What if Mexico's Energy Bill Goes Through?

If a huge energy bill and change in the constitution passes in Mexico, writes MoneyShow's Jim Jubak, also of Jubak's Picks, the companies that stand to gain the most, may be the ones with all the equipment.

Certainly it's too early to say that a historic energy bill—and constitutional amendment—will pass Mexico's legislature. Mexican senators have just begun to debate a bill that would amend the constitution and create a system that permits foreign oil companies to invest in Mexico's oil industry for the first time since the sector was nationalized in 1938. The current bill would allow private companies to own part of the production—or part of the profit—from Mexican oil wells, while keeping ownership of Mexican oil reserves in the hands of the government owned national oil company Petroleos Mexicanos, or Pemex. Foreign oil companies would not be allowed to book state-owned reserves for accounting purposes—but would be able to put cash flow from production on their balance sheets. A system like this would give Mexico, which has seen production fall by 25% since 2004, the capital it needs to drill in deeper parts of the Gulf of Mexico, to modernize oil recovery methods used in its existing fields, and to begin to exploit the country's own oil and gas shale geologies. (The effort is crucial to Mexico's economy, which has seen a manufacturing recovery, hobbled by energy costs far higher than those just across the border, and by electricity rates, 25% higher than in the United States.)

The bill is contentious. Mexico's ownership of its own oil is, for many Mexicans, a foundation of the country's economic independence from the United States. Street protests are likely to be a continuing fact of life in Mexico City, while the legislature debates the bill. The government of President Enrique Pena Nieto has set the goal of passing a bill before Christmas.

Despite the protests, and the deep ambivalence many Mexicans feel about letting the big international oil companies—that dominated the country's oil industry—back in the door, I think the current legislation has a very good chance of passing. It has been crafted to avoid those points most likely to invoke that history—and the need is very pressing. Mexico gets a third of its budget from Pemex and, therefore, the downward trend in oil production isn't just an issue for the economy as a whole, but also goes right to the ability of the government to fund its operations.

If the bill does pass, as I expect, what might an investor want to own? All the big international oil producers will move to invest in Mexico's fields. For most of these, though, even big increases in Mexican production isn't going to make a huge impact on their balance sheets. Exxon Mobil (XOM), for example, is just too big to get much leverage out of Mexico. (The two international oil producers that are likely to get the biggest leverage out of investing in Mexico are Chevron (CVX) and Anadarko (APC)—because their current finds in the Gulf of Mexico fit together, in my opinion, so well with reserves, and potential reserves, owned by Pemex.

But I think the biggest beneficiaries of a change in Mexico's constitution, that allows foreign investment in Mexico's oil industry, will be companies that sell equipment to the oil industry.

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