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Morgan Stanley Targeting Mexico Energy for Private Equity

Morgan Stanley is preparing to invest millions of dollars in Mexican energy companies as the nation opens up the industry to private capital and state-owned oil producer Petroleos Mexicanos boosts spending to a record.

The New York-based bank’s Mexican private equity venture tapped Jesus Reyes Heroles, a former chief executive officer of Pemex, to identify promising energy companies. The venture will invest between $35 million and $110 million in each, he said in an interview.

“We already have a pipeline of potential projects and should be able to announce one or two investments in a couple months,” Reyes Heroles said by telephone from Mexico City.

Domestic energy companies that provide services such as pipeline maintenance and drilling to Pemex and which need cash to boost growth are possible targets, he said. The state-owned company has more than quadrupled investments during the past decade as it seeks to stem seven years of declining output.

Pemex, based in Mexico City, is investing about $269 billion in the ten years through 2019 after output last year slumped to 2.55 million barrels on average, compared with as much as 3.38 million barrels a day at its peak in 2004.

Oil reform in 2008 opened exploration and production projects to private and foreign companies for the first time since 1938. Last year, Pemex awarded two blocks to Petrofac Ltd. and one to Schlumberger Ltd. to produce crude from aging fields. The state-owned producer is now offering six more developments, including offshore fields, to private developers.

‘Well-Kept Secret’

“The large size of Mexico’s private industry in the energy sector is a very well kept secret, and it’s poised to keep growing,” Reyes Heroles said.

A second former Pemex CEO, Luis Ramirez Corzo, is also betting on opportunities for private equity in Mexican energy. Ramirez was named executive president of Integradora de Servicios Petroleros Oro Negro, aiming to pursue investments in oilfield services, according to a Feb. 27 statement. That firm is affiliated with Temasek, Singapore’s state-owned investment company.

“There is a different dynamic now, where some Pemex contractors can evolve from suppliers to operators,” George Baker, a Houston-based energy consultant, said in a telephone interview. Besides funding, what some Mexican companies need is expertise to offer skills that Pemex doesn’t have, he said.

Reyes Heroles said other global financial institutions have expressed interest in ‘pigygybacking’ on Morgan Stanley’s Mexican energy capital investments.

‘Cover Projects’

“We felt those funds, plus Morgan Stanley’s, should be enough to cover our projects for the first two years,” he said.

“Once we can make a company to grow two to three times its current size we can eventually consider them for a public offering,” Heroles said. “It’s a terrible paradox, that despite the large size of the energy sector in Mexico there is not a single energy company listed at the Bolsa.”

After the 2008 law changes, Pemex is replacing some service contracts to prioritize efficiency over price. The company is opting not to renew the lease of shallow-water drilling rigs in the Gulf of Mexico when it can find newer equipment for the projects, Carlos Morales, head of production, said last year.

Some companies providing services to Pemex lack the financial resources to access state-of-the-art technology, said Gonzalo Gil, co-chief executive officer of Oro Negro. “Given the inevitability of Pemex’s investment plan, we see a long-term demand for many services,” Gil said.

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