Order book for Pemex’s latest note of US$5.5bn topped US$30bn as investors across the globe are rushing to snap up assets in the energy markets.
Initial pricing thoughts for the triple tranche bonds tightened substantially at the launch, with 6%-low 6% and Libor equivalent for the long five-year fixed and floating tranches settling at 5.5%, and 6.625% for the US$3bn 10-year note, initially set at 7%.
As of Monday, Pemex's 6.875% 2026 bonds were trading up to 26bp tighter over Treasuries, according to MarketAxess.
“Recent Pemex partnership agreements and timely bond placements are votes of confidence from the private sector. Pemex’s new management is making good progress in overhauling the company, redefining investment priorities and stabilizing its finances,” said Martin Castellano, Senior Economist for Latin America at IIF.
Strong investor appetite for the issuance, in which Bank of America Merrill Lynch, Citigroup, JP Morgan, Mizuho and Morgan Stanley acted as bookrunners, appeared to be formed by a combination of positive developments seen in the market in the past week.
Oil prices surged by more than 10% this week, topping the US$55 per barrel mark, following the agreement reached on Monday by OPEC and non-OPEC oil producers to cut production by 1.2 million barrels per day in January.
This created a positive outlook for the industry, leading to a number of major developments in the market.
Mexico’s government came through on its long-awaited plan to open the nation’s energy industry to outsiders for the first time in more than 75 years.
The Central American state’s oil production outputs have fallen steadily for over a decade, from 3.2 million barrels per day to just 2 million this year. In 2013 Mexico’s government had to amend the constitution to allow outside investors into the oil industry, but timed the move badly, as the crude price collapsed and remained depressed for the following two years.
But as the positive dynamic developed over the last few days, Mexico conducted the international auction in which it awarded BHP Billiton the right to develop the Trion field in the Gulf along with Pemex, while seven other blocks in the Gulf were handed to other major oil companies, including Total, Chevron and Exxon Mobil.
According to Bloomberg’s estimates, influx of foreign capital in Mexico’s oil industry could be as high as US$40bn in the next 30-35 years – a development that the Pemex CEO Jose Antonio Gonzalez Anaya called “breath of fresh air”.
“The detailed business plan recently released for this year and next is based on realistic assumptions. It favours partnerships to share infrastructure and capital costs, which seems an efficient way to spur investment in Mexico’s energy sector against a more challenging global backdrop,” Castellano noted.
Following the trend
Pemex is a prolific issuer in the best of times, but with over US$100bn in debt it has become increasingly overleveraged even by today’s standards, as most major market players struggle to balance their books after a dire 36-month period for the oil industry.
The recent surge in crude price led to a number of significant issuances around the world as oil producers looked to capitalize on positive market sentiment to by tapping the bond market.
Russia’s Rosneft recently posted a RUB600bn (US$9.4bn) bond, US-based energy giant Chesapeake raised around US$1bn, while Parsley Energy, Rowan Companies, Matador Resources and other have also tapped the debt markets.
A continued flow of foreign investment would ease the fiscal pressures Pemex is facing, and the company will benefit further from the overall improved conditions in the Mexican economy.
The Mexican peso continued its three-day rally, rising 1.3% to reach 20.33 per dollar – a two-week high. The country also received around US$2.65bn from its 2016 oil hedge; it also hedged for 2017 for oil price at US$42 per barrel via a put option at $38 per barrel.
But this short term positive dynamic is a long way off from compensating the downturn of the past few months, as inflation is projected to rise to 4.1% by December 2017 and Mexico’s account deficit widening to 2.9% of GDP in 2016Q3, up from a historical average of about 1.5%, according to IIF’s estimates. And further uncertainty linked to global factors, like Donald Trump’s trade policies and fragility of the current oil price rally, still pose major risks for the country.
“Weakening growth and higher inflation are likely to take a toll on Peña Nieto’s political capital, which is already at record-low levels,” states the recent IIF report. “This environment could compromise fiscal consolidation efforts, trigger a downgrade, and provide fertile ground for a left-leaning candidate less willing to pursue pro-market policies in the June 2018 presidential elections.”
Pemex is still an integral part of Mexico’s economy, but even if the macroeconomic outlook continues to improve, the company still needs oil price up to around US$80 per dollar to escape from the debt hole it finds itself in. The extent of Pemex’s success in achieving that target is likely to carry major implications for Mexico’s economy as a whole.