Pemex Beating Exxon on Planned Cut to Tax Burden: Mexico Credit

Petroleos Mexicanos is beating global oil producers from Exxon Mobil Corp. to Chevron Corp. in the bond market as lawmakers move closer to approving rules to lower the company’s taxes.

Dollar-denominated debt from Pemex, as the state-owned company is known, has returned 8.3 percent this year, data compiled by Bloomberg show. That compares with an average 6 percent gain for 372 5securities from integrated oil companies globally, a 1.3 percent return on debt issued by Exxon, the world’s biggest energy company by market value, and a 3.3 percent advance on Chevron notes.

Congress is debating rules this week to implement the most sweeping constitutional changes to the nation’s energy policies in seven decades. The government is seeking to reduce Pemex’s tax burden, the highest among the world’s top integrated oil companies, and open the energy industry to more foreign investment to reverse nine years of output declines. Pemex, which last month had its credit rating lifted to the highest ever by Moody’s Investors Service, paid $66 billion in taxes, equal to 54 percent of its sales, in 2013.

“It’s a sign of the trust that the market is putting in the government’s ability to deliver on its promises,” Joe Kogan, an emerging-market strategist at Bank of Nova Scotia who recommends buying Pemex debt, said in a telephone interview from New York. “The positive is reforms that make Pemex more competitive such as a lower tax burden, ability to work with foreigners, better corporate governance.”

Foreign Investment

President Enrique Pena Nieto pushed through changes to Mexico’s charter in December that will let foreign companies drill for oil in the country for the first time since 1938. Exxon and Chevron, along with Royal Dutch Shell Plc and Repsol SA, have expressed interest in Mexican oil fields, which contain about 113 billion barrels of prospective reserves. The reforms may add $20 billion to foreign-direct investment as soon as 2015, according to Bank of America Corp.

Alan Jeffers, a spokesman for Exxon, declined to comment on the performance of Pemex’s debt.

Isabel Ordonez, a spokeswoman for Chevron, the world’s third-largest energy company by market value, declined to comment on the state oil company’s bond rally.

Pemex officials didn’t respond to an e-mail and phone call seeking comment on the performance of the company’s bonds and investor speculation that the legal changes would reduce its tax burden.

Bond Yields

Yields on Pemex’s bonds due in 2044 have declined 0.83 percentage point this year to 5.32 percent, according to data compiled by Bloomberg.

Lawmakers will vote on the specific regulations for opening the industry and establishing Pemex’s new tax structure within the next month, Senator Jorge Luis Preciado, head of the opposition National Action Party in the Senate, said this week.

Mexico City-based Pemex has said the reforms may lower its taxes by $10 billion annually. Its effective tax rate rose to 124 percent last year, the highest among integrated oil companies globally that disclosed financial statements, data compiled by Bloomberg show. The rate reflects the company’s income tax expense divided by pretax income in a 12-month period.

Mexico is seeking to reduce its reliance on crude revenue, paring the percentage of its federal budget that comes from oil to 27 percent by 2018, from 34 percent.

Pemex Outlook

“Pemex has the potential to be a much more efficient and bigger company,” David Bessey, who helps manage $28 billion in emerging-market debt including Pemex bonds at Prudential Financial Inc., said in a telephone interview from Newark, New Jersey.

Michael Roche, a fixed-income strategist at Seaport Global Holdings LLC, said the benefits from the energy-law overhaul are already reflected in Pemex’s bonds, leaving little room for further gains.

The rally is nearing “exhaustion” and additional advances will be “small,” Roche said by phone from New York.

The extra yield investors demand to own Pemex’s 2044 bonds instead of similar-maturity debt from Shell has narrowed 0.47 percentage point this year to 1.02 percentage points, according to data compiled by Bloomberg.

Mexico’s peso rose 0.1 percent to 12.9636 per dollar at 3:15 p.m. in New York.

Moody’s raised Pemex’s rating to A3, the fourth-lowest investment grade and in line with Mexico, on June 19, saying the legal changes should help improve the company’s corporate governance and access to exploration and production technology.

“Investors take a look at the Pemex credit and they tie it very closely to what they think about Mexico,” Prudential’s Bessey said. “The energy reform is clearly a positive.”

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