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Pemex Keppel Deal Signals Potential Change

The world’s biggest offshore oil rig developer, Singapore based Keppel Corp (KPELF.PK) has secured contracts worth $420 million to construct two KFELS B class jackup rigs for Pemex. The construction work is expected to be completed within two years and delivery will take place in Q1-2015. Excluding the current order, Keppel already has 18 such rigs in its pipeline while it has constructed 36 such rigs in the last ten years.   Given how insular Pemex has been in its operations this deal is significant in its implications for contractors to provide solutions for the Mexican oil giant.

For some background, through the first nine months of 2012, Keppel’s revenues and profits increased by 51% and 47% from last year to $8.9 billion and $1.3 billion respectively. The business currently has more than $11.5 billion of projects in its pipeline, including the $600 million deal with Norway’s Golar LNG (NASDAQ:$GLNG) in which Keppel is developing three of the world’s first floating LNG (FLNG) vessels. It is looking to build another yard in China, which can be used to provide construction material for oil rigs, but only if the Chinese government opens the doors of the state run oil companies to foreign rig developers. I’ve covered some of Keppel’s financials and other prospects in a previous article.  It is one of my favorite large cap stocks in Southeast Asia due to its expertise in a variety of vital infrastructure and engineering fields and astute corporate management.

Besides Pemex, Keppel has also worked on similar projects with other Mexican clients such as Integradora de Servicios Petroleros Oro Negro and Perforadora Central S.A, the former is a developer of oil projects and the latter specializes in providing drilling services. However, the two are minnows as compared to Pemex which is the only Mexican company that is allowed to develop the nation’s oil assets.

The state owned Pemex has a monopoly in oil exploration and production. With daily production of 2.5 million barrels (mbpd), Pemex is the fourth largest oil producer of the world and the biggest corporate entity in Latin America. The company had an exploration budget of $2.4 billion in 2012 and is aiming for 40 rigs around the country’s coast in the near future. Mexico is the second biggest supplier of crude oil to the United States, behind Canada, with daily supplies of 1.319 mbpd which is 14.6% of the average daily U.S. crude oil imports.

Like Saudi Arabian Oil Co (Saudi Aramco), which is the world’s largest oil producer and the biggest corporation, Pemex is not publicly traded. Mexico’s President Enrique Pena Nieto has recently expressed his desire to increase private investment in the country’s energy sector. Some had taken this as a hint that Pemex’s stock might be up for grabs in the near future but their hopes were quashed later when the President stated that Pemex or any of its part was not for sale.  Although Nieto believes that his actions are in the best interest of Pemex and Mexico, the fact of the matter is that in the midst of rising demand for oil, Pemex’s output has actually fallen from 3.3mbpd in 2006 to 2.54mbpd in 2011.  Malaysia’s Petronas has had to face a similar reality over the years, pushing out around the world to find new reserves to exploit while privatizing parts of its operations. 

At least financially, Pemex is recording improvements. Its last quarterly results showed the company swinging back to a profit of $1.92 billion from a loss of $6.2 billion a year ago. But the company is far from efficient it has practically never faced any competition – there is none at home and it doesn’t step outside of Mexico. Nieto has vowed to do an overhaul of the company to make it more like a business and less like a government department. He wants it to be more like its Brazilian peer Petrobras (NYSE:$PBR) which competes with the big U.S. oil firms for major international projects. But it is not clear exactly how Nieto believes that is going to happen, since privatization, even for a minority stake, is off the table. Perhaps a better comparison would be Saudi Aramco, which has relied on the technological transfer from Western firms, on the back of a long history of joint ventures and partnerships, for growth and expansion.   And this is where the Keppel deal fits into the analysis. 

With the new investments in oil rigs, the discovery of new oil reserves (e.g. the Navegante field in Tabasco discovered last year contains up to 500 million barrels of light crude), a positive attitude from the country’s political leadership towards competition in Mexico’s oil and gas sector and a new energy secretary Mr Pedro Joaquín Coldwell in place, I believe that Pemex will modernize and become more integrated into the world oil economy. However, Pemex has to overcome the problem of its lack of skills.  The Chinese oil giants have bitten the bullet and cut deals to gain access to fracking and other shale-gas exploitation technology/expertise, so it will have to be with Pemex.  By not willing to be listed, Pemex cuts itself off from a number of potential opportunities and will then have to subcontract out certain work which, ultimately, may not be at all accretive as no one has to do Pemex any favors, but the Mexican government needs the oil revenues to keep a lid of civil and social unrest.  Last year, Pemex auctioned off some of the work that needed to be done on its declining oilfields.  It got positive response from some of the international players such as Schlumberger (NYSE:$SLB) but since the contracts were just service contracts the big players of the oil industry such as Exxon Mobil (NYSE:$XOM) have largely stayed away from the country.  Mexico has to open its doors to big oil and that will come only through production sharing contracts or other joint ventures.

The two main ETFs for investing in Mexico are iShares MSCI Mexico Index Fund Profile ETF (AMEX:$EWW) and ProShares Ultra MSCI Mexico Investable Market Profile ETF (AMEX:$UMX). EWW is about 16 years old; UMX is just two years old and tracks EWW.  EWW allocates 50% of its funds to Consumer Defensive and Communication sectors.  Keppel is one of the top 3 holdings of the iShares MCSI Singapore Index ETF (AMEX:$EWS).  Mexico is one of the world’s fastest growing emerging markets and the Peso one of the up and coming currencies, and if the government and Pemex can create that bridge with the rest of the world to revitalize their oil production there is a real long term growth opportunity across the entire country due to spillover effects.


 

EWW

UMX

EWS

6m Stock

+18.65%

+39.38%

+8.73%

Expense Ratio

0.52%

0.95%

0.52%

Focus

Mexican Equities

Leveraged Mexican Equities

Singaporean Equities

Top Holding

America Movil (20.68%)

EWW Swap Merrill Lynch (56.33%)

DBS Group (10.75%)

Top Sector

Consumer Defensive

N/A

Financial Services

P/E

N/A

N/A

14

Yield

1.03

N/A

4.01

Beta

1.39

N/A

1.31

 

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Peter Pham is a capital market specialist and entrepreneur.  With expertise as a Head of Institutional Sales and Trading he closely watches the market and probes for investment opportunities utilizing a unique blend of quantitative trading experience and macro trend analysis… (read more)

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