BREAKINGVIEWS-Pemex can't shake stigma of state-run cheapskate

Wed Jun 20, 2012 10:49pm BST

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(The author is a Reuters Breakingviews columnist. The opinions expressed are his own.)

By Raul Gallegos

NEW YORK, June 20 (Reuters Breakingviews) - Pemex [PEMX.UL] can’t shake off the stigma of being a state-run cheapskate. Mexico’s only oil company is trying to improve production after it declined by a quarter since 2004. But a second oil field auction aimed at luring in foreign players has just ended as disappointingly as the first. Meanwhile, investors lapped up the firm’s $1.75 billion sale of 32-year debt. The contrast shows how potential partners still have little faith that Pemex can be more than a cash cow for creditors and its government owner.

Pemex failed to convince global oil rivals to buy the rights to revamp six oil blocks in the country’s northeastern region. Offers from Spain’s Repsol (REP.MC) lost out to smaller peers. And the Mexican giant was left with two unassigned offshore oil fields, the most attractive oil real estate on offer. Chevron (CVX.N) decided against participating at all.

Granted, Mexico’s reserves are in decline. But the muted response from oil majors when offered a chance to gain a foothold in the country is as much a reflection of their dim view of Pemex’s ability to husband them. The firm was hoping a successful auction would increase its oil output by 140,000 barrels a day.

Pemex’s reputation precedes it: overall production of 3.72 million barrels of oil equivalent a day in 2011 was the lowest in five years. Its proven and probable reserves fell by almost a tenth from the year before.

But Mexico’s shrinking giant still has plenty of eager lenders. The company’s $1.75 billion sale of bonds due to mature in 2044 drew $6 billion in orders, according to IFR – this after net debt shot up by a quarter last year alone. Pemex’s 10-year bonds yield close to 4 percent, largely due to investor belief that Mexico will stand by the state-owned company if it runs into trouble. This is highly likely as the government relies on Pemex for nearly 40 percent of its revenue.

The demands of the government and creditors, though, are a drain on cash that limits the amount Pemex can spend to increase production. For a company that has enough oil for a mere 10 years of additional production, Pemex needs to be more savvy at pumping oil than tapping bondholders to maintain a bloated state behemoth.

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CONTEXT NEWS

- On June 19 Mexico's state oil monopoly Pemex awarded four contracts to drill mature oil fields. It was the second round of bidding to open up the country's nationalized oil industry to private investment.

- Pemex put six different areas in northern Mexico up for auction where 22 oil fields have been tapped by the company but are in decline. Two auctions were declared void.

- Sixteen companies or consortiums were in the running for the contracts and Pemex chose the winners based on who could produce the most oil at the lowest cost per barrel.

- On the same day, the Mexican oil company also sold $1.75 billion in new bonds maturing in 2044 priced at 280 basis points over United States Treasury securities. The issue attracted nearly $6 billion in orders, according to IFR.

- Reuters:

Mexico awards second round of mature oil field contracts [ID: nL1E8HJ8LC]

IFR-DEAL REVIEW: Pemex 2044 trades higher after generating USD6.25bn book [ID:nIFR40FJz7]

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- For previous columns by the author, Reuters customers can click on [GALLEGOS/]

(Editing by Antony Currie and Martin Langfield)

((raul.gallegos@thomsonreuters.com)) Keywords: BREAKINGVIEWS PEMEX/

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