Pemex Upside Not Priced In: Scotia

The bond market is not pricing in the upside of reforms that could lead to an opening up of Mexico’s Pemex, Scotia says, though major changes are not the bank’s base case scenario. “We are skeptical of recent campaign promises and our base case is that nothing happens. Nevertheless, the market is pricing zero probability of any reforms succeeding, which we think is too pessimistic,” Scotia says. Pemex, in the right environment, could trade at a yield equivalent to that of the sovereign, in contrast to its current yield differential of about 100bp over the sovereign, the shop says. The two leading candidates in Mexico’s July presidential elections have promised some form of privatization or reform at the state-owned oil company. In particular, leading candidate Enrique Pena Nieto, while shying away from a privatization, has promised to take action in his first year of office to open the firm to private investment. “Pemex needs a variety of reforms in order to raise capital, improve efficiency, and gain access to new technology. Just selling a minority interest in shares is neither sufficient nor paramount. We think there is more than one way to accomplish each objective, leaving the future administration room for creative solutions,” Scotia says.