatherford is one of the weakest oil service firms in the sector, but will therefore benefit greatest when the entire sector is lifted as a result of the Mexican reforms. Increased demand in the offshore services sector will enable Weatherford to de-leverage its balance sheet, which currently lists nearly $9 billion of debt.

Weatherford actually blamed Mexico for a six percent decline in second quarter revenues from Latin America last year, and as Latin America marks their second largest region of business behind North America, a big boost from Mexico could be especially important to them.

By. Joao Peixe of Oilprice.com