IFR Mexico Roundtable 2016: Part 3
IFR: Have they issued any CerPis yet?
Diaz de Leon, Ministry of Finance: No. The two vehicles were announced at the same time. The regulation of the Fibra E has already been published. The CerPi will be published in a few days.
Caraveo, Pemex: For us the CerPi will be like an MLP warehouse. You have the Fibra E story, which will be focused on brownfield projects. The other will be for greenfield. That is going to be for private investors that want to be part of the energy revolution in Mexico. They can co-invest with Pemex or somebody else. We have so many portfolios of assets that we need to develop: refineries, other pipelines and terminals. Our cash generation and indebtedness go directly to E&P, but the other things we have to develop for our own uses will be through these CerPis. I see it like an MLP warehousing story in order to feed the Fibra E.
Albarracin, Milbank: There are two similar success stories: Chile and Peru, which both allowed local pension funds to invest in locally listed funds, which could invest outside the country.
It was a way of circumventing some of the restrictions for offshore investments, and this basically triggered a wave of investments. And maybe something like that will happen in Mexico. All the huge private equity sponsors like Carlyle, KKR, and Blackstone went into these local markets (like Chile) to set up these funds with both pension funds or family offices.
This was a successful strategy, and these funds are being invested in across the region. You have money from Chilean pension funds being invested in Mexico, Colombia and Brazil, and I think it is the same in Peru, where these private-equity funds did something similar. It is also a way of giving the local pension funds access to more investment options, which Cesar alluded to earlier.
IFR: What is the potential size of this market?
Moussan, Actinver: In Mexico, Fibras now have a market cap amount of around Ps125bn, and they have raised as much as Ps40bn of debt in the local market. So they have been very active issuers. However, they are facing troubles now with the cap rates and finding new opportunities in the real-estate market. In the case of Fibra Es, there are good opportunities in wind farms, energy solar panels etc. So I think the size of this market could double the amount placed by the Fibras.
IFR: Moody’s has Pemex’s A3 rating on review for a downgrade. Among other things, it cites the fact that the company will have larger borrowing needs to fund negative free cashflows brought on in part by the dramatic decline in oil prices. Will these instruments help address such shortfalls? (Moody’s subsequently downgraded the credit to Baa1 on November 24)
Caraveo, Pemex: In the past, we couldn’t put together a Fibra E because we could not disincorporate the assets because that was part of the government - now we can do it. So we have other sources to fund ourselves. Pemex is different now.
IFR: How will Pemex’s new status under the energy reform bill make a difference to its bottom line?
Caraveo, Pemex: As an example, it cost a lot of money to supply jet fuel to Cancun. We don’t make a lot out of that business, but now because of the energy reforms someone can do the job for us with better returns. You don’t need a lot of money to put a terminal next to Cancun, but [before] we lost money because we were in a monopoly. We were the only ones who owned the hydrocarbons, we had to provide jet fuel to the Cancun airport, which is one of the biggest hubs of Americas.
IFR: How has the relationship between the government and Pemex changed following the energy reforms, and how will the state assist the company?
Caraveo, Pemex: After the energy reforms, of course the government used to be like an administrator of Pemex, and now it is part of the board of directors. We now have this corporate governance at Pemex, with five independent board members, and five members from the government, of which the chairman is the Minister of Finance. There is a still a deep relationship, but the decisions take place at the board level.
We have a very close relationship with the Minister of Finance and tell him about our financing strategies. The relationship is still there, especially between the finance department and the Minister of Finance, but everything is ruled at the board of director meetings. It is a new relationship but it is working.
Diaz de Leon, Ministry of Finance: I think the key message here is that Pemex is crucial and strategic for the government, and vice versa. They are both under the executive branch. Pemex remained a public-sector company, but is now called a productive company. That is just a matter of governance and how you run the oil company.
We should keep in mind that the [oil] sector is under fire worldwide, and never in its history has Pemex had so many instruments to cope with such a challenge as the one we are seeing with the reduction of oil prices.
The second point is the importance of the mutual commitment. In the energy reform it was stated that the federal government would issue debt in the same amount as the savings that Pemex could negotiate with the unions in terms of their pension liabilities. I think that is an unequivocal statement about the mutual relationship between the government and Pemex.
(On November 11, Pemex announced it had reached an agreement with the unions to reduce generous benefits for workers, significantly lowering pension liabilities that had amounted to around US$90bn as of September 30, 2015, according to Fitch. — IFR)
Caraveo, Pemex: The government is putting in one dollar for every dollar we are saving. The administration is negotiating a pension system that was designed back in the 40s. So this pension plan has to be designed for now: for people who live 70-75 years. You can retire from Pemex with 25 years of seniority at 55 years of age. The plan is to move that to 35 and 65, respectively, saving a third of the liabilities on the balance sheet. It is complicated. But if you do it, you will have a third of that from the government.
Diaz de Leon, Ministry of Finance: The message is that whatever savings they put on the table will be matched by public-sector debt.
Ortiz, S&P: In our view, it is important to bear in mind that Pemex is still a 100% government-owned company, and it provides a third of the public-sector revenues, so it is still an important company. And in our view, there is a strong relationship between Pemex and the government.
Werner, Goldman Sachs: Pemex today has much more flexibility than it had in the past, but it is still a state-owned company and subject to certain controls by the finance ministry. It is a different animal from Colombian and Brazilian oil companies Ecopetrol and Petrobras, which were both taken public.
You have the discipline of the market, of investors, research analysts, looking at their stock and performance. Today Pemex does a good job in terms of investor relations, because they have a lot of debt in the market. But that is very different from having public equity.
What is interesting in the energy reform is what is going to happen outside of Pemex. All that money coming in will create a new industry in Mexico competing with Pemex. The reform that the government passed in the energy sector was fantastic, but the status of Pemex is a work in progress. And I think that — Carlos and Alejandro can say much more than I can as I am seeing this from outside — but I think it is a step forward compared to what we saw in the past.
Alejandro was saying they have many more tools than they had before, but they are still a company with a status that is between a fully public company and a state-owned company. I hope as Pemex learns to operate in this new environment, and as they start competing with other guys, gradually they will be given more flexibility.
Julio Valle, Pemex: If you look at the arguments Moody’s makes about Pemex, they make the same case for the oil and gas industry. If you see our results, we are deeply impacted by the currency, tax revenues, and the very low prices. In general terms what you are seeing at Pemex is a reflection of what is happening in the oil industry.
Moody’s expects all these instruments to be ready today, that we already have all the contracts out, all the JVs in operation etc. But this is a process that will take time. We have never done it before. We are working 120% on trying to execute all these new tools that we have at our disposal.
I think they are going back a notch and rectifying and leveling themselves with the rest of the rating agencies, in the case of Pemex. We are talking to Moody’s, but we don’t think they will change their minds in what they announced. But in general terms, we now have a whole new set of tools that will allow us to improve further and become more agile.
(On November 24, Moody’s downgraded Pemex from A3 to Baa1, putting its ratings in line with the long-term issuer ratings of BBB+ from S&P and Fitch. — IFR)
IFR: We’ll end there. But I would like to thank all of you for taking time to attend today’s event and for the interesting and lively conversation