Last week, Mexico’s Supreme Court declared AMLO’s industry electricity law was unconstitutional. In this sense, 2013’s energy reform should stand over the changes proposed by the current presidential administration. AMLO’s law implied that CFE (Baa2/BBB/BBB-) should have priority to dispatch electricity over other electricity generators, ensuring that CFE could sell its generated electricity even if it is less cost-efficient or polluting. AMLO’s law also limited competition by designing CFE as sole electricity provider instead of other players participating in a bidding process. Lastly, green electricity providers are the only electricity generators that can acquire clean energy certificates in order to promote the generation of this type of energy. We believe that AMLO’s administration will be reluctant to return to the 2013s Energy Reform Laws; on Monday, the president sent an initiative to the Mexican Congress for CFE to return to a strategic status company similar to the status it had after the 2013 Energy Reform.
In our opinion, effectively returning to 2013 energy reform could be positive for Mexico as electricity supply generated by private parties could increase and reduce the gap between electricity demand and supply in some Mexican regions. In this scenario, we expect that private companies will increase investments in the electricity generation sector and particularly in the generation of clean energy. CFE could benefit financially by reducing required investments in the generation segment and focus on distribution, transmission and its natural gas pipeline. It would also be positive for CFE if distribution and transmission tariffs correctly compensate CFE investments and expenses.
Last week, Pemex (B1/BBB/B+) announced new KPIs for environmental targets over the next few years. Pemex is also recommitting with the United Nations Global Compact and its 10 principles, divided into four categories, including environmental, labour, human rights and anti-corruption. Pemex also signed a memorandum of understanding with the US’s Environmental Protection Agency to identify methane-gas emission mitigation opportunities. A credible ESG strategy is important for some investors to be able to acquire Pemex bonds and the company to roll-over debt maturities and fund new projects. In an investor presentation, Pemex presented its GHG reduction goals for the period 2022-27, including a CO2 equivalent reduction by 48% in oil & gas production, by 36% in refining processes, and by 58% in its gas processing complex. Pemex’s Sustainable Committee was installed last year in order to supervise Pemex’s ESG efforts. Despite not being a fully independent committee, it has some positive highlights including the reduction of CO2 and SOx to 15.2 MMtCOe (-17.8% YoY) and 280.7 Mt (-17.1% YoY) in 3Q23 compared to 3Q22.
How to play CFE and PEMEX bonds? In the current oil scenario, we favour Pemex’s bonds along the curve, particularly from 29s – 33s. Refinancing in this year would be fully covered by Mexico. We also expect that liquidity support for Pemex and CFE will remain during the coming presidential administration. In CFE’s we prefer the MXN-bonds carry trade.