When you don’t acknowledge risk factors, one tends to overprice a project and there is no correlation between risks and returns.


Financing and business development for energy in Mexico

November 4, 2022

Luis Miguel Labardini, a partner at Marcos & Asociados, talks to The Energy Year about prospects for a Pemex IPO and how the company is preparing for a rise in consolidations in Mexico’s oilfield services sector. Marcos & Asociados provides financing and business development in the energy sector.

How have prospects changed for Mexico’s oil and gas sector in the last decade?
The oil industry has experienced ups and downs. The last time we saw USD 100 a barrel was in 2014. Since then, the global industry has been through a period of crisis. As a consequence, the former administration decided to reduce investment in the sector. In 2014, Pemex received an investment of USD 27 billion while in 2017 it received only around USD 10 billion.
Since 2019, the new administration of AMLO [President Andrés Manuel López Obrador] has been committed to strengthening Pemex and raising investments in the entity. In 2022, Pemex received an approved investment of USD 17 billion. The future for the NOC is bright.
However, the company needs to sort out several structural and financial issues. These are not a result of this administration but are historical. Up until last year, Pemex had not received fresh capital. A first injection of USD 2.5 billion was made in 2020, followed by another of about USD 4.5 billion in 2021. This year, the NOC is expecting another capital injection of USD 4.8 billion. Although important, these are not overwhelmingly significant considering Pemex’s equity is in the negative by around USD 100 billion.

How could Pemex’s prospective IPO aid its performance?
The government is 100% behind Pemex. While this is not negative, any oil-producing country should also have an array of private operators. These contribute to the development of the industry and raise royalties paid to the State. Private operators pay royalties of around 70%. The country is capturing economic rent through its current fiscal regime. It is better to have many operators, but it is also good to have a national oil company. This is the case of Brazil with Petrobras and Colombia with Ecopetrol, both of which are on the stock exchange.
A healthy way of financing many of Pemex’s operations and stabilising its financial situation would be to launch an IPO on the Mexican stock exchange, even if with only a minor proportion of equity. It’s a healthy way to provide finances to a company that is acquiring debt. Pemex is an over-indebted firm because its only source of financial resources is its own cashflow, and most of its cashflow is captured by the government. It is a vicious circle.
An IPO would also be important for the company in terms of corporate governance. The Pemex board would have representatives of stockholders and that would provide more transparency and rationality in the decision-making processes. This would be a big contrast with what we have now where independent board members are appointed by the administration.

How significant will fossil fuels resources continue to be for Mexico considering the energy transition?
Due to the ideological perspective of the oil industry, the State has shut down rounds and is not considering any farm outs. We need more dialogue, which is lacking. The conversation should revolve around how to optimise value from the oil industry for Mexicans of this generation and future ones. While this industry will disappear in 30-50 years, the process will not be immediate. There are lots of opportunities for the industry today, and we need to think about what is best for our country.
The ideological load of the subject of petroleum can be traced back to the expropriation in 1938. Interestingly, the concept of petroleum rent started with President Lázaro Cárdenas del Río, who a few years before the expropriation offered the Poza Rica field to what is now known as Shell.
The agreement demanded 50% royalty and if it had gone through, it would have been the first PSC in history. Petroleum rent and royalties are an important source of revenue for Mexico. We need private and international firms helping the nation exploit its rich resources before it’s too late.
We have 50 years to exploit our fossil fuels in the most effective way possible before the energy transition makes oil a thing of the past. It is a unique opportunity for Mexicans, and we must manage it intelligently and quickly.


How has the investment environment for upstream developments recently changed?
Investment has been flowing and recent discoveries made by the private sector are contributing to enthusiasm in the upstream sector. Companies such as Eni, Hokchi and Fieldwood are now producing while recent discoveries are boosting the country’s reserves-to-production ratio.
Many potential projects are long term as they are offshore deepwater or ultra-deepwater ventures. For example, this is the case with BHP Billiton’s Trion play. These types of ventures need to be developed with the latest technology and require deep pockets. Shallow-water plays continue to be the most prolific for Mexico, accounting for around 80% of the country’s production.
Onshore development has had great success up until today. Many onshore fields are mature ones and have been exploited by Pemex for many years. The downturn of the industry has negatively impacted these plays. Pemex’s strategy has been to focus on maturing plays, wanting to obtain quick wins by enhancing production in 20 mature fields. A dual effort from both private and public entities could help enhance stagnated production.

Are there possibilities for mergers and acquisitions in the Mexican oil and gas sector?
Despite the recent downturn, the market is starting to see activity thanks to the development of the oilfields assigned in the first bid round. There have been some acquisitions in the last few years. For example, AINDA took over 3.6% participating interest in the Hokchi field. This reflects what is going to come in the coming years in Mexico.
Lack of payments on the part of Pemex in 2020 in addition to many companies going bankrupt gave way to banks closing their doors to oil and gas companies as there was no certainty companies could pay back their loans and debt. Financial institutions have been incentivised to finance greener projects, which is a big change.
Until around 2014, banks saw tremendous potential in the energy sector. Reserve-based lending was very common, and operators would extend loans based on guarantees of reserves. However, many Mexican and foreign banks are now cautious about lending to oil and gas companies because they know that even if they set up a trust and assign accounts receivable, there may not be payment. However, we need investments to grow, which is why the mergers and acquisitions scene is bound to grow.
Marcos & Asociados is trying to develop a market for M&As in Mexico, which currently does not exist. It is difficult for investors to understand the risk profile of oil companies in the market. Fortunately, there are large-scale corporations in Mexico related to the oil and gas industry that sustain it.
There will be a process of consolidation in the next few years, and we want to facilitate this process. We are looking for foreign investors and trying to open doors for them. There are companies, funds and financial entities in the US that understand the oil sector very well. It’s just a matter of going one step further and entering Mexico.

What is Marcos & Asociados’ role in helping companies navigate the Mexican market?
We define ourselves as translators of risk. Whether it be an oilfield service company or an operator, if you understand the risks of a particular contract, project or operation, you can price it correctly. When you don’t acknowledge risk factors, one tends to overprice a project and there is no correlation between risks and returns.
We help companies by hedging various risks present when entering the Mexican market. If one can understand the risks and the ways to mitigate them, then one can enter the market and succeed. Doing business in Mexico requires a very bureaucratic process that involves regulatory, fiscal, legal and cultural procedures, which are not always easy to understand.
There are many hurdles in every aspect of doing business in Mexico. We talk to clients to understand their needs and where they are coming from. This is the case with Pemex. We understand where they are coming from and how they operate. Rather than bringing them a solution, we must first understand their needs and adapt to their framework.
The oilfield service sector in Mexico is still under a monopoly with only one client. Fortunately, the market is increasing. Private operators are trying to make a space for themselves. However, the name of the game is still Pemex. Over 90% of all production in the country comes from the NOC.
When it comes to IOCs, they have a different framework when maximising the value of their operations. One can always negotiate. On the other hand, Pemex is constrained by regulations that try to prevent corruption and regulations that are customary in Mexico in terms of procurement. There are very tight constraints in terms of safety, environment and labour.

How is the company differentiated from its competition and what are its current goals?
Foreign companies or local investors that want to develop a business in the oil and gas industry normally work with large law, accounting or consulting firms. However, these entities don’t go into the details. We are not an accounting company or a law firm, but we do provide accounting and legal services.
We approach issues in a holistic way and specialise in the areas of business development and investment banking. We understand the nuts and bolts of the oil and gas industry, which makes us a perfect match. Most of our clients are oilfield services companies. We also support marine and offshore companies and those involved in seismic projects.
When it comes to our business development and investment banking goals, our objective is to institutionalise the sector. The oilfield services sector in Mexico is a cottage industry aside from major contractors. We have small owners that are very good at what they do who are under capitalised.
Consolidation and M&As is one way to achieve institutionalisation. We are working on bringing in large investors that have enough financial muscle to grow. We don’t yet have an institutionalised market for selling and buying oilfield services companies or a market to buy and sell oilfields, for example. We want to be part of making this a reality.

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