/
Analysis

Investments and Partnerships in a New Oil Reality

Wed, 01/22/2014 - 14:18

The investment consultancy PetroRock Energy sees itself as an expert in catering to Mexican oilfield service companies, targeting those that lack stable and affordable sources of financing or those in need of specific technologies or partnerships. “While some Mexican companies compete with the likes of Schlumberger, Halliburton, and Baker Hughes, it is hardly a level playing field,” says Eliecer Palacios, Founder & Managing Partner of PetroRock Energy. “The smaller participants do not have the same resources, technical capabilities, or revenue diversification. Some of these companies are home-grown businesses owned by entrepreneurs who managed to turn their single-line enterprises into multi-million dollar firms. They now want to take the next step and sell stakes to bring a partner with capital and technical expertise,” explains Palacios. This is where PetroRock Energy comes in by helping smaller players raise capital or find partners with suitable international experience. “Unlike other local financing institutions that limit their services to collateral loans or guarantees with exorbitant rates, PetroRock Energy strives to provide competitive and creative financing schemes with long-term partnerships. We do not want to overwhelm customers with onerous terms. We want to provide the right resources for a company to grow,” says Palacios.

Like any financial advisor, Palacios has sage counsel for players planning to enter any new market. He feels they should have three things in mind. First, they should be targeting an established oil province with business opportunities of scale; second, they should look for a legal system that protects investors; and finally, they should eye a stable geopolitical environment suitable for business. Coming across a market that presents all three components and is accessible for a reasonable price is difficult. “Markets like the US and Canada are very mature when all three elements are taken into account, while Brazil or West Africa usually lack at least one of these. The Mexican market had all three components but it was missing a constitutional reform to incentivize foreign investment,” says Palacios. The Energy Reform changed this and PetroRock Energy is anticipating that two main types of investment will enter Mexico. The first pertains to oilfield service companies, while the second involves exploration and production assets. Palacios admits the first area presents good growth opportunities, but adds it will be hard to exceed the expectations as PEMEX is the sole client and service companies follow its spending pace and competition guidelines. The exploration side presents a different set of challenges, wherein the risk and the potential returns on investment are both high. Palacios identifies the offshore market as the most attractive as it requires a wide range of equipment, drilling services, accommodation units, and transportation vessels, among others.

Palacios also sees PSAs and concessions as crucial to attracting investment, provided that they are well-defined. However, he hastens to quell any premature excitement about these as he predicts a long process before PSAs and concessions are a completely reliable instrument in Mexico. “The problem is that it has historically proven difficult to convince a foreign operator to stay in Mexico. But now, once these players are allocating resources in the country, they have to stay for a long time to make their investments viable. International oil companies have been waiting for the Energy Reform for a long time. They have had agreements with PEMEX for years and are now looking for long-term opportunities. However, the contracts are not being crafted with companies in mind, forcing them to evaluate Mexican projects closely versus investing elsewhere,” adds Palacios.

The uncertainty that international heavyweights might feel about coming here will be felt by domestic companies once the Energy Reform comes into full force. Palacios believes this will be a game changer for many Mexican service firms, some of which have grown a steady line of business by operating in a specific niche for years. This balance will change once the doors are kicked open to local and foreign competitors, facilitating access to technology and resources while forcing prices and profits to adjust. “One advantage that domestic firms will have though is that this will not happen overnight. International players will need time to understand the challenges and conditions of the local market. Domestic firms can take advantage of the interval to grow stronger and better prepare themselves.” While advising domestic and foreign players about these respective concerns, he acknowledges that competition is at the core of an open market, and the diversity of players should foster collaborations. “The Mexican oilfield service sector is fragmented, but although companies might be spread out in different hubs, the opportunities are not hard to spot.”

PetroRock Energy is carefully analyzing this evolving landscape before making its next move. “Our strategy is to identify the companies that will excel in different areas and then either finance them or choose one that will eventually consolidate a cluster. We have seen this model work in Norway, Canada, Brazil, and Colombia. They all have their home-grown champions working with their respective national oil companies. They know the sector and have the local expertise to be quite efficient,” tells Palacios.