After yesterday’s report on Argentina corporates, today we focus on Mexico, specifically the government’s economic strategy and state-owned oil giant Pemex. These were key areas of focus for clients during our recent meetings in London.
Although we reiterate our Hold recommendation on Pemex bonds because of their fair valuation, we remain unimpressed with the company’s fundamentals – we regard its long-term outlook as weak and fraught with risk.
Moreover, given the federal budget that the government presented to Congress three weeks ago, it seems unlikely that the state will be able to continue to prop up the company to the same degree as it has previously.
Our view is that, in order to drive up the current low production levels and reduce the heavy debt burden, Pemex’s management will have to return to the previous strategy of allowing private capital to participate in the company. This would involve ending the suspension of the farm-outs and other mechanisms that were implemented under the Peña Nieto administration’s Energy Reform.
We expect low economic growth in H2, mainly a result of the extremely low levels of public (in fact, the lowest level since 1957) and private investment.
This can be attributed to the lack of public works in the pipeline and a crisis of confidence in the private sector, partly a result of the cancellation of the new Mexico City airport, the legal battles between the government and the companies that have built natural gas pipelines (a fight that was only resolved a few weeks ago, by modifying the terms of the original contracts) and a federal budget that seems, to many, overly ambitious.
The budget is particularly problematic because one of the main sources for revenues is Pemex, based on the assumption that the company will be producing c1.9mn barrels of oil equivalent per day (mmboed). This appears to be a highly ambitious target, perhaps even impossible, particularly if the private sector continues to be excluded from exploration and production activities.