A Mexican Oil Boom in the Making: How You Can Profit from a Proven Operator

It was originally an American who struck oil near the port town of Tampico, Mexico.

Wisconsin-born Edward Doheny was an oil tycoon who drilled a successful well in Los Angeles in 1892. It set off an oil boom, and Doheny sold out in 1902, making a fortune.

He then headed to Mexico, where his company hit a gusher in 1916 near Tampico. The oil shot up nearly 600 feet in the air, raining over a two-mile radius. It could be heard 16 miles away. It became the largest oil well in the world… and put Mexico in the front rank of oil producers.

That was a long time ago. The Mexican government eventually nationalized oil, and a long period of decline set in. But that’s been reversed after seven decades.

Private companies are again at work in Mexico. This is very exciting because Mexico is practically virginal territory. With a sweep of its regulatory hand, another Mexican oil boom was born.

From The Wall Street Journal, on Nov. 5:

“A boom is coming,” Joel Vázquez, the head of Mexican-Canadian drilling company DCM, said at his downtown office here. “Not a week goes by without an oil company contacting us asking about making a joint venture or saying they’re interested in investing here.”

In the coming weeks, Mexico’s government plans to unveil terms for the first auctions of oil exploration blocks under the new energy law. Bidding, set for next year, is expected to attract heavy interest from big and small companies alike. Of the 169 blocks up for grabs, 47 lie within 70 miles of Tampico.

Pacific Rubiales, the big Colombian producer, set aside $1 billion to invest in Mexico. A Mexican startup called Sierra Oil & Gas raised $500 million to spend on drilling. But I want to draw your attention to DCM, mentioned in the WSJ quote.

DCM is a joint venture between Mexico’s Grupo Diavaz and… CanElson Drilling (CDI: tsx; CDLRF: otcbb)! Here I will provide an extended excerpt from the WSJ on the JV:

“[The JV] is in charge of drilling the Ébano oil field, an area of green woodlands encircled by swamps. The field, 40 miles west of Tampico, is where Mexico’s first oil well was drilled in 1901 by Mexican Petroleum Corp. founder Edward Doheny…

DCM’s Mr. Vázquez predicted that oil output at Ébano would increase over the next five years, to about 40,000 barrels a day, from 11,000 now.

Mexican contractors such as DCM eventually could bid for small blocks. “We will be able to work as service contractors for big private oil firms and at the same time be their competitors,” Mr. Vázquez said.

At the Ébano field recently, DCM engineer Alejandro Carrasco stopped his pickup truck on a dirt road and pointed at the two drilling rigs piercing the horizon. “The idea is to turn this into a sea of drilling towers,” he said.

No wonder when this story broke that CanElson’s stock rose almost 8%.

The oil and gas sector has been nasty, as I am sure you know. The market has not spared CanElson’s stock. It’s 40% off its highs as the market chopped about a quarter off the price of oil. Bearishness on the price has set in.

I have no idea where oil will go. But I think CanElson is in great position to profit from the budding Mexican oil boom. And the market sell-off in oil-related stocks has created an opportunity to get shares at a good price. On a free cash flow basis, CanElson is a bargain compared with its Western Canadian peers. See the chart below.

DRH_CanElson_011915

Yet CanElson consistently outperforms the industry on a number of metrics, such as return on equity. It also has a better balance sheet with low debt. And insiders own 7% of the stock, and they are really good operators. On top of all, CanElson pays a 6 cent quarterly dividend. As I write, the stock is C$5.61 — for a yield of 4.3%.

You’re supposed to buy when things are tough. Anything oil and gas right now is a scary buy, I admit. But there are smart bets to make with proven operators in companies with good balance sheets. CanElson fits. If the price of oil and gas continues to go lower, CanElson won’t be immune. It will survive the downturn, however. And you’ll get some yield while you wait.

Besides, there is that Mexican oil boom, which may prove a big opportunity for CanElson’s JV down there. There are billions of dollars headed there for drilling. If CanElson’s JV gets just a fraction of that, it will make a big impact on the stock.

I’ll end with another quote from Vázquez, opining on the opportunity in the Golden Belt.

“It’s not easy to operate here,” he said. “But there’s one thing that will persuade all of us: money. You can make a lot of money here.”

Sincerely,

Chris Mayer
for The Daily Reckoning

P.S. Ever wonder how you can make a lot of money from oil without owning a well? Or whether or not you should buy gold and silver? Or is fracking just a flash in the pan? Get insight, insider scoops and actionable investment tips twice a week with Daily Resource Hunter? Just click here for a FREE subscription!

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