For Pemex, an $84.5 Billion Question in Leftist Lopez Obrador

(Bloomberg) -- Five years after a landmark overhaul of energy laws stripped Mexico’s state oil-and-gas producer of its monopoly, few investors are eager for it to be restored.

So pledges by front-running presidential candidate Andres Manuel Lopez Obrador to turn back the clock are causing jitters among bondholders. The spread on Pemex’s $3 billion bond due in 2027 over similar-maturity Treasuries has widened by 86 basis points since Feb. 1 to 3.25 percentage points, as Lopez Obrador built up his lead in polls.

The reform allowed Mexico to take large swaths of oil reserves and auction them off to the likes of Royal Dutch Shell Plc and Chevron Corp. Pemex, whose full name is Petroleos Mexicanos, was freed up to focus on assets it was already developing. The government bet was that injections of badly needed capital and the introduction of new technologies through new joint ventures would reverse 13 years of production declines.

Any rollback after the presidential election on July 1 would be a “double-edged sword,” said Wilbur Matthews, founder and chief executive officer of San Antonio-based Vaquero Global Investment, which holds short-dated Pemex bonds. The company would have more oil and gas assets but not the partners and technology to make the best use of it all. As it is, Pemex’s “investment plan isn’t sufficient to maintain the level of production they do have.”

Lopez Obrador has threatened to stop auctions of exploration licenses, and to examine contracts already granted for signs of corruption.

Pemex itself is no fan of that. Undermining the progress so far would be a “shame,” CEO Carlos Trevino told Bloomberg TV in March. “The worse-case scenario, in my point of view, is that the speed in which we are implementing the energy reform would be reduced.”

A secondary worry for investors is that a Lopez Obrador administration could return to the old ways of siphoning off cash from Pemex.

Outsized tax contributions, a higher pension liability and implicit fuel subsidies “shackled the company from being able to grow production and grow its expertise because they didn’t have the full resources,” said Michael Roche, a strategist at Seaport Global Holdings LLC in New York.

With $84.5 billion in bonds outstanding, Pemex is the world’s most indebted oil major.

The company “is definitely faced with issues, not the least of which is the uncertainty around whether the reforms in the end will go through and whether contracts will be rescinded in any shape or form,” said Josephine Shea, who helps oversee $1.2 billion in emerging-market bonds, including Pemex notes, as director of emerging-market debt at BNY Mellon. “But do I believe I’m getting paid for it? The bonds reflect the risk that’s in the market.”

To contact the reporter on this story: Justin Villamil in Mexico City at jvillamil18@bloomberg.net.

To contact the editors responsible for this story: Rita Nazareth at rnazareth@bloomberg.net, Anne Reifenberg at areifenberg@bloomberg.net, Jessica Brice, Brendan Walsh

©2018 Bloomberg L.P.