Despite accident at sea, PEMEX bonds have risen this week

(Bloomberg) — Petroleos Mexicanos (PEMEX) bondholders are reaping the benefits of the government’s support for the state oil company — even after it accidentally set the sea on fire.

The world’s most indebted oil major made global headlines on July 2 as apocalyptic images of the blaze circulated on social media, drawing criticism from people including activist Greta Thunberg and U.S. Congresswoman Alexandria Ocasio-Cortez.

Bondholders were more lenient. The company’s $3.8 billion of benchmark 10-year notes have climbed this week, extending last week’s 1.2% gains. The bonds are trading above 98 cents on the dollar, close to the highest in three weeks, and well above the 84 cents they were sold at when the bonds priced in October last year.

Investors turned a blind eye to the pipeline accident after the energy ministry designated Pemex as the operator of the nation’s largest oil discovery by private companies, over the objections of a consortium led by Talos Energy Inc. The government announced its decision to award Pemex the Zama field, as the discovery is known, just days after the gas leak.

“Zama is really just another step in showing how the government is standing behind the credit,” said Roger Horn, a senior strategist at SMBC Nikko Securities America in New York. “The leak looked scary, but the company says it’s not a serious risk.”

In a statement on Monday, President Andres Manuel Lopez Obrador said that the damage from the leak has been contained and that an investigation into the cause has already begun. A presidential spokesperson didn’t respond to a request for additional comment.

Mexico First

The latest demonstration of the government’s commitment to Pemex makes the 324 basis-point spread of its bonds above Mexican sovereign debt an attractive prospect, said Horn.

Still, Pemex remains mired in deep problems.

The company’s debt burden has ballooned to almost $114 billion, even as it struggles to increase a decades-long decline in production. In the first quarter, Pemex managed to increase oil output from the last quarter of 2020, though it remained 1.4% below the year-earlier figures. Despite the gains, the company still posted a $1.9 billion net loss in the first quarter.

Luckily for the company, the government’s support has been consistent.

President Lopez Obrador has pursued a policy of Mexico-first since taking office in 2018, seeking to shore up the nation’s aging state companies. Earlier this year, he backed legislation to prioritize Pemex’s oil claims by scrapping a program to open the nation’s oil sector to more private industry investment.

Driving Advances

While that bill has been suspended by Mexican courts, it’s served as a clear signal to markets that Lopez Obrador’s administration will continue to protect state assets. That, coupled with an improving external environment of climbing oil prices and falling Treasury demand, is driving Pemex bond advances.

“Higher oil prices and the rally in U.S. Treasury yields” have helped considerably, said Jens Nystedt, a portfolio manager at EMSO Asset Management in New York. “The administration’s support remains very strong.”

Elsewhere in the market, Mexican bonds climbed over the week, joining advances in both peso-denominated and dollar-denominated sovereign credit.

In the last data release, Mexican consumer prices rose 5.88% in June from the year earlier, while core inflation reached 4.58%, the fastest pace since December 2017. The reading, coupled with Banxico minutes, will likely sustain expectations of substantial rate hikes in the rest of 2021. Mexico’s TIIE swap curve currently prices in more than 110 basis points of tightening before year-end, with almost a two-thirds chance of a 25 basis-point increase next month.

Next week will be light on data releases. Mexico will report May industrial production figures, June formal job creation numbers, and ANTAD same-store sales. International reserves up to July 9 are also due.

Source: Bloomberg



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