The Daily Update - Pemex

Pemex, Mexico’s dominant oil producer, 100% owned by the government, has been in the news of late.  It recently announced its largest onshore oil discovery in the past 15 years with the Ixachi-1 well: estimates put total reserves at around 350m boe and over 1.5bn boe in place.  The find is world scale and particularly attractive given its proximity to existing infrastructure allowing for a quick development schedule.  This discovery builds on the momentum of some other discoveries in Mexico, albeit announced by private companies participating in the Mexican Government’s Energy Reform Programme; notably the Zama offshore oil field discovery which is estimated to have 1.4-2bn barrels of oil in place.

Of late there has also been more news on Pemex’s farm-out program: Cheiron won the bid for a 50:50 JV on the Cardenas-Mora field and DEA Deutsche won the bidding for a 50:50 JV for the Ogarrio field.  This will net Pemex USD125m for the Cardenas-Mora transaction and USD190m for Ogarrio while the Mexican government will receive USD41.5m and USD213.9m respectively.  Interestingly, the Ayin-Batsil prospect received no bids despite estimates putting 3P reserves at 359 m boe suggesting perhaps the terms were not attractive enough.  The next farm-out round is expected in December when bidding for a partner for the Nobilis-Maximino deep-water acreage is due.  Farm-outs are an attractive way for Pemex to boost its production profile by sharing costs and risks with international players and at the same time using the best international practices.  Nobilis-Maximino is of particular interest as it has 3P reserves estimated at 502m boe which makes it of a similar size as the Trion field which Pemex formed an USD11bn JV with BHP to develop last year.  Further farm outs are expected in 2018.

Despite this good news, Pemex’s 3Q results were disappointing in the sense it slipped back to a net loss of 101.8bn pesos (USD5.6bn): although this reflected weaker production due to the impact from the hurricanes and earthquakes in September and natural field declines.  The picture was better for nine months ending September 30 which recorded a net profit of 18.9bn pesos.  Importantly, it is the first year since 2012 that Pemex is so far registering a profit and it has come with an average Mexican blend oil price of USD43/bbl in 2017.  In 2012 when Pemex last registered a net profit the Mexican blend crude price averaged USD104.bbl.  This suggests that the cost and efficiency drive targeting profitability along the entire value chain is gaining some traction.  Encouragingly, Pemex has affirmed its production target of 1.94 m bpd of crude this year, despite the natural disasters, and continues to guide to a small production increase in 2018, which would be the first time production has increased since 2004.

Pemex, is a quasi-sovereign issue, rated Baa3/BBB+ by Moody’s/S&P respectively, reflecting its importance to the Mexican economy and a track record of backing and support from the government which results in a better rating than its stand-alone credit profile and financial metrics would warrant.  Pemex continues to screen attractively within our universe, and does not look to have captured the move up in the Mexican crude oil basket since the end of September: pressure on Mexican exposures due to uncertainty due to the NAFTA renegotiation a likely reason; although our base case remains the agreement will end up being renegotiated.  At current levels favoured bonds such as Pemex 6.625% 2035 look attractive as it prices in a significant a significant amount of risk trading on a yield of 6% and ~4.8 credit notches cheap on our models.