Death of 75-Year Monopoly Can’t Come Soon Enough: Mexico CreditBen Bain and Nacha Cattan
President Enrique Pena Nieto’s plan to loosen Mexico’s 75-year-old oil monopoly is underwhelming the bond market after he unveiled fewer incentives for private drilling companies than his political rivals advocated.
Yields on peso-denominated debt due in 2024 have climbed 23 basis points, or 0.23 percentage point, to 6 percent since the 29-page proposal was released yesterday. Speculation that the plan, which was delayed by a week as Pena Nieto tried to build greater political support, would boost Mexico’s economy had reduced yields this month by 24 basis points. That compares with an average decline of two basis points for emerging-market bonds, according to Bank of America Corp.
Pena Nieto’s energy-reform agenda, the centerpiece of his presidency since taking office on Dec. 1, raised expectations he could bring together Mexico’s political parties to pass laws that eluded his predecessors and introduce private investment to the state oil industry. While the bond rally propelled the peso’s world-beating advance this year, yesterday’s plan would limit producers to profit-sharing contracts that provide less control over the oil than the so-called concessions proposed by the largest opposition party.
“If the goal was to really maximize production, I’m not sure it’s the best system,” Joe Kogan, head of emerging-market strategy at Scotiabank, said in a telephone interview from New York. “The proposal seems a little underwhelming.”
Exxon Mobil Corp., Chevron Corp., Royal Dutch Shell Plc and Repsol SA are among major producers that have expressed interest in Mexican oil fields.
The opposition National Action Party last month offered an energy proposal that includes concessions and would pave the way for a sale of shares in the national oil company, Petroleos Mexicanos, known as Pemex. Emilio Lozoya, the chief executive officer of Pemex, said yesterday in an interview with Radio Formula that a share sale isn’t being considered.
With a concession, the private company takes ownership of its share of the oil at the wellhead. Under a profit-sharing contract, the oil would remain the property of the state, with the driller getting a cost reimbursement and a pre-agreed share of the net income.
Banco Santander SA analysts David Duong and Alejandro Rivera said in a note to clients today that Mexico’s fixed-income and foreign exchange markets “could trade under pressure until the prospects for an agreement become more evident.”
The Mexican peso has depreciated 0.8 percent in the past two days to 12.7241 per U.S. dollar. It’s still up 0.9 percent this year, the best performance among 16 major dollar counterparts. The president’s office declined to comment yesterday on the market’s reaction to his plan.
“It’s not strange to me that some would have wanted a regime with concessions where assets or oil profits are transfered to investors, but I think this is a model that keeps the property and profit and that will allow us to attract capital to develop the sector,” Finance Minister Luis Videgaray said today in an interview with MVS Radio, according to a transcript.
Pemex, which is the third-largest crude oil exporter to the U.S., paid about 55 percent of its $127 billion in revenue in taxes in 2012. July oil output slid to 2.48 million barrels a day, the lowest in almost 18 years, Pemex said this month.
Pena Nieto, the 47-year-old former governor who returned his party to power in December, opted for risk-sharing contracts similar to those used in Ecuador, Bolivia and Iran, rather than a concession model, Energy Minister Pedro Joaquin Coldwell said. The state would retain ownership of oil reserves.
“The private partner could be held back somewhat by having to make up for Pemex’s inefficiencies,” Rafael Elias, Latin America fixed-income strategist at Credit Agricole SA in New York, said in an e-mailed statement.
Duncan Wood, director of the Mexico Institute at the Woodrow Wilson International Center for Scholars in Washington, says the president’s plan “may disappoint some people” who think that concessions give more incentives for private companies.
Oil at all stages of production, refining and distribution has been the legal property of the Mexican people since 1938, when then-President Lazaro Cardenas seized fields from U.S. and British companies and changed the nation’s charter. The expropriation is celebrated every March 18 and trumpeted as a point of pride in schoolchildren’s textbooks.
Even without concessions, Pena Nieto’s plan represents “a historic moment,” Alejandro Urbina, a money manager at Chicago-based Silva Capital Management LLC, which oversees $800 million in emerging-market assets, said in a telephone interview.
Because the plan was “pre-negotiated” with the opposition, “it’s something that’s going to get done,” Urbina said.
The energy plan may add 1.5 percentage points to the nation’s potential economic growth, Barclays Plc said yesterday in a note. When combined with the boost from labor and telecommunications reforms, growth may reach 5.8 percent in the “medium term,” the bank said. The Mexican central bank projected last week that Latin America’s second-biggest economy will expand by 2 percent to 3 percent this year.
The extra yield investors demand to own Mexican government dollar bonds instead of Treasuries fell five basis points to 197 basis points at 4:38 p.m. in Mexico City, according to JPMorgan Chase & Co.’s EMBI Global Diversified index.
Mexico’s five-year credit default swaps, contracts that protect holders of the nation’s debt from non-payment, fell four basis points to 114 basis points, according to data compiled by Bloomberg.
While Pena Nieto’s proposal amounted to a “realistic reform,” it fell short of expectations that the government would allow an even wider opening to private-sector investment in energy, Carlos Hermosillo, an equity analyst at Grupo Financiero Banorte SAB, said in a telephone interview from Mexico City. “The market was expecting a rather more aggressive reform than what we got.”