The Daily Update - Mexico and Pemex

The Mexican Energy Reform Programme has benefited from some positive news-flow in recent weeks.  A discovery at the Zama offshore oil field is estimated to have 1.4-2bn barrels of oil in place.  This field is owned by Talos Energy, Premier oil and Sierra Oil & Gas and was one of the blocks bought in the earlier auctions opening up the acreage to private companies, a direct result of Energy Reform that came into effect in 2014.  Also Eni announced that they had upgraded their estimates for the size of their find at the Amcoa field in the Campeche Bay to 1.3bn boe in place.  These finds are significant as they are world scale: Zama is the fifth largest find globally in the past 5 years.  Importantly, these fields could be producing by 2020 which will help stabilise and reverse Mexico’s declining oil production profile: it is currently producing less than 2 m b/d down from a peak of 3.4m b/d in 2005.  Mexico also saw a positive response to the recently launched second and third auctions for further oil rights (round 2.2 and 2.3) in Round 2.  These auctions sold 21 out of 24 blocks with only 3 blocks in the onshore gas rich Burgos area not receiving any bids.

This news is credit positive for the Government of Mexico as it will encourage investment and increase government revenues due to the royalties.  Moody’s note for the Zama project that the government will ‘receive a 68.99% profit share from every barrel produced in the offshore field, and as much as 80% when considering taxes and fees over the life of the project. Taxes, fees and royalties from this field and other oil concessions will support the recovery of the government’s oil revenues, which fell 27.7% in 2016, and accounted for only 8.6% of total revenues, down from 13% in 2015 and 27% in 2014.’  The Mexican National Hydrocarbon commission (CNH) estimates that the auctioned off Round 2.2 and 2.3 oil blocks will generate USD2bn worth of investment over the life of the concession (30 years).

In addition to this, this week S&P raised its outlook on the Mexican Government to stable from negative and affirmed its foreign currency rating at BBB+.  They note ‘the prompt reaction of Mexican government authorities to recent negative shocks, such as the depreciation of the currency in late 2016, will diminish the recently rapid pace of debt accumulation and help stabilize the government's debt burden.’  They expect that the government’s debt to GDP will remain around 45% of GDP this year and next assuming no major currency depreciation.

Pemex, the world’s eighth largest oil producer (2015 data), 100% owned by the Mexican government, has been active in the market in the past couple of weeks with a USD 5bn tap on its 6.5% 2027 and 6.75% 2047 bonds that was well received; the proceeds are intended to refinance debt and finance capex.  Moody’s reaffirmed their rating at Baa3 (negative outlook) and S&P this week upgraded their outlook to stable and affirmed the rating at BBB+ following the changes to the sovereign rating outlook.

Jose Antonio Gonzalez Anaya, Pemex’s CEO, noted in an interview that Pemex has completed its financing program for 2017 and so the focus is likely to turn to its farm out program: 4 farm outs are expected to take place as the year progresses (Ayín-Batsil, Cárdenas-Mora, Ogarrio in an October bidding round and Nobilis-Maximino in a December bidding round).  This is 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.  Pemex’s CEO also said that he expects Pemex to produce 1.94m bpd of crude this year and slightly increase output into 2018 reversing a decline in its production profile that has been in place since 2004.  One of the key challenges has been for Pemex to replace the drop in production from its main field, Cantarell, but greater flexibility for partnerships with private companies allowed under Energy Reform has helped in this respect.

Pemex remains one of our favoured Mexican positions: for example, the US dollar denominated Pemex 6.625% 2035 trades on a yield of 6.2% and is just under 5 credit notches cheap according to our valuation models.