What is your outlook on Mexico’s energy sector this year?
The 2013 energy reforms redefined Pemex as a State Productive Enterprise, with clear guiding principles such as the efficient allocation of resources and value maximisation. In addition, it provides mechanisms to stabilise and increase production, incorporate reserves and improve Pemex’s fiscal regime. It offers an opportunity to make the company more competitive and efficient, and evaluate the development of new businesses with third parties.
The approval of the energy reforms have eliminated previous restrictions, and Pemex is now able to collaborate with as many operators and on as many projects as we deem appropriate, after required documentation to carry out farm-outs and joint ventures (JV) is submitted and approved by the regulators—the Ministries of Finance and Energy, and the National Hydrocarbons Commission (CNH, per its acronym in Spanish).
This year we will see the first outcome from the new regulatory framework, which will be applicable to the upstream business. The Trion block will be tendered in the upcoming 1.4 round in December. Trion holds over 480 MMboe in 3P reserves and is located in the ultra-deep waters of the northern portion of the Gulf of Mexico, within the Perdido Area. This is very close to Great White, which is currently operated by Shell, and to other projects which are being exploited by Chevron, Stone Energy, Marathon, ExxonMobil and British Petroleum. The potential lying in the deep waters of the Gulf of Mexico is huge and is definitely a key component of Pemex’s future success.
Pemex has developed complex technology and know-how for the development of shallow water fields. In fact, Pemex is one of the leading companies in this kind of fields. Although Pemex can share this technology, we also need to partner up with third parties to bring aggregated value to the company, like other oil & gas companies, in order to obtain operational know-how and share risks and investments, especially in deep water projects.
What are some of Pemex’s funding strategy priorities in the medium-term? What are some of the major factors influencing that strategy?
Based on our historical background of being the only oil & gas operator in Mexico for many years and with the mandate to supply the country’s energy needs along with the legal framework that restricted us from accessing various funding alternatives, we have depended on our ability to issue debt to complement any funding requirements we have. Nevertheless, the energy reforms allow for alternative means of financing through JVs, monetisations, divestments and migrations.
Pemex is exploring various financing alternatives under the existing legal framework. This includes collaboration and the forming of strategic alliances with companies that have the technical and economic know-how as well as the capacity along the entire value chain. The monetisation of non-core assets is another option available to us, and is in line with the best international practices. The company would operate monetisation through financial instruments such as FIBRA E, reaping the benefits of the energy reforms without losing the control and operation of the assets.
Pemex sealed two big bond deals this year, each in different currencies. Can you walk us through the strategy on both deals? To what extent is Pemex looking to open up new corridors with Asian lenders?
Some of the most relevant transactions that we executed in 2016 focussed on stabilising and redefining our curves in the traditional markets, diversifying our investor base, taking advantage of opportunities present in the markets, optimising our debt profile and adding liquidity to our most relevant benchmarks.
An important element for this strategy is to be predictable and transparent with our investors, and follow a path that covers our main curves and matches our requirements with those of our most significant bondholders’ in a competitive manner.
Additionally, Pemex is pursuing the company’s objective in diversifying its investor base, continuously assess conditions to incorporate new markets that can provide either promising opportunities or competitive funding, or both.
Pemex has done different transactions in both the local and international markets. As for international market transactions, Pemex sold US$5bn in bonds in January, €2.25bn (US$2.54bn) in March and CHF357mn (US$363mn) in May. More recently, in July, JBIC signed the guarantee for Pemex’s JPY80bn (US$760mn) 10-year Samurai bond. The issue, led by Mizuho, Bank of Tokyo-Mitsubishi and Sumitomo, was 1.8x oversubscribed and carried a yield of 0.54%.
The energy reforms implemented two years ago were seen as crucial, but have been criticised by some. Can you share some insight into any new opportunities currently being explored that have resulted from these reforms?
The legislative process related to the energy reform decree concluded in 2014, and the implementation process is still ongoing. Nevertheless, in these two years important results have been achieved, demonstrating that the energy reforms offer opportunities to make Pemex a productive, competitive and modern company.
Pemex’s operational restructuring was carried out in record time in just eight months. This restructuring seeks to streamline the operations of the company to focus on its core activities; exploration and production and industrial transformation. In addition, the creation of productive subsidiary companies, such as logistics, cogeneration, fertilisers, drilling and ethylene generate competitive advantages by providing auxiliary and complementary services for both Pemex and other companies within the industry.
As previously mentioned, on July 27, the National Hydrocarbons Commission approved the terms and conditions for the bidding process for assignments that include the Trion block, which was an historic day for Pemex. Trion is a strategic field for the company, the industry, and the country. The investments required to productively exploit the field are close to US$11bn. These resources will translate into the development of infrastructure and will drive development in the region.
Another important benefit we received from this reform is related to the revision of the pension scheme. As it was established on the energy reform decree, the Federal Government may equal the savings that Pemex achieves from the negotiations with the union in the same amount. Last year, we announced expected savings of approximately MXN184.5bn. This means that the government will offer Pemex the same amount. In December 2015, we received a MXN50bn promissory note from the government, which will materialise in the next few months.
Furthermore, a new fiscal regime for Pemex was approved within the framework of the energy reforms, which is of significance and benefit because it reduces the tax burden and expands the range of available investments.
Overall the implementation of the energy reforms allows private investment and competition in the activities of hydrocarbon exploration and production, transportation and industrial transformation among others. The reforms will provide Mexico the opportunity to boost oil and gas production and, with it, economic output, which will have a number of positive effects throughout the rest of the economy. It will enable more financial resources and technologies to exploit the country’s vast energy resources without incurring debt or putting public finances at risk.
Latin America has seen stronger capital inflows as the lower-for-longer interest rate environment sets in and as developed market risks (such as Brexit or the potential for a Trump presidency) continue to remain prevalent. Has this changed the tone or dialogue Pemex has with both local and international investors or the terms of deals?
We have been assessing market conditions, and the impact of some global factors carry greater weight than others. International markets are sensitive to economic decisions, as well political, electoral and geopolitical ones. It is very difficult to predict which factors will have a greater impact, and sometimes the markets do overreact.
Over time, we have been continually reinforcing our communication strategies and transparency to improve investors’ assessment on the company and increase their understanding of the Pemex’s assets and credit. Also, we have incorporated global trading services into our local-currency debt, in order to broaden the investor base for these transactions and improve market depth.
What is the single biggest piece of advice you would give to borrowers or issuers looking to come to the markets in Mexico given current market conditions?
Mexico has a positive future. The country has strong macroeconomic fundamentals which are attractive for investors. As for Pemex, important oil and gas potential lies within the activities of exploration and production, and important opportunities can also be found within the downstream and midstream businesses.
For borrowers, our recommendation would be to assess market conditions thoroughly and to listen to financial advisors in order to successfully weather volatility, while remaining open and transparent with current and potential investors to increase their awareness and knowledge of the company.