Sweetening the Deal for Foreign Investors in Mexico

Bottom Line: As Mexico proceeds towards oil and gas liberalization and the modernization of state-run Pemex, it's taking steps to lure in private companies by lifting restrictions on registering the value of contracts with the US Securities and Exchange Commission-the attractive notion of booking reserves.  

Analysis: Mexican President Enrique Pena Nieto's plan is to get rid of these restrictions and replace contract values reported to the US SEC with values that would be converted into volume and acknowledged on balance sheets. What this means, essentially, is that US companies (think ExxonMobil) would be able to book reserves, which would make it easier to raise financing. It gives potential investors a better idea of where money is being spent and what production will look like further down the road. This means that risk-sharing is registered with the SEC as an economic interest. It's great for the balance sheet.

Recommendation: Mexico's goal here is to make the president's proposed profit-sharing deal attractive enough to ensure foreign interest in the project. The effect will have to be immediate because a lot is at stake here. We're talking about ending a 75-year state monopoly on oil and gas exploration and production in Mexico. It won't work unless there are enough incentives or foreign investors. The Mexican president is looking to have this approved by the end of the year. Who's interested already? Exxon, Chevron Corp (CVX), Royal Dutch Shell Plc (RDSA) and Spain's Repsol SA (REP). This new proposal could be a deal-clincher; reserve booking is almost as good as production-sharing agreements. This will be a game-changer, so we'll keep monitoring the progress in Mexico over the coming months.