Playing The Coming Mexican Oil Boom

For more than seventy years the oil reserves of Mexico have been the exclusive property of the state run oil company Petroleos Mexicanos, or Pemex. That changed at the end of last year when the Mexican parliament agreed to amend the country’s constitution and allow foreign oil companies in. That decision prompted many to start guessing who would benefit most, with the usual suspects, Exxon Mobil (XOM), Chevron (CVX) and BP (BP) heading most people’s lists. On Wednesday of this week, though, we found out why the big oil companies may not be the best way to play the coming Mexican oil boom.

In a move that surprised very few, the government announced that Pemex would be keeping 83 percent of the country’s proven and probable reserves; hardly a bonanza for the big boys, but, as I said, not that much of a surprise either. The reason is simple. While Pemex has been inefficient in exploiting the fields and it is hoped that the introduction of outside firms will force that situation to improve, it is the oil that they cannot get to, that located in shale fields and ultra-deep water that the Mexican government wants the foreign firms to help with.

For big oil this opens up some possibilities for sure, but they are in exploration with its attendant risks. Moreover, if the shale boom in the U.S. is any guide, smaller, more nimble firms will be the ones to benefit the most, at least initially. We could take a guess at which ones that will be, but this strikes me as another situation where the “picks and shovels” approach that I have outlined here before offers the best chance for investors to profit. Put simply, during a gold rush it is those that supply the prospectors, rather, than the prospectors themselves, who consistently make money.

Rather than trying to pick winners in the exploration game, investing in the oil service companies that they all will use makes more sense. Foreign oil service companies have been allowed in Mexico for some time, so three of the biggest in that field are all well placed to take advantage of the boom.

Schlumberger (SLB), Halliburton (HAL) and Weatherford International (WFT) all have operations in Mexico, with extensive local knowledge and contacts. The prospect of servicing incoming exploration companies, combined with recent weakness in their stock, makes them all attractive propositions at current levels. It should be noted that said weakness is largely in response to uncertainty about Russia, and some may wait for resolution there before wading in. To me, though, that weakness looks to provide a decent entry point for long term investors, and the effects of the sanctions and disruption are starting to look priced in.

If you agree that oil service companies look like the best way to play the start of the coming Mexican oil boom, then don’t try to pick a winner, just spread an investment between the three mentioned.

Nearby levels of previous support or resistance in all three stocks are likely to provide support in the short term; SLB at around $104, HAL at around $65.50 and WFT at around $20. They all may be too close to be used as effective stop loss levels given recent volatility and the long term nature of the investment, but a significant break below those levels should be watched for and, should that occur, I would be looking to take a small loss on part of the position and buy again when things settle down. This would be a situation where the old trading rule about never averaging can be put aside.

Of course, the opening of the Mexican oil market will be beneficial to the big oil companies over time; the size and scope of their operations, combined with their expertise, mean that most things are. Given that Pemex will be keeping the proven fields though, and given what we know about the way the U.S. shale boom has played out, a broad based investment in those supplying the boom rather than attempting to pick a winner among the explorers makes sense to me.