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E&P companies in Mexico look to M&A as global trends, local factors weigh on strategies


Global decarbonization efforts prompt a rethink

Accelerated by local policy to halt liberalization

Small onshore operators most likely to seek an exit

Majors likely to share risk and wait for different conditions

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Exploration and production companies operating in Mexico are increasingly looking to exit the market as global trends and local factors weigh on portfolio strategies, observers told S&P Global Platts.

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The decision to explore mergers and acquisitions comes as companies adjust their strategies to global decarbonization efforts, observers said, but the policy of President Andrés Manuel López Obrador of not continuing the liberalization of the sector started by the previous administration has accelerated the trend.

M&A options are being pondered particularly by small exploration and production companies operating contracts in onshore deposits, observers said. International and Mexican companies obtained contracts to explore or develop onshore mature fields during the oil rounds of 2015 and 2016, data from the National Hydrocarbons Commission, or CNH, shows. The fields had been abandoned by state oil company Pemex in the 1980s after the discovery of Cantarell, the largest producing field in Mexican history, and offered proven resources.

Out of the 111 contracts that stemmed from the oil rounds, 48 were for onshore blocks, CNH data shows. Some of those with onshore contracts include international companies Renaissance Oil, Shandong Kerui and Sun Gold, as well as Mexican firms Diavaz, Grupo Diarqco, Grupo R, Jaguar, Newpek and Roma Energy, the data shows.

Some of the onshore operators looking to sell have contracts with small production, said Daniel Sanchez, a partner specializing in the Mexican energy sector at law firm Baker McKenzie.

In June, total crude output by independent companies was 70,000 b/d, with Eni, Hokchi, and Petrofac producing 70% of that. The rest was produced by the other 18 companies operating in the country, CNH data shows.

"In some cases, the main purpose of the companies to participate in the rounds has always been to win the contract that can be sold later," Sanchez said.

Sierra Oil and Gas, an E&P company founded by Riverstone, EnCap and BlackRock shortly before the oil rounds, was the first Mexican company to win interests in six shallow-water blocks as a non-operator and one of the first to find a buyer shortly after the rounds. The company sold itself to Deutsche Erdoel in 2018.

Reaching critical mass

Other companies came to Mexico looking to build portfolios but were unable to reach critical mass by the time the current government decided to cancel the oil rounds, said César Fernández, an international partner at law firm Norton Rose Fulbright who specializes in the Mexican market.

"Those are the most likely to look for an exit, particularly given the impossibility to keep participating in further rounds and the regulatory uncertainty," Fernández said, adding that many of those companies offered the government high royalties to enter the market, hoping that over time, the size of the portfolio would compensate for those costs, and they are finding it hard to justify those costs without a large portfolio.

According to CNH data, the government take in the contracts from the oil rounds was above 70% on average.

Deepwater contracts

The inability to reach critical mass to justify investments and risk exposure affects E&P companies operating deepwater contracts as well.

In that space, there could be some M&A as well, said Marco Biersinger, a director of oil and gas corporate finance at Duff & Phelps, a Kroll business.

For many of those companies, meeting global energy transition goals has become a priority, and that has had implications for their portfolios, Biersinger said.

"Some of them have started buying renewable and carbon capture assets, but their budget has not grown, so they have to rethink their strategy," he said, adding that some were unable to build a competitive strategy.

Fernández also pointed to the interest of companies in the deepwater business, but he thinks they are more likely to share the risk with partners willing to make the long-term bet to operate in the country. In his opinion, the interest in investing in Mexico will remain given the potential.

In July, Russian major Lukoil announced it had agreed to acquire the 50% operator interest held by Houston-based Fieldwood Energy in a shallow-water block in the Gulf of Mexico for $435 million. Fieldwood had won that block together with Mexico's PetroBal, which will remain a partner.

Limited interest

There is not much interest in investing in the Mexican upstream market at the moment, despite the vast resources in the country, said Dino Barajas, chair of US energy M&A at law firm DLA Piper in Los Angeles.

"Hydrocarbons are so aligned with the cultural identity of Mexico that it is one of the sensitive areas for foreigners to invest in," Barajas said, adding that interest in the country will continue. He suggested that perhaps under a different administration interest could resume.

"The resources in Mexico can't be overlooked," he said.