One March 18, 1938, the Mexican government nationalized the country’s energy assets and handed them over to the state-owned Petroleos Mexicanos, better known as Pemex. The expulsion of foreign oil interests was such a popular move that March 18 is still celebrated as a national holiday.

Pemex fuels Mexico’s economy, accounting for 40 percent of the Mexican government’s revenues and about 7 percent of its export earnings.

But over the past 75 years, the Mexican government has backed itself into a corner.

Although Mexico is one of the world’s top oil-exporting countries, production from Pemex’s aging fields is declining. As the government has siphoned off Pemex’s profits to fund other national spending programs, the company hasn’t been able to plow enough money back into exploration activities or technology.

Mexico still has plenty of oil, with reserves estimated at 115 billion barrels, but it lacks the capital and technology to efficiently produce those areas itself. That’s a critical deficiency, since about three-quarters of its reserves are believed to be unconventional, in deepwater fields and tough to reach shale formations.

On Monday, Mexican President Enrique Pena Nieto introduced an energy reform proposal to help his country overcome that hurdle.

Geared towards attracting international oil companies back to Mexico’s energy patch, the reform package mainly consists of constitutional amendments that would allow private companies to participate with the government in capital intensive projects. Private investors would then be able to collect a revenue stream from those projects.

Many wonder if the reform goes far enough, though.

For one thing, there’s no move towards the privatization of Pemex. While more conservative Mexican politicians have called for just that, there’s still too little popular support from the Mexican people to make that a feasible option. That’s also why private companies won’t actually be allowed to own the energy assets, which will remain the property of the Mexican government.

So while the government is loosening its grip on energy assets, it’s not just giving them away.

That raises other concerns for international oil companies, especially over the timing of payment. Most major oil companies begin monetizing projects the second the first barrel of oil comes out of the ground but, since they would be paid the cash equivalent of a percentage of oil produced, monetization would come much later in the process. And since the oil companies wouldn’t actually own the assets, just a right to a share of the profits, they might not be allowed to book reserves.

While there’s little to be done about the monetization issue, Pemex and the Mexican government have reportedly been talking with the US Securities and Exchange Commission for nearly eight months about allowing foreign investors to book their profits from the Mexican contracts as reserves.

The response of most multinational oil companies to the reform effort has been largely lukewarm so far, but we suspect they won’t pass up the opportunity to do business in the world’s seventh-largest oil producing country. That will be particularly true as follow up legislation provides additional clarity on precisely what sort of contracts will be up for grabs.

Regardless of the outcome, the proposal is a huge break from Mexico’s past and is widely expected to pass in the country’s Congress. While the leftist Democratic Revolution Party has said it won’t support the constitutional changes, the majority Institutional Revolutionary Party and the National Action Party have enough votes to push it through.

The changes will bring desperately needed international help to the country’s energy patch and may even help curb the corruption in the sector, given the level of transparency most multinational companies need to avoid running afoul of their regulators.

If Mexico can once again grow its oil production, even if more of the revenue is plowed back into exploration and production, any incremental improvement should result in more money in the government’s coffers, which can fund further reform efforts.

The legislation will also be another feather in President Pena Nieto’s cap, to go along with his progress in liberalizing the country’s labor and education systems.

Creating a fairer, more open and less corrupt country will go a long way towards providing more economic opportunities for Mexicans, reducing their reliance on the drug trade and other criminal enterprises that have plagued the country for decades.

If the violence subsides, more business will come to Mexico, creating a long-term virtuous cycle. And the Mexican government has made more progress on that front over the past two years than it has in the past two decades.

Portfolio Update

Since being added to the Long-Term Portfolio on July 24, Credicorp (NYSE: BAP) has gained more than 11 percent, largely thanks to its generally positive earnings report.

Earnings dropped 68.3 percent to USD54.5 million compared to the year-earlier period, but that was largely due to currency volatility as the Peruvian sol declined about 7.5 percent against the US dollar in the quarter.

Given its high level of US-based investors, Credicorp is one of the few companies that report earnings in US dollars, despite the fact that most of its business is conducted in soles.

But net interest income grew by 11.9 percent year-over-year to USD440.8 million, while total loans were up 11 percent to USD21.4 billion.

Investors haven’t been deterred by currency volatility, given Credicorp’s strong growth in local currency terms. Investor spirits were also buoyed by management’s focus on beefing up the company’s bottom line.

The company has enacted tight risk management and improved efficiencies, while continuing to expand its Banco de Credito operations, Peru’s largest bank, at a slower pace. The pace of branch expansion is now expected to be about half that previously planned, now coming in at about 50 new locations this year.

We’re bumping our buy target for Credicorp up to 145.