Pemex eyes menu of funding options ahead of historic reforms

Mon Jul 21, 2014 4:17pm EDT

NEW YORK, July 21 (IFR) - Green bonds, debut local loan syndications and Samurais are some of the financing options on the table for Mexican state-run oil company Pemex as it seeks to become a more profitable entity in the wake of the country's historic reforms.

Several bills passed by the Mexican Senate this weekend put the country one step closer to opening up an energy sector closed to foreign investment for decades, while chipping away at Pemex's oil exploration and production monopoly.

The new legislation also gives Pemex more budgetary independence and a new tax regime as it tries to boost oil production to three million barrels per day by 2018.

"Our mandate will change little by little," said Rodolfo Campos, the company's treasurer. "We will be more like a company instead of a government agency. We are changing DNA so that success will be measured by our ability to generate value."

Part of the process requires Pemex to change the way it allocates capital expenditures as it focuses on what it thinks are its most productive assets.

Depending on the ultimate wording of the secondary laws currently moving through the lower house, and foreign investors' response to them, the frequent issuer could feel some added financial pressures as it rushes to increase investments, at least initially.

Once Pemex's chosen assets have been approved by government authorities in "round zero" later this year, the quasi-sovereign then has a relatively short three-year window to make them productive - with an additional two-year extension if required. Otherwise it risks loses them.

"At the beginning could exert pressure to keep those assets in the portfolio," said Campos. "We have to invest in all of them, and that is something we didn't used to do."

On the other hand, financing needs may ease somewhat as foreign investors bid and fund the assets that Pemex decided to discard.

This is important for a company that has been reliant on external borrowing, because a good chunk of its internally generated funds have been siphoned off by the central government.

With the aim of creating value, Pemex will focus on what is sees as its most productive shallow-water fields.

"The cost of production in shale and deepwater is twice or three times higher than the cost in shallow water," said Campos. "To maximize the value of the company it makes sense to develop assets where the cheap oil is located."

This comes as the company narrows its funding strategy by sticking only to bond markets, which offer sufficient depth to raise at least USD1bn each year and maintain a regular presence there.

"This leaves us with few markets," said Campos, who notes that, aside from dollars, Pemex will consider raising funding in euros, sterling and the yen market - where the government recently sold its first ever 20-year Samurai without any support from the Japan Bank for International Cooperation (JBIC).

"We think that with the successful transaction of the government in that market, we could also be a player there," he said.

Pemex has already covered a good portion of the USD4bn-USD6bn it said it would raise in the international capital markets this year - a USD4bn multi-tranche dollar trade in January and another EUR1bn 3.75% 2026 in April.

Another USD1bn in US Ex-Im bank guaranteed bonds are also expected to be sold this year, while green bonds are also on the longer-term agenda.

Timing is unclear, as more work has to be done in providing experts in sustainability investments such as Sustainalytics and Robecosam with more information, Campos said.

"It is a way to explain our commitment to social responsibility and sustainability," he said. "The idea is also to broaden our investor base. Investors are more and more taking a look at these issues."

The company also wants to raise up to USD4bn equivalent in an increasingly deep domestic bond market, where it has already sold about USD1.3bn in debt to both locals and foreign investors in the form of global depositary notes.

Pemex is also preparing Mexico's first locally syndicated, peso-denominated loan in an effort to raise up to USD2bn-equivalent.

The company has traditionally tapped the bank market in dollars, but has never done so in local currency.

Banks have yet to be mandated for the 10-year loan, but four financial institutions with a strong domestic presence are expected to be selected to take lead positions. Japanese banks have also shown a strong appetite for the loan and are expected to participate once leads are mandated. (Reporting By Paul Kilby)

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