PEMEX, the world’s most indebted major oil company’s bonds hover at record
(Bloomberg) — Bonds sold two years ago by Petroleos Mexicanos, the world’s most indebted major oil company, are trading close to a record high as the state company stabilizes production, ratings companies back away from credit downgrades and global investors step up their hunt for yield.
Pemex bonds due in 2027 have climbed by almost a fifth since their November 2018 lows, trading at about 109 cents on the dollar even as the sprawling firm struggles to meet an ambitious government production target.
“While there are some goals that have not been met, such as the expected level of production, production has stabilized,” said Luis Gonzali, a Mexico City-based money manager at Franklin Templeton, which holds Pemex debt. “Very attractive rates, coupled with the willingness to pay, makes Pemex’s debt desirable for investors.”
Pemex was buffeted last year by a Fitch Ratings downgrade in June to junk. A similar move by either Moodys Investors Service or S&P Global Ratings would almost certainly lead to Pemex’s removal from investment-grade indexes around the world and a subsequent forced sell-off.
Yet Mexican President Andres Manuel Lopez Obrador has vowed to do whatever is necessary to support the oil company. In January, Barclays analysts wrote that despite issues faced by Pemex, Mexico has ample resources to help it. And UBS analysts led by Rafael De La Fuente said last week that Moody’s will probably wait until at least April, when first-quarter results are due for release.
Pemex debt as a whole has returned 27% since the 2027 bonds hit their nadir, compared with 17% for U.S.-dollar emerging-market bonds on average. That’s still lesss than the 29% that Mexicam government bonds returned in that span.
Any optimism may not last long. Pemex faces an uphill climb to reverse more than a decade of production declines, and would have to increase output by 13% to meet the government’s ambitious 2020 objective. Missing it would renew pressure for a downgrade to a company with a debt burden north of $100 billion. Pemex averaged 1.706 million barrels of oil a day in December, 64,000 daily barrels shy of its target.
Investors have about six months before Pemex comes under renewed scrutiny, said Eduardo Suarez, the Mexico City-based head of Latin American economics at Scotiabank. The 2027 bonds pay about 233 basis points of yield over similar-maturity sovereign debt, compared with 150 basis points when they were sold.
“At these spreads, people feel like they’re being well-paid for the risk, which I agree with,” he said. “It’s like having drinks on the Titanic, but we still haven’t hit the iceberg.”
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