Flash Report /

AMLO hurts Pemex... again

    Rafael Elias
    Rafael Elias

    Director, Latin America Credit

    Tellimer Research
    9 May 2019
    Published by

    The prices of Pemex bonds fell after Mexico President Andres Manuel Lopez Obrador (AMLO) announced today that the tender to build the refinery in Dos Bocas, in his native state of Tabasco, has been declared void. None of the bids came close to the targeted price of US$8.0bn and only one of the bidders said they could complete the refinery by 2022. 

    To put this into context, industry experts have been repeatedly saying that the realistic cost of the refinery would be two-to-three times the US$8.0bn figure and that construction could take 5-7 years, from conception to operation. Thus far, an executive project plan has not been made available to the public, which means that it is difficult for Pemex investors to know the refinery’s capacity, size, and technical and operational plans.

    After declaring the tender process void, AMLO said during his daily conference call that “he had a Plan B from the beginning” and that the construction of the refinery will now be the responsibility of Mexico’s Ministry of Energy and Pemex itself. This is in contrast to his statement with Rocio Nahle, the Secretary of Energy, a few weeks ago when they said they had invited only four companies to bid for the project, given how complex it was, and because those companies were “the best in the world”.

    We reiterate our view that the construction of the refinery would be a mistake and that the funds would be better spent on the company’s oil exploration and production activities. We believe the best way to prop up Pemex’s finances would be to revive the auctions for projects in the deep waters of the Gulf of Mexico, as was originally envisaged in the country's energy reform.  

    However, AMLO has instead frozen any future bids on deep-water projects, insisting on focusing investment in (low margin) refining activities, and refusing to acknowledge the market dynamics that would allow Pemex to purchase refined products at competitive prices abroad. 

    In addition, instead of finding ways to make the company profitable and self-sustainable, AMLO’s strategy (backed by the Ministry of Finance) calls for using the oil stabilisation fund to finance the company’s operations.

    In sum, we believe that: 

    1. The Ministry of Energy and Pemex do not have the expertise needed to build the Dos Bocas refinery;

    2. The current strategy to prop up Pemex is wrong and the use of funds from the stabilisation fund is a one-off solution that does not address the company’s fundamental operational and financial issues;

    3. Rating agencies will take note of today’s announcement and possibly downgrade Pemex to 'junk'; 

    4. The 'Pemex paradox' is likely to continue – ie the company continues to deteriorate, but investors see the credit as a sovereign risk because it can count on ongoing government support. 

    Although we expect the market to eventually catch up with our view and that Pemex bonds will have to start trading on their own fundamentals, we believe the catalyst for this will have to come from rating actions, which we do not believe will take place for at least another quarter, if not longer.

    Thus, for purely technical reasons, we reiterate our Hold recommendation on the Pemex family of bonds.