The Daily Update - Pemex CNOOC Oil Mexico

Some good news for Mexico yesterday as they successfully auctioned off eight deep water oil and gas blocks in the Gulf of Mexico as an ongoing policy to open up the country’s energy industry. Companies such as China Offshore Oil Corporation (CNOOC), Australia’s BHP Billiton, France's Total, Norway’s Statoil, Malaysia’s Petronas, BP and a number of US companies were all successful bidders with a number of joint ventures established.

Mexico’s relieved energy minister Pedro Joaquin Coldwell said, ‘This underlines Mexico is very competitive in the oil and gas sector’ adding, ‘Before the current administration ends in two years’ time Mexico will likely hold three more oil auctions for shallow and deep water, as well as onshore areas’. Government expectations were reportedly that it would have been content if just four fields had been auctioned so the result that eight were successful was an obvious boost. It is thought that over the next decade the fields auctioned yesterday will add around 900,000 barrels a day to Mexican output with the auctioned fields thought to contain an estimated 8.4 billion barrels of oil.

CNOOC  the Chinese giant easily won both blocks they went for  which was in the Perdido Fold Belt which is thought to hold about 1.2 billion barrels of the most valuable light and super light crude and marks the largest ever investment by a Chinese company in Mexico. We hold a couple of positions in CNOOC maturing in 2022/23 with an expected return and yield of over 7% in US dollars, not bad for a AA3 rated quasi sovereign and with a spread of around +140 bp over Us Treasuries, this equates to over 3 credit notches of protection.

We also have positions in Pemex with our favourite holding the Pemex 5.5% maturing in June 2044, a 12 year duration bond, yielding over 7.3% for the Baa1 rated entity which is a spread of 439bp over US Treasuries and a  4.6 credit notch discount to our fair value marker. This equates to a return and yield, should this bond move to fair value, of a staggering 37% return, defiantly one of our favourites...