Bloomberg News

Repsol Rebuffing Pemex Spurs Foreign Bond Slump: Mexico Credit

October 12, 2011

Oct. 12 (Bloomberg) -- Bond investors are punishing Petroleos Mexicanos after its 1.1 billion-euro ($1.5 billion) bid to gain influence in Repsol YPF SA backfired, undermining the Mexican company’s efforts to stem declines in reserves.

Euro-denominated bonds due in 2017 sold by Pemex, as Latin America’s biggest oil producer is known, yield 99 basis points more than similar-maturity securities from Madrid-based Repsol, compared with 69 a month ago, according to data compiled by Bloomberg. Yields on the Pemex securities rose 67 basis points to 5.10 percent, compared with a 37 basis-point increase for Repsol yields and a 27 basis-point yield advance for euro- denominated bonds sold by Russia’s OAO Gazprom.

Pemex is seeking to boost oil reserves that fell 1.4 percent from last year by tapping into Repsol’s technological expertise in deep-water drilling. Pemex and Sacyr Vallehermoso SA agreed on Aug. 29 to coordinate their combined 29.8 percent voting stake in Repsol to restructure the company’s management. The move prompted Repsol to change its bylaws on Sept. 28 to preclude rivals from holding board positions, preventing both Pemex and Sacyr from voting.

“It’s generating noise that affects Pemex,” Miguel Angel Aguayo, a debt analyst with Banorte-Ixe Casa de Bolsa in Mexico, said in a telephone interview. Investors are concerned that the company is “entering legal battles,” he said.

Pemex’s dollar bonds due in 2021 yield 4.80 percent, or 114 basis points more than similar-maturity Mexican government debt, compared with 89 a month ago, according to data compiled by Bloomberg. A basis point is 0.01 percentage point.

‘Heavier Influence’

Pemex Chief Executive Officer Juan Jose Suarez Coppel, 52, said he expects to convince other Repsol shareholders that Pemex’s goal is to improve Repsol’s value. Pemex and Sacyr, Repsol’s largest shareholder, are seeking to split the roles of CEO and chairman at the Spanish company. Both are currently held by Antonio Brufau. Pemex, a founder of the Madrid-based company in 1979, almost doubled its stake in Repsol to about 9.5 percent with its 1.1 billion euro purchase of shares.

“Pemex would like to have a heavier influence in the decisions and a stronger voice on the board,” Suarez Coppel told reporters on Oct. 6 at the company’s headquarters in Mexico City. “I never expected such a reaction. But we’re not going to back off and go back home because they’re reacting like this.”

An e-mail message and phone message to the Pemex press office weren’t answered. A Sacyr press official didn’t return a phone message and an e-mail seeking comment.

“Our strategy is solid organic growth and financial prudence,” Repsol spokesman Kristian Rix said in an e-mailed response to questions today. “We can only hope the markets value this.”

Production Declines

Repsol has also asked Spain’s energy and securities regulators to review the agreement between Pemex and Sacyr as part of its effort to thwart the alliance.

Pemex plans to drill five more deep-water wells this year and eight to 10 wells in 2012 as part of its effort to stem six straight years of production declines. Mexico estimates it may have 30 billion barrels of oil in deep waters. Pemex has primarily discovered gas in 15 deep-water wells drilled since 2005.

The spat with Repsol is hurting Pemex because the company increased debt to finance the purchase of the shares, said Joe Kogan, a credit analyst at Scotia Capital. Suarez Coppel told reporters Sept. 1 that Pemex would finance 70 percent of the transaction with debt, including loans from Mexican and foreign banks.

Deepwater Drilling

“We haven’t really received a complete explanation as to what the advantages are” of increasing the stake in Repsol, Kogan said in a telephone interview from New York. “Everyone agrees that the long term is dependent on Pemex’s ability to get oil out of areas that are hard to reach.”

Pemex says it needs technology from international oil companies to develop deepwater reserves. Mexican law bans private companies from claiming ownership of oil they discover, blocking Pemex from creating joint ventures to explore on the Mexican side of the Gulf of Mexico.

Former President Lazaro Cardenas expropriated the assets of international oil companies including what are now Exxon Mobil Corp. and Chevron Corp. in the years before World War II. His government formed Pemex and banned private investment in Mexico’s oil industry.

The extra yield investors demand to own Mexican dollar bonds instead of U.S. Treasuries narrowed six basis points to 227 at 4:15 p.m. Mexico City time, according to JPMorgan’s indexes.

Default Swaps

The peso rose 0.8 percent to 13.2874 per U.S. dollar.

Yields on futures contracts due in December, known as TIIE, were unchanged at 4.68 percent.

The cost to protect Mexican debt against non-payment for five years fell 20 basis points today to 150, according to data provider CMA, which is owned by CME Group Inc. and compiles prices quoted by dealers in the privately negotiated market. Credit-default swaps pay the buyer face value in exchange for the underlying securities or the cash equivalent if a government or company fails to adhere to its debt agreements.

Investors are unlikely to keep selling Pemex bonds should the company fail in its bid to increase its influence in Repsol, said Juan Cruz, a corporate debt analyst at Barclays Plc. Bondholders are more concerned about Pemex’s declining oil production, he said.

“If this transaction doesn’t take place, it’s not the end of the world for Pemex,” Cruz said in a telephone interview from New York. “They’re exploring their alternatives.”

Pemex’s bonds yielded 133 basis points more than similar- maturity Repsol debt on Oct. 4, the most since Dec. 21, 2009, according to data compiled by Bloomberg.

Bond Sale

Separately, the Mexican company sold $1.25 billion worth of dollar bonds due in 2041 to yield 6.3 percent, according to data compiled by Bloomberg. BNP Paribas SA and Deutsche Bank AG arranged the sale.

Repsol stock has gained 17 percent in the past month in Spain.

Jeremy Martin, an oil specialist at the Institute of the Americas in La Jolla, California, said Pemex should have invested the money on other projects aimed at getting direct deepwater experience instead of buying Repsol shares.

“I never really understood what they were trying to do” with the Repsol transaction, Martin said in a telephone interview. Pemex “could have spent less in more projects, and more importantly could have diversified” its portfolio of projects, he said.

--With assistance by Veronica Navarro Espinosa in New York. Editors: Lester Pimentel, Jonathan Roeder

To contact the reporters on this story: Jonathan J. Levin in Mexico City at jlevin20@bloomberg.net;

To contact the editor responsible for this story: David Papadopoulos at papadopoulos@bloomberg.net


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