Leading Off

 

With winter coming to a close, the greatest season is almost upon us. That’s right, I’m talking about baseball season. And with a lineup stacked with talent the likes of Altuve, Correa, Keuchel and Verlander, can there be any doubt of a repeat performance by the men of Minute Maid Park? I say no. But alas, baseball isn’t the only thing I’ll be watching out for this spring. Down south, Mexico’s energy ministry is going back to the well—or the auction block—with a third try at bidding out onshore oil and gas blocks. Meanwhile, Pemex is performing some financial gymnastics to pay off expiring bonds and open up cash for the future. Get the inside story – read on!

 

Going Once, Twice, Sold! … Or Is That Strike Three?

For the third time, Mexico’s Ministry of Energy (SENER) is bringing onshore unconventional tight oil and gas blocks back to auction. The ministry’s previous two efforts were scrapped as failures, but SENER is hopeful that regulatory and environmental advances will soothe investor fears about the hydraulic fracing required to develop the blocks.

The lion’s share of the parcels up for auction are located in the Burgos and Tampico-Misantla formations of Tamaulipas, northern Veracruz and western Coahuila. Looming political uncertainty appears to have motivated Mexico’s regulatory agencies to push processes and execute contracts, and SENER is optimistic that invitations for bids could be issued in the next two months, with winning bids announced prior to the new administration taking office in December. Lofty aspirations, to be sure, but the ministry appears to be making good progress toward slamming the gavel.

The reserve potential in the Burgos and Tampico-Misantla basins is vast, if not yet properly defined. With that said, both the oil and gas should have strong local demand: northern Mexico is the hub of a considerable natural gas infrastructure project designed to connect existing and future production from the US to Mexico. Additionally, the port of Altamira is Mexico’s private-sector petrochemical hub. The light-gravity shale crude would also presumably be a strategic fit for several Pemex refineries and could quite easily find an attractive market for export.

Local production combined with existing demand is a recipe for success. But as we have witnessed time and again, the rewards must be properly balanced with the opportunity risk to attract development capital. All the same questions will apply here: political uncertainty, contract validity, taxes, theft, well economics, logistics, alternative sources. Will third time be a charm, or a strike out?

 

Banks Love Energy Companies More Than Spring Training

With production sagging, crude oil prices fluctuating, a monumental election upcoming, and a couple of bond issuances set to come due, Pemex is venturing into the capital markets to shore up their financial position. The state oil giant just placed $4 billion of bonds in two tranches, at returns of 5.35 percent, due in 2028, and 6.35 percent, due in 2048. The good news: the issuances were more than 6x oversubscribed, with more buyers than paper. The bad news: Moody’s rated the bonds Baa3, with a negative outlook.

Approximately half of the funds raised by the sale will retire notes set to expire over the next two years, and the remainder will serve as a security blanket for cash on hand. With more debt scheduled to mature in 2018-19, and a capital budget required to drill their way back to financial (and operational) stability, Pemex will need to utilize the full flexibility of their financial toolbox to keep all avenues open.

The goal: a program that continues to access capital markets, layer in derivatives to protect against negative price swings, enter into strategic partnerships, and yield effective returns on actual capital deployed. It won’t happen overnight, but Pemex can right this ship.

Also, it did not slip by our attention that former Pemex CEO, Jesus Reyes-Heroles, floated the possibility of a Pemex IPO. I strongly doubt that Mexico would head down that route, and if they did, we’d be talking years before the offering would mature — read up on the Aramco IPO process, if you have time.

 

Pace of Play Improvements

I think it’s safe to say that the distaste for regulatory red tape is universal. That is, of course, unless red tape is how you draw your paycheck. Americans and Mexicans are united in their complaints about government agencies complicating the progress of business. In the US, President Trump has taken a pro-business stance, actively pursuing a policy of reduced oversight and regulation for domestic industry. The results have been a charging equities market, strong corporate earnings, low unemployment rates and forecasts of continued growth for the foreseeable future.

After years of delays and complaints from the international community on prohibitive business practices south of the border, Mexico is looking to streamline its regulatory processes as well. Three of the regulatory agencies that oversee Mexico’s energy industry, the CRE, the ASEA, and the CNH have announced the creation of the “Offices for Coordinated Assistance to the Energy Sector,” or ODAC, for the acronym-inclined. The purpose of ODAC will be to assist parties in the process of acquiring necessary approvals from more than one of the agencies. Specifically, ODAC will assist in the approval of exploration plans, extraction plans, drilling wells, sale to the public and transportation of natural gas through pipelines.

This sharing of information should result in fewer headaches, repetitive filings and shorter timelines for approval of new entrants to the Mexican oil and gas markets. Let’s be clear: they aren’t going so far as to eliminate any processes or jobs, but increased coordination should ease some of the frustrations felt across the investment community.

Inspired to jump into the Mexican market? Click here to contact our international markets team.

Best,

Chad Smith
Senior Vice President of Terminal Services