A support vessel sails away from the Petroleos Mexicanos Pol-A platform complex, located on the continental shelf in the Gulf of Mexico. Pemex’s plan to take on a record amount of debt to bolster production is fuelling concern among its bondholders.

Bloomberg

Mexico City

 

With oil prices plunging to a four-year low, Petroleos Mexicanos’s (Pemex) plan to take on a record amount of debt to bolster production is fuelling concern among its bondholders.

The state-owned company, whose debt load reached an all-time high of $74bn at the end of September, said this week it will boost net borrowings next year by $15bn. Pemex’s $2.1bn of bonds due in 2023 have fallen since the announcement, pushing up yields by 0.33 percentage point this week and reached an almost two-month high of 4.05%.

The slump in crude prices comes as Pemex tries to reverse a decade-long decline in output and prepares to face overseas competition after the government ended its seven-decade monopoly this year. The company also said this week that it will increase bond sales next year to as much as $15bn, the most since at least 1999, according to data compiled by Bloomberg.

“Any time that a major issuer announces that there’s going to be a lot of paper flooding the market, people dump it,” Luis Maizel, who helps manage $5.5bn of fixed-income securities including Pemex debt at LM Capital Group in San Diego, said in a telephone interview. “As more competition comes in and as more opportunity happens, in Mexico, they’ll need more liquidity.”

Pemex’s press office declined to comment on the company’s bond performance and financing plans.

The oil producer may sell as much as $8bn of bonds locally and $7bn overseas in 2015, according to an investor presentation posted on the company’s website. It said the debt will help finance an investment plan of $27.3bn next year. Pemex has the fourth-largest net debt load among major global oil and gas companies at $66.8bn, according to data compiled by Bloomberg.

Pemex is trying to “sustain current output levels, while holding on to strategic exploratory prospects to facilitate organic growth in the future,” the company said in the presentation.

The company has lost about 150bn pesos ($11bn) this year as output fell and as about half its revenue went to the government in taxes. Oil production averaged 2.4mn bpd in the third quarter, 4.3% less than a year ago. Pemex, which has posted losses for eight straight quarters, funds about a third of the federal budget.

Mexico’s mix of crude oil has plummeted 31% from its 2014 high on June 20 through November 19, dropping to a four-year low of $70.20 a barrel.“Their revenue is falling due to low oil prices, and they need to make investments, especially with the reforms, so they’re using debt as a complement for financing,” Carlos Legaspy, a money manager at InSight Securities, which holds Pemex debt among its $350mn in emerging-market securities, said in a telephone interview from Miami. “These investments should lead to greater production in future years, but if we don’t see oil prices turn around, you could see more of a negative impact on the bonds.”

President Enrique Pena Nieto says the legal changes to let foreign companies pump crude in Mexico for the first time since the 1930s will help reduce Pemex’s tax burden and attract $250bn in foreign direct investment by 2018.

The peso climbed 0.4% to 13.6024 per dollar at 9:33am in New York.

Alberto Bernal, head of research at Bulltick Capital Markets, said Pemex’s growing indebtedness won’t hurt demand for the company’s bonds since the funds are aimed at financing investments to stem output declines.

“The bet investors are making is the country will be able to reverse the decline in oil production,” Bernal, who recommends buying Pemex bonds, said in a telephone interview from Bogota. “If you have an increase in output, nobody cares about the debt load.”

Pemex has sold about $14.4bn in debt this year, accounting for more than one-third of all Mexican offerings, according to data compiled by Bloomberg.

“Debt issuance is increasing because capital expenditures are increasing,” Cathy Hepworth, a money manager at Prudential Financial in Newark, New Jersey, said in an e-mail.