Aid from AMLO to Pemex for US $ 20,000 million would not be enough

Mexico’s President Andrés Manuel López Obrador has done everything possible this year to assure investors that the aging state oil company will not only survive, but also prosper.

This week, it announced a US $ 3.5 billion capital injection into Petróleos Mexicanos and plans to create a new five-year business plan and a series of bond market transactions to reduce the debt burden. That is in addition to initiatives this year to take over debt payments, reduce taxes and review management. López Obrador told investors that Pemex’s debt is as safe as sovereign.

The campaign has been a failure to bondholders, even as the price of oil has risen 40% since December. The additional yield on Pemex bonds maturing in 2047 versus government securities of similar maturity is back where it was at the beginning of the year, stagnant near 390 basis points.

The disappointing response to the extraordinary levels of support for Pemex underlies how bleak the outlook is for the company, which faces the same existential questions that haunt other oil majors in this age of climate change, and which also struggles to halt the decline in production or boost its dwindling reserves.

In total, Pemex will receive more than $ 20 billion in combined tax breaks, capital injections and financial aid during López Obrador’s term. However, investors consider these to be patch measures unlikely to offer long-term solutions.

Alejandro Di Bernardo, strategist of Jupiter Asset Management in London, he said there must be a credible plan to shore up Pemex’s operations, not just its financial profile.

“The injection of capital doesn’t really move the needle that much ”, He said. “For bonds to compress significantly on sovereigns, I think we need to see a concrete plan of action from the Government.”.

The long history of Pemex in Mexico it has turned it into an institution and for years it produced dividends that financed large portions of the federal budget. But its debt has never been explicitly guaranteed by the government, and in recent years investors have questioned its viability without such support.

The company is $ 113 billion in debt, higher than any major oil producer, and is struggling to reverse more than a decade of declines in crude production and relies heavily on the federal government being willing to follow through. paying bondholders.

Pemex He replaced its chief financial officer last week amid concerns that he might not be able to win investors’ trust. The company may also end up spending nearly double what it originally projected to take over Royal Dutch Shell Plc’s Deer Park refinery.

The most recent attempt to prop up the producer came on December 6, when officials announced the capital injection. The state oil company will receive the funds as part of a liability management transaction that includes the issuance of new dollar-denominated bonds and the repurchase of old securities. Wednesday in a note, Moody’s Investors Service He said that the operation was positive credit.

The five-year business plan will be reviewed “to strengthen its financial position in the medium and long term, as well as to prepare Pemex for the challenges that the energy sector will face”According to a statement.

But for investors of PemexIt has been a year of frustration. Yields on the $ 6 billion of bonds maturing in 2047 have risen about 0.6 percentage points to 7.9%.

Still, investors sold out the company’s $ 1 billion bond sale this week and bought 10-year instruments with a 6.7% yield. The lawsuit highlights Pemex’s relatively strong returns since López Obrador took office in late 2018.

It is a company with a speculative grade rating and high coupons, for whose debt the holders of bonds maturing in 2047 have obtained an average annual yield of more than 9%, well above the average of 6.2% of the country’s quasi-sovereign bonds. Developing. Pemex has outperformed most of its regional peers, except for Petróleo Brasileiro SA.

And while bonds have suffered in 2021, they may have fared much worse without the support López Obrador has provided. Investors appreciate knowing that he backs the company, even if they still see long-term hurdles ahead.

“Had AMLO not expressed such support for Pemex, spreads would likely have widened much more”Said Jens Nystedt, EMSO’s senior portfolio manager in New York, saying he is still betting on Pemex bonds.

Luis Maizel, co-founder of LM Capital Management in San Diego, California, said that while he is happy to maintain his position in the debt of Pemex Thanks to the government’s implicit guarantee, López Obrador has yet to offer a real plan. According to him, spreads will only be significantly reduced if the government can provide the company with more than partial support.

“They’re kicking the can a little further“Said Maizel. The investors “They need to see that somehow Pemex can find a way to reduce its money needs and start making money.”.