Mexico's 'Energy Revolution' Could Boost Schlumberger's Numbers

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 |  About: Schlumberger Limited (SLB)
by: Khuldune Shahid

Summary

The Mexican president has signed a 21-component energy reform into law, which would dismantle the state-owned Petróleos Mexicanos’s (Pemex) seven-decade long energy hegemony in the country.

Proper investments in deepwater exploration could result in a mammoth 27 billion barrels of oil from the Mexican segment of the Gulf of Mexico.

With the Mexican energy reforms, SLB is all set to further increase its production and revenue numbers in the near future.

On August 11, Mexican President Peña Nieto laid the foundation of what is being dubbed an energy revolution in the country. The Mexican president has signed a 21-component energy reform into law, which would dismantle the state-owned Petróleos Mexicanos's (Pemex) seven-decade long energy hegemony in the country. Mexico is allowing international and private firms to be a part of its energy sector by investing in the oil, gas and electricity industries.

The 'energy revolution' is designed to attract more investment in the oil and gas sector that has been witnessing plunging production for nearly a decade now. This could provide Schlumberger (NYSE: SLB), the ideal opportunity to up the ante on its activity and boost its numbers. Even though the firm has already been working on projects with Pemex, the oil giant could lead U.S. oilfield companies' increasing involvement in Mexico, most significantly in the deepwater realm.

Mexico's plunging numbers

As things stand Mexico currently possesses around 13.5 billion barrels worth of oil reserves, with the country being among the Top 10 of the world's biggest oil producers. Following the energy revamp, Pemex would be retaining fields that have an estimated 20.6 barrels of oil, which would be sufficient for the company to produce around 2.5 million barrels of oil per day for the next couple of decades.

The Mexican company has been producing oil through fields that are easy to access. Most of these fields are located in onshore areas and in shallow waters, which makes drilling easy. Even so, fields like Cantarell field, which is among the largest oilfields in the country, are traversing their mature stage and awaiting enhanced exploration.

This might not have stopped Mexico from meeting its local demand of oil, but oil exports, which happen to be responsible for 13% of the country's earnings, have been clinging on to a downward spiral.

Manufacturing sector has been jarred by high electricity and gas rates, which the current energy reforms are vying to address by increasing competition through an influx of foreign investment.

Pemex hasn't been able to bolster its production since it doesn't have the needed technology, or the required investment. This in turn has led to a plunge in oil reserves by up to 3%, since new discovery of reserves hasn't been able to match the decline in the level of production. The 'energy revolution' is designed to muster the capital, expertise and investment needed to capitalize on the reserves.

The challenges

Private firms like SLB, have been working as Pemex's subcontractors, charging a fixed fee for their services or working on incentive-based contracts. With the reforms coming into place, the companies would now be able to book a particular percentage of the oil reserves and work on operations that are based on a risk sharing model. This in turn would allow the foreign firms to have better exposure to the oil industry in Mexico and better exposure to the reserves.

Even so, while legislation is underway, Mexico's recent past reveals that legislation does not always result in implementation. And implementation of this new energy model is going to be a key for both the country, and the foreign oil firms.

Another challenge for these oil firms is countering the corruption trend in Mexico. Contracts in the oil industry are often marred by nepotism and favoritism. Even though the energy reforms are going to formulate a Mexican oil commission that would be in charge of making the decisions on the contracts, it is still not clear whether or not the Mexican government would be able to come up with contracts that would be lucrative for foreign oil firms. What also remains to be seen is if these contracts are managed transparently.

SLB's deepwater play

Assuming that everything goes according to script in Mexico, oil blocks should be opened for foreign oil pretty soon, it is becoming obvious that deepwater exploration would be one of the areas where international investment would be expected.

As far as the deepwater space is concerned, the Gulf of Mexico's Mexican segment would be of particular interest to international firms. This is owing to the massive underdevelopment witnessed in the Mexican portion, which is in stark contrast to the rest of the Gulf of Mexico. Proper investments in deepwater exploration could result in a mammoth 27 billion barrels of oil from the Mexican segment of the Gulf of Mexico, which would increase the country's oil reserves by 200%.

SLB is the industry leader in, among other realms, deepwater and subsea technologies. The firm has been penetrating deeper into the area - as is manifested by its Subsea Well Intervention Alliance with OneSubsea and Helix - and is spearheading the activity in the Gulf of Mexico. And with the Mexican energy reforms, SLB is all set to further increase its production and revenue numbers in the near future.

Investment Prospects

SLB's annual revenue has increased from $33.47 billion in 2010 to $45.47 billion last year, with the number expected to touch the $48.92 billion mark following the ongoing calendar year. 30.1% of SLB's stock price is owing to its maneuvers in North American rigs. The expected revenue for SLB come 2017 is $63.05 billion (by 2021 the number is expected to rise to $85.06 billion). However, if SLB is seen making the most of Mexico's untapped reserves and leading the deepwater activities these numbers could soar further northward. Similarly the expected cash flow numbers ($11.26 billion by 2017; $15.82 billion by 2021), would be bolstered as well.

Being an industry leader SLB has always been a lucrative buy. The recent Mexican reforms have added further impetus to SLB's numbers. If the reforms are implemented transparently, expect SLB to help Mexico triple its oil reserves and enhance its own revenue significantly rewarding the investors in due course.

Disclosure: The author has no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.

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.