Project Financing in the Mexican Market

Q: Where does your company look for project financing opportunities in the Mexican market?

A: Like every other project financing firm, Ultra Maris Capital is constrained by the Mexican legislative framework: no company here looks for funding unless they either have already been awarded a service contract by Pemex, or are planning to participate in a bidding process and want to have funding lined up. In the same way as all companies, we keep a close eye on the contracts that Pemex puts on the market, and we are limited by those opportunities. Since the majors and even some of the larger service providers typically have their own funding, our company tends to be approached mainly by mid-sized service providers – the ones that do not have access to international capital markets and therefore are more dependent on finding funding from other sources.

Q: What size of funding do you provide in the Mexican market, and how does this compare to international markets?

A: We have funding for much larger amounts than are currently required by the market, because our sources are the biggest international insurance companies, pension, and private equity funds. We are not resource constrained; our sources of capital would actually be happier if they could look at larger projects, whether or not as part of a bigger package. As a result, we are just as keen as the private players in the market for the Mexican government to be a little more generous and aggressive.

Q: Which parameters do you use to analyze risk in the Mexican market?

A: It comes down to making sure that all of the legalities are properly dealt with, so no legal quagmire can come back to haunt your project. Normally, we ask our clients to hire a top law firm in Mexico that has expertise in the sector. To make sure the geology is promising, we ask clients to bring a geological report from a prestigious third party that is credible for investors. Once these two aspects are taken care of, the risk/reward ratio has to look good, because international insurers, pension and private equity funds are not looking to take on large amounts of risk. Rather, they are looking for projects that will bring in a solid cash flow for a good number of years. The weaker projects all over the world are being weeded out. In Mexico this is not such a problem, but in other parts of the world you often find projects from small groups that have done enough geological work to know that there is some potential in the project, but have not completed a fullscale geological survey, and in today’s market, nothing can be done to help those projects, short of finding an angel investor to help them complete the work that needs to be done. A few years ago, these groups might have been able to find a fund or even an individual investor that was willing to take the risk, but right now they cannot.

Q: What do you expect to be the impact of the introduction of integrated service contracts on the development of the Mexican oil and gas sector?

A: We see it as a positive step for the country. Pemex has access to capital markets; they have relationships on Wall Street and in London, and do not normally work with boutique investment banks like us. The fact that the market participants are more numerous is very good, because it o†ers us much more scope to work in Mexico. We are definitely all in favor. Right now, we are following the opportunities that Pemex provides, which are predominantly created by the integrated service contracts. We are interested in drilling contracts, because the capital investment required is bigger, and which is attractive for our funding partners. However, our work in this area is still at an earlier stage.

Over the next few years, one of the most important things that Pemex and the Mexican government can do is to redefine the risk/reward ratio they are willing to provide. Once the formulae to calculate this are in place, they will be successful in attracting the capital and technical expertise needed to achieve the industry’s goals.