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Pemex bonds sink to record low

Pemex Bonds Plunge to Record Low on Oil Crash and Virus Fears

- Mexican producer's 2027 bonds slide after Monday's 11% decline
- Pemex will need to consider how to target exports, says Castro

By Amy Stillman and Justin Villamil/Bloomberg

Petroleumworld 03 11 2020

Petroleos Mexicanos bonds crashed to a record low as a producer battle for market share hammers oil prices and the coronavirus threatens demand.

The state driller's bonds maturing in 2027 dropped an additional 1.1% on Tuesday, after sliding 11% Monday. Yields rose 21 basis points to 8%, taking the spread above similar-maturity Mexican sovereign bonds to 478 basis points, another record high.

“A lot of EM investors woke up yesterday to a $30 oil scenario and are reducing risk to the sector by selling one of the easier bonds to sell,” said Roger Horn, a senior emerging-markets strategist at SMBC Nikko Securities America in New York.

Oil plunged the most in almost three decades this week as Saudi Arabia and Russia vowed to pump more in a battle for market share just as the coronavirus spurs the first decline in demand since 2009.

“It's not only the fact that prices will be lower and that you will have more competition in the market, but that one of your main buyers will have to reduce its imports, depending on how long the virus impact continues,” said Ixchel Castro, an oil and refining markets manager for Latin America at Wood Mackenzie Ltd.

“If Saudi Arabia decides to increase production then it's an additional supply of medium and heavy crude, so that impacts specifically one of the main regions where Mexico is exporting crude right now,” she said.

Investors are skeptical of Mexican President Andres Manuel Lopez Obrador's more nationalistic energy policy, which includes tasking Pemex with building an $8 billion refinery in the his home state. The driller is struggling to be profitable while balancing the need to finance the country's budget, which relies on it for nearly a fifth of its revenue.

Pemex's debt has soared even amid struggling oil production, which has dropped every year since 2004. Despite an accelerated drilling program at a group of onshore and shallow-water fields, Pemex's production stagnated in the fourth quarter of last year, at 1.68 million barrels a day, little changed from the previous quarter.

More than 80% of Mexico's oil production has a break-even price higher than $35 a barrel, making it the Latin American producer that's most exposed to the crude crash, according to Wood Mackenzie. However, that doesn't account for the financial hedge that Pemex often uses as insurance against a downturn.

The hedge, which is separate from the finance ministry's, typically protects about one-third of its production from pricing volatility.

It is too early to tell how Pemex's production will be affected by the price war, Castro said.

“The first thing to have in mind now is whether there's going to be a relatively short-lived price impact, if we can see a quick resolution to the agreement between the parties or if we're back in a world of lower for longer pricing scenario,” she said. “The first strategic decision for Pemex is how do you target your export market.”

— With assistance by Peter Millard

Story by Amy Stillman and Justin Villamil from Bloomberg
03 10 2020



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