Please see the below daily update from EPIC Investment Partners received this morning:
In a long-awaited move, the board of state-owned Petroleos Mexicanos (Pemex) recently approved the oil giant’s Sustainability Plan. The ESG outlay, which aligns with the company’s Business Plan to “consolidate the route to sustainability performance”, establishes goals and ambitions spanning the medium (2030) and long term (2050), with a focus on greenhouse gas emission reduction and energy transition.
Among the key objectives, the company aims to reduce methane emissions by 30% from 2020 levels by 2030 and phase out routine gas flaring by the same year. Additionally, Pemex plans to allocate 14% to 18% of its capital expenditures in 2024, and 10% to 14% annually from 2025 to 2030 towards ESG projects.
In terms of the social aspect, the plan outlines commitments to improve industrial safety performance, generate positive impacts on communities, and strengthen relationships with local populations. The anti-corruption approach is highlighted as a permanent legacy within the company’s compliance culture. Moreover, to strengthen governance conditions and enable effective execution of the sustainability strategy, the plan identifies key enablers and promotes transparency and disclosure of information, aligning with international standards.
Pemex’s Chief Financial Officer, Carlos Cortez, emphasised the company’s commitment to reducing its environmental footprint through efficient practices and sustainable operations, calling the plan “a roadmap to a more prosperous future.”
The government-owned petroleum company has and will continue to be a topic of hot debate ahead of Mexico’s elections in less than a month’s time. Pemex has been grappling with mounting debt and lower crude oil production, and has thus received substantial support from its government, via tax cuts and capital injections. Leading presidential candidate Claudia Sheinbaum vowed to maintain support for Pemex whilst also pushing her renewable energy agenda. “It’s about strengthening Pemex in its main function of oil production, but at the same time, reinvigorating the company in the face of the current moment within the context of climate change,” Sheinbaum said. “Pemex is — and will continue to be — the company of all Mexicans,” she added.
Pemex is rated investment grade, BBB+, by S&P Global. The company’s bonds have broadly enjoyed positive performance so far this month and continue to offer attractive risk-adjusted returns. The 6.625% bond, maturing in 2035, for example, trades 465bps cheaper than similarly rated bonds with a duration of ~7 years, resulting in an expected return to “fair value” of 32%, plus a yield around 10.5%. We have long held Pemex within our core Next Generation Strategy.
While some investors may need to see concrete steps to achieve the stated goals before fully embracing the ESG theme, we expect the sustainability plan to open the window of opportunity for those investors with ESG restrictions, particularly in Europe.
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Andrew Lloyd DipPFS
08/05/2024