The Need for Financing, Investment Banking in Oil Field Services

The Mexican oil field service industry has a history as long as the oil and gas industry itself when the “Faja de Oro, or “Golden Strip,” was developed in the early 20th century between Tampico and Poza Rica. The oil and gas industry and its service sector have always worked in tandem. The first is the industry that takes the geological and financial risks involved in any oil and gas venture, while the service industry is devoted to providing the suite of technologies, products and services that are required to support an optimum development of oil and gas fields.

At the international level, major service providers include big names such as Schlumberger, Halliburton, Baker Hughes and Weatherford, but there is also a very large number of international and local companies that have been working for PEMEX for decades, in an interaction that requires a lot of collaboration and mutual understanding with the goal of optimizing the value of the industry as a whole.

Unfortunately, in spite of the fact that Mexico is a long-standing player in the international oil scene, there is little knowledge of how the dynamics of the oil field service industry actually work.

In Texas and Oklahoma, the large number of operators and service companies eventually resulted in a much-needed development of financial services and a financial market for service-related assets and companies. I had the privilege to know Matt Simmons, the founder of Simmons and Company, an investment banking firm specialized in the oil field service industry, where he developed a very professional practice that became a landmark when many of the service companies started going public.

Unfortunately, Mexico does not have such a profound financial market, and service companies have always struggled when it comes to financing investment and operations or to seek additional capital, sell or buy companies. This is particularly true because, in spite of the 2013 Energy Reform, most of the investment and production still comes from one single state-owned company. PEMEX holds an enormous power as the oil and gas monopsony, a fact that increases and concentrates the risk of operating in Mexico.

Understanding PEMEX is, with no doubt, a key aspect to properly assess the risk profile and prospects of any oil field service investment in Mexico. However, this should not be an obstacle to increasing our efforts to develop a financial market for oil field-related assets and companies.

As in any other sector, the oil field service industry requires a segment of the financial services industry devoted to finance investment, assets and working capital. There is also the need for investment banking services to facilitate valuations, sales, mergers and acquisitions.

The lack of an institutionalized market has hampered the development and growth of the segment in Mexico and, in many cases, has resulted in the demise of companies that otherwise would have prevailed and prospered.

It is in the best interest of the financial sector, including banks and investment bankers, to further develop their abilities related to the oil field service industry. There is the need to increase oil field service literacy, which could be achieved through deliberate efforts to improve communication and the transfer of information, incorporating the participation of industry representatives, such as AMEXHI and AMESPAC, two trade organizations that throughout the years, have improved the quality of communication between industry participants and the conversation with PEMEX.

Another party that should be most interested in the development of financial services specialized in oil field services is PEMEX itself. PEMEX needs reliable, financially sound suppliers and contractors, and the consistency of decisions and transparency of information would significantly contribute to the reduction of the risk profile of service providers. Throughout the years, there have been significant efforts to improve corporate governance within PEMEX, in order to rationalize the decision-making process. I am one of those who believes that PEMEX should follow the path of companies like Petrobras and Ecopetrol because going public not only provides a healthy alternative to finance investment in strategic projects but also contributes with a much-needed accountability for an entity that, at the end of the day, is an economic enterprise that must optimize value and respond to the stockholders as well as to the stakeholders.

Except for a handful of large players, the Mexican service industry is mostly a cottage industry, a fact that does not help in attracting the interest of large banks or investment banking firms. Those of us involved in the industry should join forces, and develop strategically sound initiatives to develop financing and investment banking alternatives for the large universe of players that must operate in a challenging environment. This industry is crucial for the success of our oil and gas industry and there are undoubtedly capital resources that would be interested in investing in the sector as long as risks and returns are properly understood.

Other strategic sectors in Mexico have been strongly supported by a decisive government policy and development banks Nacional Financiera and Bancomext, through specific, focused programs. This is not the case of the oil field services industry, which notwithstanding its relevance, has historically been overlooked by public initiatives. A notable exception is a factoring program called “Cadenas Productivas” through which Nacional Financiera supports PEMEX suppliers and contractors.

This sector is still highly attractive and should provide long-term reliable and sound returns if properly financed. This is the piece of the puzzle that all of us involved in the industry must contribute to building in the near future, particularly considering the current environment of high oil prices.