Mexico Drillers Sign First Farm-Out Deal Without State Oil Giant

(Bloomberg) -- Two upstart Mexican drillers have signed the first farm-out deal in Mexico’s oil sector that doesn’t include state company Petroleos Mexicanos.

Jaguar Exploracion y Produccion agreed to sell a 50 percent stake of three onshore areas in Tabasco and Veracruz to Vista Oil & Gas for $37.5 million, plus contingency payments if oil prices rise above $65 a barrel in the next two years. Vista, Mexico’s first listed crude producer following a $650 million share sale last year, will pay and operate two of the areas that are already in production, while Jaguar will remain the operator of the third exploratory block.

The deal will help Vista “position ourselves in Mexico,” said Chief Executive Officer Miguel Galuccio, former head of Ypf SA and the architect of Argentina’s shale boom. The areas Vista will operate in Tabasco are already known to Galuccio from his prior experience as a Schlumberger executive, he said. "These areas have a lot of potential. This year we are going to conduct a lot of studies, and next year we will drill eight wells.”

Jaguar, a subsidiary of Mexico’s Grupo Topaz, won the blocks last year in competitive bid rounds. Sharing the financial burden of the development of the blocks will allow Jaguar “to grow and participate in other rounds," said Dionisio Garza Medina, founder of Grupo Topaz.

Jaguar will bid in Mexico’s upcoming onshore auction in September, said Medina, which could be among the country’s last should presidential front-runner Andres Manuel Lopez Obrador win elections on July 1. The leftist candidate, who is leading in the polls, has said he would cancel new oil contracts and review those already awarded. That could see farm-outs, or joint ventures in which help in developing an oil area is exchanged for a stake, become one of the only alternatives for oil drillers seeking to enter Mexico.

Other companies are considering farming out areas won in Mexican oil auctions, including Italy’s Eni SpA, which could sell a stake of its two-billion-barrel oil discovery in the Campeche Bay. China’s Cnooc Ltd. has also said it will seek to farm out blocks it won in Mexico’s first deep-water oil auction in 2016.

Galuccio shrugged off market concerns that Lopez Obrador could derail the reforms that opened the country to private investment several years ago, ending three-quarters of a century of state monopoly over the oil market.

Vista could participate in Mexico’s onshore and unconventional auctions in September, and will probably sell shares in New York by the end of the year, he noted. “If you ask me, pragmatism will come first,” he said. “There are always alternatives.”

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