Pemex May Issue More Bonds as It Seeks Venture Partners

Petroleos Mexicanos, the country’s largest bond issuer, may sell more debt to fund joint ventures as the government ends its 75-year monopoly on oil production.

Pemex, as the company is known, has identified potential partners and plans to move “very fast” in establishing joint ventures after additional industry reform legislation is approved, Chief Financial Officer Mario Beauregard said yesterday in an interview in Mexico City. Financing to assist with projects in deep water and output from shale formations may be funded by increasing the company’s bond sales, which will total $10 billion this year, he said.

“Projects that we have in front of us are really huge,” Beauregard said at Pemex’s Mexico City headquarters. “We want to reverse the decline in our oil production and need to invest more money in some of our projects. You may see an increase in our activity in the market in the next few years.”

The law approved last year to open Mexico’s energy industry to foreign participants for the first time since 1938 has spurred a reduction in Pemex’s bond spreads, Beauregard said. The reduced spreads are a sign of investor confidence in the future of the company as it transforms from a state-run company to a private one, he said.

Tapping Opportunities

“Pemex needing to borrow to help fund potential partnerships makes sense,” Ray Zucaro, a Pemex bondholder who helps manage $390 million at SW Asset Management LLC, said by telephone from Newport Beach, California. “With the change in legislation, there is certainly a lot of opportunity in Mexico to tap fields Pemex hasn’t had the financial or intellectual capacity to do.”

Lawmakers are holding talks for additional legislation designed to help open up Mexico’s energy industry and Pemex Chief Executive Officer Emilio Lozoya was scheduled to meet with Emilio Gamboa, the majority leader of Mexico’s Senate, at the company’s headquarters yesterday. The legislation is expected to be approved by the first week of August, National Action Party Senate leader Jorge Luis Preciado said July 7.

Dollar-denominated debt from Pemex has returned 8.3 percent this year, data compiled by Bloomberg show. That compares with an average 6.4 percent gain for 372 securities from integrated oil companies globally, a 1.3 percent return on debt issued by Exxon Mobil Corp., the world’s biggest energy company by market value, and a 3.3 percent advance on Chevron Corp. notes.

Too Rich

Pemex has $57.4 billion in long-term debt, the largest corporate issuer in Mexico, according to data compiled by Bloomberg. Yields on Pemex’s bonds due in 2044 have declined 0.77 percentage point this year to 5.31 percent, according to data compiled by Bloomberg.

Pemex’s bonds appear “too rich from a number of angles” and better opportunities for spread tightening can be found in other quasi-sovereign international energy companies, Barclays Plc said today in a research note to clients. Mexico’s reforms will take time to materialize and investors should consider switching from Pemex to Ecopetrol SA, Petroleo Brasiliero SA or Gazprom Neft OAO Via GPN Capital SA notes, Barclays said.

Pemex plans to keep taking advantage of low U.S. interest rates and will remain aggressive in its long-term borrowing plans, said Pemex Treasurer Rodolfo Campos, in the same interview in Mexico City. The company will likely “still be very active in international and local debt markets,” he said.

Chevron Partnership

One of the most important pieces of secondary legislation for Pemex will be the company’s partnership participation options and farming out of projects, Beauregard said. Pemex hopes the legislation will allow Pemex the flexibility to choose “with whom we can join forces,” he said.

Chevron, the world’s second-largest energy company by market value, became the first major international oil producer to reveal partnership plans with Pemex since Mexico signed landmark legislation to reopen its doors.

Chevron is in talks with Pemex for exploration opportunities in deep water, shallow water or shale, Ali Moshiri, Chevron’s president of Latin America and Africa, said May 12 at a conference in Mexico City. “If we focus on those activities where we are more competitive or bring partners to those activities where we are not competitive right now, then I think we will see more compressing of our spreads,” Beauregard said.

Pension Revisions

After secondary legislation is approved, Pemex will resume talks with the union to modify the company’s pension plan to an individual account system, Beauregard said. Pemex’s pension liabilities are worth about 1.3 billion pesos ($100 million) and changing the format could free up capital for other projects, he said.

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. The government is seeking to reduce Pemex’s tax payments, the highest among the world’s top integrated oil companies.

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