After almost a year without tapping the bond market, Pemex is set to make a big comeback. The company has mandated a number of investment houses to issue a series of USD-denominated bonds in three tranches: a 7-year, a 10-year, and a 30-year offering, expected to be launched tomorrow (12 September), subject to market conditions. Pemex had stayed away for the most part for practical reasons and because it had been funding itself from the banking system through a series of syndicated loans.
The proceeds from the new three-tranche bonds will be used to fund a portion of the refinancing of outstanding short-term debt and US$ bonds. The company sees this series of bonds as “liability management” and will be launched concurrently with the sovereign (the United Mexican States or UMS), which is contributing cUS$5.0bn to Pemex in the form of a capital injection. This sum is expected to be funded with “assets in the treasury”, according to a company statement.
In sum, proceeds from the new bond offerings will be used to refinance short-term debt as well as intermediate and long-dated Exchange Offers (comprising US$ bonds with 2022-2025 and 2041-2048 maturities) in order to achieve an extension in maturities. The US$5.0bn capital injection will be used to refinance short-dated US$ bonds with maturities ranging from 2020 to 2023.
According to Bloomberg, JPMorgan Chase, Goldman Sachs, Citigroup and Bank of America are among the banks working on the transaction.
We believe this is a good starting point for Pemex and Mexico’s Ministry of Finance to “defend Pemex’s ratings”, as stated by Finance Minister Arturo Herrera. However, we also believe that these amounts might be insufficient, particularly since the 2020 budget envisages Pemex will be producing c1.9mn barrels of oil per day (mmbpd), when the last results showed the company producing only a little over 1.6mmbpd. Although both the company and the Ministry of Finance insist that the production increases will come from onshore and shallow water fields, we believe such fields are too mature to generate the expected increases in the budget.
We echo the hopes of many investors and industry specialists that when the government finally realises it will be practically impossible to reach the levels of production laid out in the budget (especially from onshore and shallow water fields), they will re-open bids for exploration and production by the private sector in the deep waters of the Gulf of Mexico, where the highest volumes of new oil reside.
We reiterate our Hold recommendation on Pemex’s bonds for purely technical factors.