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Exxon Mobil Corporation (XOM), Royal Dutch Shell plc (ADR) (RDS.A): Mexican Privatization Could Bolster Dividends

A change not seen since 1938 is coming. 1938 was the last time US oil companies operated in Mexico before the creation of Pemex, which stands for Petroleos Mexicanos, Mexico’s state-run oil company. In 1938, Mexico nationalized its oil and gas sector, seizing all foreign assets and making it illegal for foreign oil companies to operate in Mexico. They forced all foreign companies out of Mexico’s petroleum sector and monopolized the market.

Now there is a change in the wind and Mexico wants to modernize and expand its petroleum sector to boost output, economic growth, and tax revenue. Pena has stated that in September, Mexico will vote on whether or not to privatize Pemex and allow for foreign investment in Mexico’s declining petroleum sector. This is a great idea for Mexico and one of the reasons why Mexican President Pena Nieto won the election.

Exxon Mobil Corporation (NYSE:XOM

This won’t just help Mexico, it will also help the US, as most of that oil will be shipped north to refine and use. This increases Mexico’s economy and provides the US with energy security. Back in 1938, two companies that had their assets seized were Exxon Mobil Corporation (NYSE:XOM) and Royal Dutch Shell plc (ADR) (NYSE:RDS.A), and now they may once again be able to operate in Mexico.

Output

Back in 2004, Mexico was producing 3.4 million barrels of crude a day, but now Pemex is pumping only 2.5 million barrels of crude a day. Pemex is responsible for 35% of Mexico’s tax revenue and declining crude output is hurting Mexico’s finances, which prompted the need to privatize Pemex. Pena’s idea is to have Pemex drill in some fields and have private companies drill in others.

This would be great news for Exxon Mobil Corporation (NYSE:XOM) and Royal Dutch Shell plc (ADR) (NYSE:RDS.A), as they need to keep boosting output to grow. Exxon Mobil Corporation (NYSE:XOM) in Q1 2013 saw a 3.5% decline in oil and gas production, but saw a 2% rise in production in North America. Mexico has very similar shale and offshore plays to the US and would likely see billions of dollars in investment from Exxon Mobil Corporation (NYSE:XOM). Royal Dutch Shell plc (ADR) (NYSE:RDS.A) has been investing heavily in Canada’s oil sands, but has still has seen its oil and natural-gas liquids production fall by over 300,000 bpd from 2007 to 2011 (according to its website). In order for both these companies to grow their production levels they need a big hit.

Comparison

Petroleo Brasileiro Petrobras SA (ADR) (NYSE:PBR) is Brazil’s state-owned oil company (the country own 64% of it) and Brazil decided to privatize part of it back in 1997. Back in 1997, Petroleo Brasileiro Petrobras SA (ADR) (NYSE:PBR) had an oil-production rate of 1 million bpd, but by 2003 it had doubled its production up to 2 million bpd. If Pemex can see even half that growth, it would would grow its oil production by at least 1.2 million bpd, but because of the shale plays in Northern Mexico the company could easily double its production over the next decade.

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