A change not seen since 1938 is coming. 1938 was the last time US oil companies operated in Mexico before the creation of Pemex, which stands for Petroleos Mexicanos, Mexico’s state-run oil company. In 1938, Mexico nationalized its oil and gas sector, seizing all foreign assets and making it illegal for foreign oil companies to operate in Mexico. They forced all foreign companies out of Mexico’s petroleum sector and monopolized the market.
Now there is a change in the wind and Mexico wants to modernize and expand its petroleum sector to boost output, economic growth, and tax revenue. Pena has stated that in September, Mexico will vote on whether or not to privatize Pemex and allow for foreign investment in Mexico’s declining petroleum sector. This is a great idea for Mexico and one of the reasons why Mexican President Pena Nieto won the election.
This won’t just help Mexico, it will also help the US, as most of that oil will be shipped north to refine and use. This increases Mexico’s economy and provides the US with energy security. Back in 1938, two companies that had their assets seized were Exxon Mobil Corporation (NYSE:XOM) and Royal Dutch Shell plc (ADR) (NYSE:RDS.A), and now they may once again be able to operate in Mexico.
Output
Back in 2004, Mexico was producing 3.4 million barrels of crude a day, but now Pemex is pumping only 2.5 million barrels of crude a day. Pemex is responsible for 35% of Mexico’s tax revenue and declining crude output is hurting Mexico’s finances, which prompted the need to privatize Pemex. Pena’s idea is to have Pemex drill in some fields and have private companies drill in others.
This would be great news for Exxon Mobil Corporation (NYSE:XOM) and Royal Dutch Shell plc (ADR) (NYSE:RDS.A), as they need to keep boosting output to grow. Exxon Mobil Corporation (NYSE:XOM) in Q1 2013 saw a 3.5% decline in oil and gas production, but saw a 2% rise in production in North America. Mexico has very similar shale and offshore plays to the US and would likely see billions of dollars in investment from Exxon Mobil Corporation (NYSE:XOM). Royal Dutch Shell plc (ADR) (NYSE:RDS.A) has been investing heavily in Canada’s oil sands, but has still has seen its oil and natural-gas liquids production fall by over 300,000 bpd from 2007 to 2011 (according to its website). In order for both these companies to grow their production levels they need a big hit.
Comparison
Petroleo Brasileiro Petrobras SA (ADR) (NYSE:PBR) is Brazil’s state-owned oil company (the country own 64% of it) and Brazil decided to privatize part of it back in 1997. Back in 1997, Petroleo Brasileiro Petrobras SA (ADR) (NYSE:PBR) had an oil-production rate of 1 million bpd, but by 2003 it had doubled its production up to 2 million bpd. If Pemex can see even half that growth, it would would grow its oil production by at least 1.2 million bpd, but because of the shale plays in Northern Mexico the company could easily double its production over the next decade.
Investments and final thoughts
I would not invest in Petrobras for one big reason; it is still 64% owned by the Brazilian government and the current administration hasn’t made any major reforms nor plans on doing so for a while. While Petrobras does pay out a 3.7% dividend yield, it trades at a PE (trailing-12 months) of 10, which is higher than other big oil companies. I would stay away from it as government-run companies are notorious for being ineffective and inefficient with their investments and cash flow, just look at Russia’s Gazprom.
If I were to play this I would look primarily at Exxon Mobil Corporation (NYSE:XOM) because of its recent focus on growth in North American production, which so far has panned out well.
ExxonMobil pays out a 2.7% dividend yield and trades at a PE (trailing-12 months) of 9.2, but is expected to only grow at a snails pace over the next few years. It does, however, have a low payout ratio of 23% and has the possibility to significantly boost output if it gets into Mexico’s petroleum sector and continues to focus on boosting US oil production.
If you want a stable investment with dividend growth and future catalysts in the coming years, Exxon Mobil Corporation (NYSE:XOM) is the stock for you. A 23% payout ratio is significantly less than the industry average of 64.5%, so there is a lot of room for the company to boost its yield.
Royal Dutch Shell plc (ADR) (NYSE:RDS.A) is also worth looking at but for a different reason. It has a payout ratio of 41.5% and a dividend of 5.5%, so it has less of an incentive to boost its dividend yield. Shell trades at a lower PE (trailing-12 months)) than ExxonMobil at 7.9 but is expected to grow by even less in the next few years. Royal Dutch Shell plc (ADR) (NYSE:RDS.A) is worth investing in if you want a dividend yield of more than 5.0%, and ExxonMobil is worth investing in as it could potential boost output significantly in the next few years if it gets to tap Mexico’s oil plays. Exxon Mobil Corporation (NYSE:XOM) could also easily boost its dividend by 50% if it raised its payout ratio up to 35%. I’m bullish on Mexico’s privatization and the future growth of Mexican oil output.
The article Mexican Privatization Could Bolster Dividends originally appeared on Fool.com and is written by Callum Turcan.
Callum Turcan has no position in any stocks mentioned. The Motley Fool recommends Petroleo Brasileiro (NYSE:PBR) S.A. (ADR). Callum is a member of The Motley Fool Blog Network — entries represent the personal opinion of the blogger and are not formally edited.
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