Investors question Pemex's potential investment strategy

Investors question Pemex's potential investment strategy

Capital Markets Debt Energy

Bond investors are questioning Mexican President-elect Andrés Manuel López Obrador's (AMLO) plans to boost investment in state-controlled energy company Pemex.

The strategy, which includes MXN160bn ($8.6bn) in investments in an oil refinery, requires that Mexico tap into several different funding sources. The buyside, however, is unsure how AMLO can ramp up investment without increasing government debt.

"In order to build refineries and process the crude, Pemex needs a large investment," one Europe-based investor said. "And the incoming government is reluctant to increase government debt, so it is difficult to see where all this investment will come from."

Octavio Romero Oropeza's appointment as Pemex's next CEO also raised eyebrows in the DCM community. A government official during AMLO's time as Mexico City's mayor, Romero brings little oil and gas experience to the new role, and Pemex's bonds have widened up to two points across the curve since the appointment was made public.

"Romero has also been a vocal opponent of Mexico's energy reforms, which is something the investor community does not like," a second bond buyer in London said.

While AMLO lacks the two-thirds majority in Congress required to amend the energy reforms, which are also bound by Mexico's constitution, he has pledged to review some oil and gas-related contracts awarded to international companies.

Pemex, meanwhile, may tap the cross-border bond market for between $3bn and $3.5bn, CFO David Ruelas recently told investors.

Last month, Pemex recorded a MXN163bn loss for the quarter. The company had MXN1.96tn in net debt at the end of June this year, compared to MXN1.94tn at the end of June in 2017.

Market conditions heading into September remain jittery at best. Turkey's financial crisis has sent tremors across emerging markets, hammering currencies in Mexico, Argentina and Brazi. 

"Latin America is certainly feeling the effects of what is happening in Turkey," the Geneva-based investor said. But the investor added the DCM pipeline in Latin America still remains healthy, particularly from the Andean region.

But like Pemex, prospective issuers are waiting for improved market conditions before taking on new debt issuances, sources have said.

"Everyone has a pipeline, but it is just not doable right now," one syndicate banker in New York said.

Baa3/BBB+/BBB+ rated Pemex has raised cross-border debt in dollars, euros and Swiss francs this year.