Investors Keep the Faith in Pemex After Rig Fire Slashes Output

(Bloomberg) -- It seems that every blow to Mexico’s state-run oil company just reinforces bondholders’ faith in its long-term outlook.

Debt issued by Petroleos Mexicanos, or Pemex, rallied this week even after a fire engulfed one of the company’s oil platforms and temporarily took a quarter of its production off-line. Rising oil prices were one reason, but perhaps more importantly the disaster highlights investor confidence that the government will step in to help out the oil major if needed. 

“Every time something bad happens -- like a fire knocking out a quarter of production -- it just increases the likelihood of another demonstration of government support,” said Roger Horn, a senior strategist at SMBC Nikko Securities America in New York. “Many investors have long given up looking at Pemex as an oil credit and instead consider it an old school quasi-sovereign.”

The company’s bonds tracked oil prices higher in each of the three days after the blaze that killed at least five workers late Sunday. The $3.8 billion of debt maturing in 2031 gained 0.9 cents on the dollar to 96.68 cents, though the notes weakened on Thursday. The credit even outperformed other oil majors like Petroleo Brasileiro SA and Exxon Mobil Corp. Pemex’s bonds have returned 0.5% in the past three months, compared with the 1.5% average of quasi-sovereign debt in emerging markets. This week, they kept pace with their peers.

The explosion came two months after a pipeline rupture at one of Pemex’s rigs set the sea on fire, grabbing headlines worldwide. Bonds rallied after that incident as well.

To The Rescue

While the two fires highlight the perilous state of Pemex’s oil platforms as it tries to reverse more than a decade of falling output, bondholders have been reassured by President Andres Manuel Lopez Obrador’s repeated backing for the company. 

The Pemex 2031 spread above equivalent sovereign bonds reached 375 basis points earlier this month amid a general pullback from risk assets. Since the fire, that spread has narrowed to 360 basis points. 

Another factor that may be boosting the embattled company is the recent allocation of special drawing rights from the International Monetary Fund that gave Mexico’s central bank a $12 billion windfall. Some money manager say those funds could be used to help ease Pemex’s $115 billion debt burden.

The IMF reserves are “going to Pemex or CFE,” said Luis Maizel, referencing Mexico’s state utility Comision Federal de Electricidad. Maizel manages between $50 million and $60 million in Pemex debt through his firm LM Capital Group LLC.

Rig Fire

Pemex needs the help.

The fire shut-down the company’s entire Ku-Maloob-Zaap field, its largest production complex, Fitch Ratings said in a note Tuesday. While Pemex has raised production at new fields in the past two years, a rapid decline in output from the KMZ mature field would be “more challenging to offset,” according to the note.

AllianceBernstein’s head of EM debt, Shamaila Khan, was unfazed.

“The expectation is that the crisis will be short lived,” Khan said in an interview from New York, two days after the fire. There’s still “strong sovereign support.”

Pemex CEO Octavio Romero said Wednesday that the fire started during programmed maintenance work at the platform, shutting down 125 wells. Thirty-five of them were brought back online Tuesday, with full production set to resume next week.

Elsewhere in Mexico this week, Mexican corporate bonds joined Pemex’s advance. Peso-denominated sovereigns also climbed, while dollar-denominated government bonds dropped.

Mexico’s TIIE swap curve steepened last week with one-year rate falling and other tenors rising. The market continued to price about 65 basis points in hikes in the rest of 2021, even after mid-August inflation came in under analyst expectations. Investors may need additional inflation data to be convinced that price gains have peaked and to begin trimming their rate-hike expectations.

Next week, the Mexican central bank will release its inflation report that should give traders an indication of the trajectory of price pressures. The nation will also release the August PMI report, net outstanding loans and the year-to-date budget balance.

WHAT TO WATCH:

• Aug. 30: Year-to-date budget balance
• Aug. 31: Net outstanding loans, international reserves, inflation report
• Sept. 1: Remittances, PMI
• Sept. 2: Domestic vehicle sales, consumer confidence, leading indicators

BOND SALES:

• Coca-Cola Femsa to sell 10b pesos of bonds on Sept. 21
• Volaris to sell 1.5b pesos in local bonds on Oct. 6
• Volkswagen Leasing to sell 2b pesos of bonds on Sept. 22
• Toyota Financial Services Mexico to sell 2b pesos of bonds on Oct. 7
• Fovissste to sell 10b pesos of local bonds on Oct. 1
• Cetelem to sell 2b pesos of local bonds on Sept. 21
• Mercader Financial to sell 450m pesos of local bonds on Sept. 8

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