The Daily Update - From Oman to Mexico

Yesterday Oman came to the market with a multi-tranche USD5bn bond issue that was close to four times covered but with the 30 year issuing at a generous yield of 6.549%, even for a Baa1 rated credit (Moody’s), it is easy to see why investors were keen to get exposure, ourselves included.  That said, we still see the greatest valuation upside in the quasi-sovereign space.

Most quasi sovereign bonds trade at wider spreads than their own governments and globally quasi sovereigns pay roughly 0.9% more than their sovereign owners. That is a lot of extra compensation for the modest additional risk. This is why quasi sovereigns have been a focus of ours for many years. Although the issues are usually not explicitly guaranteed by the government, the strategic importance of quasi sovereigns means that the government is highly likely to stand behind these credits.

Pemex, the world’s eighth largest oil producer, 100 percent owned by the Mexican government, remains a favoured holding of ours:  For example, the US dollar denominated Pemex 6.625% 2035 issue trades on a yield of 6.51 percent and is trading ~5.5 credit notches cheap on our valuation models which compares with a yield of 5% on the longer dated US dollar denominated Mexican States 4.6% 2046 which is trading ~2.5 notches cheap on our models.  Pemex’s debt is not explicitly guaranteed by the Mexican government but the producer is of strategic importance and the government has a track record of supporting and injecting capital into the business when required.  For example, the government injected USD1.5bn in equity in 2016 to plug a gap in its pension liabilities and the Ministry of Finance has recently made public statements supporting Pemex.  It comes as little surprise that Moody’s view Pemex as having a ‘very high likelihood of extraordinary support’.

Pemex has been heavily criticised for being inefficient and badly run which has manifested in a much weaker stand-alone credit profile and financial metrics. However, under the leadership of the new CEO Jose Antonio Gonzalez Anaya, Pemex seems to be gaining some traction with a cost cutting program and efficiency drive targeting profitability along the entire value chain.  The company remained loss-making at the net income level in 2016 (MXN -296bn) but shifted to profit at the operating income level (MXN 364bn), a considerable improvement over 2015, and which supports 2017 as an inflexion point.  The CEO expects the Pemex to return to profitability in 2019 or 2020.  While the company has high debt levels and a weak liquidity position Pemex has successfully been able to access the debt markets, diversifying the funding base and lengthening the average term of the debt.  The company expects to bring net debt down to MXN150bn in 2017 down from MXN232bn in 2016; this is important as rising leverage was one of the concerns cited by the rating agencies.

Encouragingly, for the first time in five years the company exceeded their production target producing 2,154,000 barrels per day in 2016.  That said, there is still much work to be done to address a declining production profile; mainly due to the decline in the major Cantarell field.  In terms of exploration and capex its strategy is to form joint-ventures to develop new fields and upgrade existing facilities.  For example, a farm-out agreement was signed with BHP Billiton in December 2016 for the development of the Trion field, an USD11bn project.  The Trion field is expected to produce 120,000 barrels per day by 2025 although it will not begin operating until 2023.  BHP bring expertise in deep-water subsalt exploration and drilling and the farm-in structure reduces Pemex’s capex requirements on a go it alone basis.

Please read this important information before proceeding. It contains legal and regulatory notices relevant to the information on this site.

This website provides information about Stratton Street Capital LLP ("Stratton Street"). Stratton Street is authorised and regulated by the UK's Financial Conduct Authority. The content of this website has been prepared by Stratton Street from its records and is believed to be accurate but we do not accept any liability or responsibility in respect of the information of any views expressed herein. The information, material and content provided in the pages of this website may be changed at any time by us. Information on this website may be out of date and may not be updated or removed.

The website is provided for the main purpose of providing generic information on Stratton Street and on our investment philosophy for the use of financial professionals in the United Kingdom that qualify as Professional Clients or Eligible Counterparties under the rules of the United Kingdom Financial Conduct Authority (the "FCA"). The information in this website is not intended for the use of and should not be relied on by any person who would qualify as a Retail Client. Products and services referred to on this website are offered only at times when, and in jurisdictions where, they may be lawfully offered. The information on this website is not directed to any person in the United States. The provision of the information on this website does not constitute an offer to purchase securities to any person in the United States (other than a professional fiduciary acting for the account of a non-U.S person) or to any U.S. person as such term is defined under the Securities Act of 1933, as amended.

The website is not intended to offer investors the opportunity to invest in any Alternative Investment Fund ("AIF") product. The AIFs managed by Stratton Street are not being marketed in the European Economic Area ("EEA") and any eligible potential investor from the EEA who wishes to obtain information on the AIFs will only be provided with materials upon receipt by Stratton Street of an appropriate reverse solicitation request in accordance with the requirements of the EU Alternative Investment Fund Managers Directive ("AIFMD") and national law in their home jurisdiction. By proceeding you confirm that you are not accessing this website in the context of a potential investment by an EEA investor in the AIFs managed by Stratton Street and that you have read, understood and agree to these terms.

No information contained in this website should be deemed to constitute the provision of financial, investment or other professional advice in any way. The website should not be relied upon as including sufficient information to support any investment decision. If you are in doubt as to the appropriate course of action we recommend that you consult your own independent financial adviser, stockbroker, solicitor, accountant or other professional adviser. Past performance is not necessarily a guide to the future. The value of investments and the income from them may go down as well as up. An application for any investment or service referred to on this site may only be made on the basis of the offer document, key features, prospectus or other applicable terms relating to the specific investment or service.

Where we provide hypertext links to other locations on the Internet, we do so for information purposes only. We are not responsible for the content of any other websites or pages linked to or linking to this website. We have not verified the content of any such websites. Such websites may contain products and services that are not authorised in your jurisdiction. Following links to any other websites or pages shall be at your own risk and we shall not be responsible or liable for any damages or in other way in connection with linking.

By using this site, you should be aware that we may disclose any information that we hold about you to any regulatory authority to which we are subject, or to any person legally empowered to require such information.

This website uses cookies to improve user experience, by clicking the "I Accept" button below means you consent to the use of cookies on our website.