Investment Solutions

Mexican Energy Reform – September, 2014

Newsworthy, Mexican President Enrique Pena Nieto signed into law Mexico’s historic energy reform bill ending the 75-year oil monopoly that barred foreign participation. We believe this is a significant development for the “Energy Value Chain” as Mexico is believed to be home to the world’s 6th largest oil and gas reserves. In conjunction with the opening up of foreign investment for oil and gas production, the Mexican government also announced $4.9 billion of electrical generation and natural gas pipeline projects.

On the production side, we believe the major beneficiaries are the large independent oil and gas exploration companies like Anadarko Petroleum whose technical expertise in offshore and onshore oil and gas development should help Mexico boost production. The other beneficiaries should be the service companies like Halliburton and Schlumberger whose product offerings and cutting edge drilling and well completion technologies will be critical to Mexico’s success.

Turning to the infrastructure side, this is a significant development for the Master Limited Partnership (MLPs) and Engineering and Construction companies. The MLPs like Kinder Morgan, Targa Resources, and the Energy Transfer complex will be responsible for transporting natural gas to the newly built natural gas fired power generation. These pipelines will be cross-border pipes sourcing gas from Eagleford Shale in Texas powering the new generation facilities. This in turn should reduce electricity costs in Mexico making business there, more competitive. The Engineering and Construction companies like Chicago Bridge and Iron, Flour, Mastec, and Quanta should be responsible for building the generation facilities, pipelines, and the associated transmission and distribution assets.

We have been long believers that “Energy Renaissance” created by the technological advances in horizontal drilling and well completion would be a significant disruption to conventional energy wisdom. As countries like Mexico, whose long dated resources nationalism has hindered production growth, begin to adopt these technological advances, it only extends the potential growth opportunities for our investable universe. We are often asked in terms of a baseball game “what inning do you think we’re in” of this energy revolution and we believe the game is just beginning.

Certain statements contained herein may contain "forward-looking statements" within the meaning of the Private Securities and Litigation Reform Act of 1995. Such forward-looking statements involve known and unknown risks, uncertainties and other factors which may cause the actual results, performance or achievements of the Fund to be materially different from any future results, performance or achievements expressed or implied by such forward- looking statements. Such factors include, among others, risks and uncertainties associated with the timing and costs of energy sector production, the demand for and prices of oil/gas products, the timing and amount of capital spending in the nation and world wide, and general economic factors. This report is not a recommendation to either buy or sell any securities mentioned.

 

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About ELCO Management, LLC
Established in 1995 and based in New York, ELCO Management (www.elcomanagement.com) offers investment solutions to high net worth individuals and institutions. ELCO also manages two highly specialized energy funds: the ELCO Energy Fund, L.P. and the ELCO Select Fund L.P.