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Summary

  • The Mexican government finalized rules for new energy sector investment.
  • Market opening was contemplated in my past articles, though the deep water emphasis is a positive surprise.
  • Reiterate Buy, as SDRL is the driller best-positioned to benefit.

On Wednesday, the Mexican government defined the extent of deregulation in its energy sector, hoping to spark an energy boom and $50 billion of investment over the next four years. The strategy adopted by the Mexican government should be highly beneficial for Seadrill (NYSE:SDRL) and other underwater drillers that are "long" on sixth- and seventh-generation drilling rigs (those that can drill in 10,000 ft. and 12,000 ft. of open water). The Wall Street Journal reports state-owned oil company Petroleós Mexicanos (better known as Pemex) will retain 83% of the country's "proven and probable reserves, that is oil fields that are currently producing". Exciting for SDRL and its cohorts with incremental sixth- and seventh-generation underwater rigs, 80% of new fields will be open for bidding and competition (the initial auction will contain 109). The most significant and potentially largest deposits are in deep water in the Gulf of Mexico. The Wall Street Journal noted that Pemex lacks the financing and technology to pursue areas like deep waters. Exxon Mobile (NYSE:XOM) spokesman, Patrick McGinn noted his company would "pursue potential investment opportunities in Mexico..." (last week, XOM signed a two-year contract with SDRL for its new seventh-generation West Saturn rig).

The opening of the Mexican market has been a significant and in-process development that has been eagerly watched and I have anticipated. As I wrote in, "Seadrill: Best Prospects Among The Drillers And A Buy" and other articles, new, state-of-the-art rigs are receiving sizable contracts, and drillers will benefit from a shift by producers to "safer" and more lucrative off-shore projects away from increasingly risky environments such as Iraq, Libya and even Nigeria. Mexico, with a stable currency, democratic process and under 4% inflation, is the sort of safe, known and stable environment producers increasingly prefer. For more on Mexico, please read, "Mexico: Time To Invest? Reforms, Stability & Optimism Suggest ¡Sí!"

As this news is consistent with my thesis, I reiterate my "Buy" on SDRL as the best-positioned of the underwater drillers and a beneficiary of the opening of the Mexican energy sector.

This article reflects the author's opinions and is not meant to be the basis of an investors' buy or sell decisions. All investors should conduct their own due diligence and make investment decisions solely on their research.

Disclosure: The author is long SDRL. The author wrote this article themselves, and it expresses their own opinions. The author is not receiving compensation for it (other than from Seeking Alpha). The author has no business relationship with any company whose stock is mentioned in this article.

Source: Update: Seadrill Big Winner In Mexican Energy Deregulation