Here's How Mexican Reforms Could Make You Rich

Here's How Mexican Reforms Could Make You Rich

Has it really been 75 years? That's how much time as passed since private oil and gas companies could still operate in Mexico. Now, after years of declining production, Mexico is going to reform its oil and gas industry so private enterprise can once again operate in the area. Brazil's energy reforms during the 1990's set the perfect example for why Mexico's reform attempts could yield amazing results.

Back in 1996, a year before Brazil's partial privatization of its oil and gas industry, crude oil output stood at ~800,000 barrels per day.

Now Brazil's domestic production stands at ~2 million bpd a day, which is an increase of 250% over 16 years.

Pemex needs a better snorkeler
At currently levels, Mexico is growing off of a larger base than Brazil was, as Mexico's crude production stood at 2.54 million bpd as of October. In order to grow, Pemex needs to be able to its develop its offshore oilfields, which lay 7,000 feet below the ocean. Pemex sees 29 billion barrels of recoverable oil in the Gulf of Mexico, and when the reforms roll out Pemex will finally be able to tap into those reserves. Regardless of what the growth rate ends up being, it still beats years of declining production.

Pemex sees most of its recoverable oil out in the Gulf being below ~7,000 feet of water, which means deepwater rig demand will likely increase. In order to drill down through 7,000 feet of water, followed by 10,000-20,000 feet of the Earth's crust, you need a rig specially designed to do so. It just so happens that Transocean has the right tools in place to do just that.

Beneath the big blue sea
Pemex has high hopes for the Gulf of Mexico, but lacks the ability to develop the region itself. This is why Mexico needs the right expertise to drill down into the Gulf, expertise that Transocean can offer.

Transocean has 27 rigs capable of drilling in ultra-deepwater -- 7,500 feet or more -- with another 12 capable of drilling in deepwater -- 5,000-7,500 feet. Transocean has seven more ultra-deep water rigs under construction, with plans to finish them between 2014 and 2017.

For deepwater rigs, Transocean sees average fees ranging from $400,000 to $450,000 a day. For ultra-deepwater rigs it gets even better, with Transocean guiding for rates to be around $500,000 to $600,000 a day depending on the rig.

To put this in perspectiv, if Transocean's seven new ultra-deepwater rigs were being used 300 days a year -- an 82% utilization rate -- at an average price of $550,000, then Transocean would be making an additional $1.16 billion a year in revenue. Not too shabby considering that equals 12% of its last-twelve-months revenue figure.

Way ahead of you partner
When the deepwater offshore bonanza starts in the Gulf of Mexico, Transocean will have 12 deepwater and 34 ultra-deepwater rigs that could potentially be used to turn around Pemex's fortunes while making one for Transocean investors. Transocean can use the additional cash flow from its operations to maintain a stable balance sheet while building new rigs to cater to Mexican demand.

Just look at the name
It says it right in its name, Seadrill . Seadrill is another deepwater rig operator that has the capability to help develop even the deepest, darkest parts of the Gulf.

BP recently added a new ultra-deepwater rig from Seadrill, the West Auriga, to develop the Thunder Horse field. The West Auriga can drill in 12,000 feet of ocean, which means BP will leave no stone unturned in its never-ending search for crude.

With nine rigs up and operating in the Gulf of Mexico, BP plans to invest $4 billion each year over the next decade to develop the region. Most of that money will be directed to deep sea drilling, which Transocean and Seadrill are positioned to service.

Seadrill has four ultra-deepwater rigs operating in the United States, which will become available around 2017-2020 (they are currently in use). That's just in time to be utilized by Mexico to replicate Brazil's success with market oriented policies.

Foolish conclusion
Energy reforms have worked in the past, so why wouldn't they work in the future? If Mexico follows the path of Brazil then output should rise as capital, both monetary and intellectual, flows into the market. Deep sea rig operators are on the verge of something big -- just wait and see.

So what's the best play on deepwater drilling?
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Callum Turcan has no position in any stocks mentioned. The Motley Fool recommends Seadrill. The Motley Fool owns shares of Seadrill and Transocean. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.

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