Daily GPI / NGI The Weekly Gas Market Report / Mexico

Pemex Locks In 2018 Funding Ahead of Election Year Uncertainty

Mexico’s state-owned oil and natural gas company Petroleos Mexicanos (Pemex) earlier this month all but sealed its financial plans for next year with a bond issue of 450 pounds sterling (US$650 million) just before the Mexican Lower House completed a marathon sitting that submitted the complete 2018 federal budget for final approval by President Enrique Pena Nieto.

Next year’s presidential election is due at the beginning of July, with Pena Nieto scheduled to hand over power to his elected successor on Dec. 1, 2018. Mexican presidents serve six-year terms, and there is no re-election.

Election years are often fraught with tension, not least because of the memories of the major financial collapses of 1982 and 1994, which shook not only Mexico but much of the world’s banks and business leaders.

So it is significant that major oil companies from around the world are giving a firm vote of confidence now in the upcoming second deepwater auction under Pena Nieto’s energy reform.

The auction is to be held at the end of January. As of Nov. 9 there were 25 companies that had applied.

That contrasts with the somewhat lukewarm support that Mexico in general and Pemex in particular have been receiving in the financial markets. Brazil, until recently beset by political and business risks, is now able to borrow at cheaper rates than those enjoyed by Mexico. Only recently, the roles have been reversed.

The risks that face Mexico appear to be twofold. One is the potential renegotiation of the North American Free Trade Agreement, or NAFTA. Representatives of Mexico and Canada fear that they may be unable to meet U.S. demands in the talks. Mexican business and political leaders have long regarded NAFTA to be a linchpin of the nation’s economy.

The other risk is political, posed by presidential candidate Andres Manuel Lopez Obrador, who opposes the energy reform, though age and ill health appear to have doused much of the fire from his former oratory.

Lopez Obrador remains the early leader in opinion polls, but Mexican politics is more fluid than ever. New coalitions and alliances have appeared to dilute his impact.

The sterling bond issued Nov. 10 is for eight years at 275-287.5 basis points above comparable British Treasury notes of 3.75-3.875%. British banks Barclays and HSBC handled the issue.

Earlier, in July, Pemex raised $5 billion with two long-term bonds in order to repurchase debt expiring over the next two years.

The company, still 100% state-controlled but no longer a monopoly, reopened two long-term bonds to raise about $5 billion on international markets, using some of the proceeds to repurchase debt expiring over the next two years.

The bill that the legislators sent to Pena Nieto was the second part of the federal budget process. The first stage, which covers expenditures, was completed in September, when Pemex was ordered to produce 39,000 b/d of crude on top of this year’s expected 1.983 million b/d on an allocation that was reduced by 4.6%.

But on the income side of the budget, legislators earlier this month raised their estimate of the export price of Mexican crude to $48.50/bbl from $46/bbl. That, however, remains a conservative estimate. Last Thursday, the average export price of Mexican crude stood at $54.82/bbl.

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