Death of 99% Pemex Tax Soothes Oil Monopoly Fate: Mexico Credit

President Enrique Pena Nieto’s plan to reduce state-owned oil producer Petroleos Mexicanos’s tax burden while giving it first rights on prospects is enriching investors with Mexico’s biggest bond-market gains.

Pemex’s $2.3 billion of notes due in 2035 have returned 9.9 percent in September, the most among $84 billion in outstanding dollar-denominated bonds issued by 120 Mexican corporate borrowers. The advance is also quadruple the 2.4 percent gain for the Bloomberg USD Emerging Market Corporate Bond Index.

Pena Nieto’s proposal last month to end Pemex’s 75-year monopoly on oil production came with perks, including cuts to an effective tax rate that exceeded 99 percent last year, the highest among the world’s biggest oil producers. The bill also gives Pemex priority in the choicest drilling blocks, helping to assuage concern it would be penalized as the government sought to attract outside investment, Bank of Nova Scotia said.

“It’s now clear that the major parties agree that the government must seek other sources of revenue besides Pemex’s sales,” Alejandro Urbina, who helps oversee $800 million at Silva Capital Management LLC, said in a telephone interview from Chicago. “When you have this type on consensus among the main parties around an issue, like Pemex taxes, then you can expect it will be part of the new law.”

Tax Savings

Officials in the press department of Mexico City-based Pemex didn’t respond to a request seeking comment on the performance of the bonds.

Pemex estimates the tax cuts could reach at least $10 billion a year, almost 15 percent of the $69 billion that it paid in 2012.

The oil producer paid 99.5 cents for every dollar of the $71 billion in pretax revenue it generated last year, data compiled by Bloomberg show. The average for integrated oil producers was 35 percent, while Petroleo Brasileiro SA, Brazil’s state oil company, paid 25 percent, the data show.

Pena Nieto is trying to attract investment from private companies such as Exxon Mobil Corp. and Chevron Corp. by giving them the chance to pump crude oil in Mexico for the first time since 1938 through changes to the constitution. While parts of the government’s proposal have met with opposition from the two main opposition parties, there’s agreement on the plan to reduce Pemex’s tax burden.

“All the proposals favor Pemex,” Araceli Espinosa, a fixed-income strategist at Bank of Nova Scotia in Mexico City, said in a telephone interview.

Stimulus Maintained

Pemex’s bonds have gained along with Mexican government notes, which have advanced this month as the federal reserve opted to maintain its $85 billion of monthly bond purchases.

The flood of cheap money known as quantitative easing has suppressed borrowing costs and pushed investors into emerging markets seeking higher returns. Pemex is rated Baa1 by Moody’s Investors Service, the same as the Mexican government.

Even so, the extra yield investors demand to own Pemex 2022 bonds instead of similar-maturity Mexican government notes decreased by 0.05 percentage point to 0.67 percentage point this month, according to data compiled by Bloomberg.

That gap could narrow by 0.3 percentage point more after the reforms are approved, said Espinosa.

‘Round Zero’

Energy Minister Pedro J. Coldwell said Aug. 12 that under the proposed industry revamp, Pemex would get the right to choose which fields to keep -- a process known as “round zero.” In addition, the company won’t be obligated to participate in other drillers’ projects.

The system “lets Pemex choose the most profitable projects without competing against private companies,” Alejandra Leon, a Mexico City-based analyst at IHS CERA, said in an interview. Pemex is expected to keep most projects in the shallow waters off the Gulf of Mexico coast “because that’s the area where they already have the experience and technology.”

The extra yield investors demand to own Mexican government dollar bonds instead of Treasuries widened four basis points to 206 basis points at 1:21 p.m. in New York, according to JPMorgan Chase & Co.

The cost to protect Mexican debt against non-payment for five years with credit-default swaps rose seven basis points to 122 basis points, according to data compiled by Bloomberg. Credit-default swaps pay the buyer face value in exchange for the underlying securities or the cash equivalent if a borrower fails to adhere to its debt agreements.

The peso fell 0.6 percent to 13.1443 per dollar.

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