The Mexican Government’s oil sector liberalisation programme continued with 19 deep-water blocks being successfully auctioned off in the latest January round. Shell was a prominent bidder. Pemex, Mexico’s dominant oil producer and 100% owned by the Government, was awarded 4 blocks, 2 individually. The government will receive USD535m for these blocks and Mexican officials estimate that this could bring in as much as USD93bn in investments, unquestionably a credit positive for the sovereign. The oil sector badly needs additional investment to revitalise a flagging production profile: government estimates suggest the blocks can produce 1.5m bpd by 2032 offsetting natural field decline and boosting total output.
It was interesting that the auction received such a positive response with the Presidential Election due in July 2017 and as Moody’s note: ‘The auction results indicate foreign oil companies are confident the legal framework will protect investments in the event of review by a new administration.’ The hard-left candidate Andrés Manuel López Obrador (often referred to as AMLO), although it is very early days, has been leading in the polls and has said he intends to review the oil contracts if he were elected President.
However, to enact significant changes to Energy Reform AMLO would require at least a majority in both the Chamber of Deputies and the Senate and a constitutional amendment would require two-thirds of the votes from each chamber. At this stage it looks unlikely that AMLO’s Morena Party would have sufficient votes to achieve this. AMLO has also talked of holding a referendum on energy reform but in 2014 the Supreme Court quashed a proposed referendum by his party on this issue. That said, a more pragmatic approach now seems to be emerging from his campaign talking of a review of whether reforms are meeting their goals and respecting the legality of existing contracts.
From our point of view the recent market volatility has created an opportunity as Mexican States 6.05% 2040 is trading 3.4 notches cheap. We see even more value in Pemex 6.625% 2035, which is trading on a yield on 6.36% and over 5 credit notches cheap on our models.