Heading south, down Mexico way: creditors of Petróleos Mexicanos (Pemex) had a rough go of it yesterday, as the firm’s dollar-pay 6.5% bonds due 2041 tumbled as much as 2.3 cents to 70.6. That selloff, one of the worst across the high-yield market, following a Bloomberg report that Pemex will soon issue upwards of $2 billion in fresh debt to help cover the near $6 billion in amortization payments due by the end of March.
“We are getting to the point where the indebtedness of the company is getting outrageous,” Luis Maizel, co-founder of LM Capital Management, tells Bloomberg. Indeed, Pemex sports the dubious distinction of the world’s most encumbered energy firm, toting a cool $105 billion in financial debt as of the end of the third quarter.
Operating results, too, leave something to be desired. Pemex logged a $2.58 billion net loss over the three months through September and has posted negative free cash flow in each year since at least 2012, burning through a cumulative $86.8 billion over that stretch. Crude oil output remained stuck at 1.764 million barrels per day during the third quarter, barely half of the 3.4 mbpd achieved during the 2004 glory days.
Since a bearish analysis in the March 23, 2018 edition of Grant’s Interest Rate Observer identifying an unhealthy codependency between the oil giant and the Mexican state, Pemex’s 6.5s of 2021 have widened to a 636-basis point spread over Treasurys from 363 basis points, while the firm’s credit default swaps sit north of 500 basis points, triple their early 2018 level.
For now, at least, Pemex’s beleaguered lenders are on their own, as the Mexican government led by President Andrés Manuel López Obrador signaled that further financial assistance won’t be forthcoming any time soon after bequeathing a series of tax breaks and cash infusions in recent years. Mexico faces a budget deficit equivalent to 3.5% of GDP this year if analysts at Bloomberg are on target, which would be the widest such shortfall since 2015. Back in July, Moody’s downgraded the country’s sovereign rating to triple-B from triple-B-plus, citing “increased expenditure rigidity related to recurrent support to state-owned enterprises.”
Of course, it’s a different story a few hundred miles to the north, as the U.S. oil service industry enjoys the fruits of the post-Covid energy bull market. On Tuesday, Houston-based Halliburton Co. (ticker: HAL) reported fourth quarter earnings of $0.72 per share, double last year’s tally and topping the $0.67 analyst consensus, as revenues jumped 31% year-over-year to $5.58 billion. Sporting a 19.8% operating margin, its fattest since 2015, Haliburton undertook $250 million in share repurchases during the period and announced a 33% quarterly dividend hike to $0.16 per share, while management articulated plans to pay out half of free cash flow to investors.
Those shareholders have enjoyed a 48% total return since HAL featured as a pick-to-click in the Jan. 21, 2022, edition of Grant’s Interest Rate Observer, just shy of the 53% logged by the Van Eck Oil Services ETF but lapping the negative 7% return for the broad S&P 500. Recent strength aside, the “current price still offers a reasonable entry point for new money,” analysts at Benchmark Securities believe.
“Everything I see today points to continued oil and gas tightness,” commented Halliburton president and CEO Jeff Miller. “It’s clear to me that oil and gas is in short supply, and only multiple years of increased investment in both. . . will solve short supply.”
In that belief, the Halliburton head has plenty of company. The Federal Reserve Bank of Dallas’ fourth quarter energy survey found that 64% of respondents plan to increase their capital spending in 2023, with 25% of the 148 firms polled “anticipat[ing] a significant increase.” In contrast, only 14% expect capex spending to decline, with most of that cohort foreseeing only a modest downtick.
Industry heavyweight Schlumberger Ltd., now doing business as SLB, is likewise reaping the rewards of a secular tailwind, as the world’s largest oilfield services outfit churned out $0.74 in fourth quarter EPS and $7.9 billion in revenues, up 76% and 27% year-over-year, respectively, while increasing its quarterly dividend to $0.43 a share, a 43% bump. CEO Olivier Le Peuch sees blue skies ahead, stating that “activity growth is expected to be broad-based” this year, while “pricing continues to trend favorably.”
A small fly in the ointment: SLB noted in its form 10-K that it still awaits $1 billion from “its primary customer in Mexico.” That same, unnamed entity accounted for $500 million in receivables this time last year.