An article in Business News Americas may tip off investors to a profit gusher in Mexico.
Their small piece I saw yesterday reported that Mexico could take front and center in an important investment conference this September. If some of the news we expect is actually announced, it could be one of the biggest bombshells to hit Latin oil.
At the Latin Asia Business Forum 08 (LAB08) held in Singapore from September 22-23, Mexican officials could detail their progress on rewriting the legal framework for private investments in state-owned oil.
Mexico's LAB08 presentations could detail initiatives that would let foreign companies have greater participation in public-works projects for transportation, telecommunications and energy development.
And it's the energy development that caught our eye. As I write this, a revamp of Mexico's national oil company is being pushed by President Felipe Calderon.
Petróleos Mexicanos (PEMEX) is Mexico's energy giant. It is the 10th largest oil company in the world in terms of revenues, which are pegged at $55.9 billion.
On April 8, Mexican President Calderon issued an executive initiative that would fundamentally change Pemex's structure and operations. This is a move that's way overdue.
Because Pemex neglected to invest enough in exploration or refining, and pipelines and storage facilities, the whole shebang has deteriorated to the point where Mexico is forced to import 40% of its gasoline.
Worse, the company has amassed a staggering $42.5 billion in debt, including $24 billion in off-balance-sheet debt. If you're wondering how this could happen, the answer is simple.
Mexico's federal government skims 30% of Pemex's royalties and taxes to fund the national budget. Pemex has been abused to support all kinds of social programs -- including those subsidies called corruption and nepotism. It should be noted, though, that Pemex also helped pay down Mexican's foreign debt despite all the skimming.
Calderon's proposed legislation aims to loosen the company from the government bureaucracy. He wants Pemex to keep more of its windfall profits when oil prices are high to reinvest in the company.
If Calderon gets his way, his initiative would encourage private companies to build and operate storage facilities, refineries and pipelines. But none of this is a done deal.
Pemex is a flashpoint in Mexican politics. It's a source of national pride and perceived independence from the U.S.
Ever since Mexican President Lazaro Cardenas seized private companies on March 18, 1938, the constitution makes it abundantly clear who owns Mexican oil: "The nation has direct dominion over all national resources of the continental platform... (including) petroleum and all solid, liquid or gaseous hydrocarbons ..."
While Calderon may not have the clout to take Pemex fully private, he is bent on saving the company from its fiscal and logistical crisis. Key to Calderon's success is convincing the Mexican people that the government is too inept to keep Pemex in the black.
Calderon's initiative also flies in the face of the petro-facist movement that has griped Latin America -- with Venezuela's President Hugo Chavez as its poster boy. Nationalization in Latin America is spreading like a wildfire.
On May 2nd Bolivia took over four international energy companies: Transredes, part of British firm Ashmore; Andina owned by Spain's Repsol; Chaco, a subsidiary of Pan American Energy; and CLHB, controlled by joint Peruvian and German firm Kapital/Oiltanking.
Bolivian President Evo Morales is a leftist-populist with an agenda for nationalizing the country's energy resources. He wants to bleed oil and gas companies to fund government programs in support of the Indio majority, who live mostly in the resource-starved highlands.
Meanwhile, Mexico is in its own world of pain when it comes to energy. There is a refinery crisis that could become Calderon's number-one priority.
A shortage of refining capacity costs Pemex some $900 million dollars in 2000 that rose to a staggering $3.5 billion dollars by 2007. There is an immediate need to increase refinery capacity by 50%.
At the same time, while Pemex feeds the poor it is only spending 20% as much resources to engineering in processing and manufacturing as it did 20 years ago. The cash cow is on its last legs.
Bottom line is that Pemex today imports 40% of distilled petroleum products to cover domestic sales. The cost of imports has gone from $5.5 billion dollars in 2004 to $16.8 billion in 2007, with demand expected to build. At the same time, Pemex's reserves are going fast.
Calderon insists his initiative will not privatize Mexico's oil. Under his plan, foreign companies would not own the oil reserves. What he does want is to privatize the most profitable pieces such as refining, processing, and transport.
So what does this mean to you as an investor?
We have found that the best way to cash in on an opportunity like Pemex is to keep your eye on the company itself. See if it awards contracts to independents who are involved in drilling, refinery construction, transportation, pipeline construction -- you name it. Those would be the companies to play.
You can start with the Pemex web site. There is an RSS feed button, which means that you can add your email address to automatically receive relevant news announcements. (By the way, you can also receive this blog via RSS with the button on our own home page.)
The other thing you can do is sign up for our free Taipan Daily eletter. We're constantly monitoring the likes of small-cap independents that could be candidates for the big Pemex overhaul.
--Irwin Greenstein
