Investors advise three-pronged strategy for Pemex

Investors advise three-pronged strategy for Pemex

Bonds Debt Capital Markets Corporate & Sovereign Strategy Economy & Policy Energy Regulation Politics Mexico

Mexico's state-owned oil company Pemex could pursue a three-pronged strategy to win over investors, one that goes beyond the tax breaks offered by President Andrés Manuel López Obrador, LatinFinance has heard.

"If I were them, I would lower taxes, lower the royalty burden and do a cash injection to show they are serious and free the company's cash flow to increase production and pay more dividends," said Ray Zucaro, CIO at RVX Asset Management in Miami.

AMLO repeated plans this week to lower the taxes that Pemex pays and have more money to spend on increasing production.

The finance ministry had said the government will cut Pemex's taxes by about MXN11bn ($576m) per year. The AMLO administration has also outlined a MXN25bn capital injection for Pemex in the 2019 budget.

Pemex's bonds have rallied on AMLO's remarks and they now trade at 150bp over Mexico's treasury bonds, up from a historical spread of around 50bp and higher than bonds from Brazil's Petrobras and Russia's Gazprom, Zucaro said.

But Pemex needs to act quickly if it plans to sell bonds anytime soon because it reportedly has $10bn in financing needs this year and faces $5.3bn in debt payments in May.

Pemex officials met with investors in January, but the company may have missed its chance to issue new dollar-denominated notes in the cross-border bond market after Fitch downgraded it two notches to BBB-, or just one step above junk status.