President elect Andrés Manuel López Obrador (aka AMLO) is not due to take office until December creating an element of uncertainty about changes to Mexico’s energy reform programme. However, AMLO does seem to be taking a pragmatic approach, particularly given the government’s goal to drastically increase oil production: it is targeting to boost Mexico’s oil production to 2.48 m b/d by 2024. Rocio Nahle, the incoming energy minister, stated ‘We will respect the rule of law and the agreements that have been made with the outgoing government’.
Arresting the decline in Pemex’s (the 100% government owned and dominant producer in Mexico) production profile will be important in achieving this goal. In August Pemex’s production run rate was languishing at 1.82 m b/d. AMLO has been talking about investing ~USD4bn in oil production and drilling to try and address an industry shortfall. Encouragingly, Pemex recently announced the discovery of two new fields, Manik and Mulach which together comprise 7 reservoirs potentially holding 180 m BOE of 3P reserves. Combined these fields could produce up to 45,000 b/d. These fields are part of a group of six fields being evaluated and could add 210,000 b/d crude and 350MMcf/d of gas production.
On a positive note, Pemex recently announced a reduction in its negative financial balance for 2018 due to higher oil prices which reduces its 2019 funding requirements. Plus, the incoming deputy Finance minister Arturo Herrera indicated that Pemex will not be burdened with additional debt to finance planned investment in the oil sector.
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: uncertainty on the energy sector under an AMLO administration is a likely factor. At current levels, bonds such as Pemex 6.625% 2035 look attractive as it prices in a significant amount of risk trading on a yield of 6.85% and ~4.6 credit notches cheap on our models.