(Bloomberg) — For a company drowning in debt, Petroleos Mexicanos SA is enjoying a rare wave of investor optimism. Buyers are snapping up the driller’s bonds, betting President Claudia Sheinbaum can stabilize its finances and restore credibility for the state-owned giant.
The extra yield investors demand to hold the company’s debt over Mexican sovereign bonds has shrunk to almost three percentage points, hovering near a record low on speculation that the government will unveil a sweeping package of about $50 billion to shore up Pemex.
Beneath the optimism, though, lies a company burdened by mounting liabilities and plunging output. Next year alone, Pemex has about $19 billion in bonds coming due. But even as Sheinbaum has yet to reveal a plan, traders are embracing her early signs of long-term reform — more than they ever did the temporary fixes of her predecessors.
“The person in charge of Pemex is Sheinbaum herself,” said Pramol Dhawan, head of emerging markets portfolio management at Pacific Investment Management Co. “She’s taken a lot of personal responsibility and autonomy to make sure that the situation is taken care of, both in terms of stabilizing outputs as well as dealing with the financing needs.”
It’s a shift from former President Andres Manuel Lopez Obrador, who boasted about being Pemex’s biggest champion and splurged $80 billion on last-minute bailouts that failed to improve operations or finances for the driller.
Sheinbaum spearheaded an energy reform that expanded government control over Pemex and removed its profit mandate since taking office in October. She also appeased investors by appointing a technocrat to lead the company and opened the door to private investment from the likes of billionaire Carlos Slim.
Sheinbaum’s vision, however, is colliding with Pemex’s reality. The Mexican president pledged to boost production to 1.8 million barrels of crude per day, yet she inherited a company with declining production that’s now fallen to just 1.6 million barrels a day, the lowest in at least 40 years. The company has also posted its fourth consecutive quarter of losses and its debt load hovers around $100 billion.
Spokespeople for Pemex and the Energy Ministry declined to comment.
Investors watched for six years while AMLO, as Sheinbaum’s predecessor is known, injected cash into Pemex and slashed its taxes, solutions that proved temporary, as output sank and accidents increased. They’re expecting a new plan under Sheinbaum that instills some discipline on the company’s operations.
“While there is a strong willingness to support the company and not let it fail, there’s also a strong desire to see results,” especially in operational successes, said Bruno Rovai, a sovereign debt strategist at Macquarie Asset Management in New York. The government’s appetite for writing Pemex a blank check is “relatively low.”
Mexico’s Finance Minister Edgar Amador signaled that shift last month, saying the government no longer sees cash transfers to Pemex as a permanent solution. Instead, Sheinbaum is expected to cut inefficiencies — especially around the refinery business — and share profits with private partners willing to drill in Mexico’s aging oil and gas fields.
Pemex executives said on a recent earnings call the company would publish a business plan later this year that will outline efforts to increase production, and that it’s working with the government on a solution to pay its 2026 maturities. The company is also weighing plans to cut some 3,000 employees, or about 2% of its workforce, and is searching for financing for the 506 billion pesos ($26.3 billion) it owed suppliers at the end of last year, according to the latest data compiled by Bloomberg.
“I see the company recognizing the challenge,” said Roxana Muñoz, a senior credit officer at Moody’s Ratings. “The support has been more sophisticated with this administration. That’s a change.”
Investors are expecting Sheinbaum to unveil the plan before early September, when next year’s budget is due to lawmakers, though some argue it may come as soon as this month. Barclays strategists in May upgraded their recommendation on the debt to marketweight from underweight, saying their base-case scenario is that the government could contribute between $45 billion and $55 billion.
Although Pemex is getting more attention from the government, Dhawan, who manages $70 billion in emerging-market debt, said he favors short-dated bonds, as a plan is yet to be announced.
“In order to see the curve flatten, you’re going to need to see a more credible longer-term plan for the company,” he said. “We haven’t seen that yet.”
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