Distressed oil rig bonds soar over 20% yield mark

[MEXICO CITY] To appreciate the stunning reversal of fortune wrought by the collapse in oil prices, look no further than Mexico's rig operators.

A year ago, they were poised to be among the biggest winners of the country's historic move to abandon its seven- decade oil monopoly.

Now they're joining the swelling ranks of distressed borrowers around the world. The change is just another example of how the 53 per cent plunge in crude since June is upending bond investors' assumptions and stoking unprecedented losses in a country that was supposed to be home to an oil-industry boom.

Rig operators including Grupo R's Offshore Drilling Holding SA and Oro Negro Drilling Pte Ltd are facing pressure from Petroleos Mexicanos as the government crude producer moves to cut costs.

Offshore Drilling - whose revenue depends on the day rate it charges for ultra-deepwater rigs - has seen its notes due 2020 lose 28 per cent in value this month alone, the most for Mexican bonds in the Bloomberg USD Emerging Market Corporate Bond Index.

The debt is yielding 21 per cent, an unprecedented 18.8 percentage points above Treasuries.

"The financials of these companies are pretty simple to understand: They have rigs, and they charge a day rate, and they have debt," said Jim Harper, the head of research at Greenwich, Connecticut-based BCP Securities LLC, said by telephone.

"If the money from the day rate doesn't cover it, then they're in trouble."

Mexico's mix of oil plummeted to US$37.36 per barrel on Jan 13, the lowest price since March 2009. The peso climbed 0.3 per cent to 14.6118 per dollar on Wednesday at 8:43am in Mexico City.

The industry's struggles show how the swoon in crude has undermined President Enrique Pena Nieto's bid to reverse a decade-long decline in output and lure foreign investment. The government has estimated the energy overhaul will help bring in about US$50 billion in private foreign investment by 2018.

Pemex, as Petroleos Mexicanos is known, is seeking to save as much as US$3 billion this year on purchases and contractor rates, Chief Executive Officer Emilio Lozoya said Jan 16. A day earlier, Chief Financial Officer Mario Beauregard said the Mexico City-based company began discussions with suppliers this month to reduce rig rates and other costs. Pemex didn't respond to a request for information on what rig operators are currently charging.

Before Offshore drilling sold its US$950 million of bonds due 2020 in September 2013, the company's Centenario GR ship charged Pemex US$495,000 a day, according to the prospectus for the debt offering. Its Bicentenario and La Muralla IV rigs were rented by the state oil company for US$565,000 and US$489,000 a day, respectively. Offshore Drilling, a unit of Mexico City-based Grupo R, provides three of Pemex's four ultra-deepwater rigs.

Raschid Mohamed, Grupo R's director of investor relations didn't respond to requests for comment on the fees it charges Pemex or the tumble in the Offshore bonds.

Like Offshore Drilling, Oro Negro also counts the state oil producer as its biggest client. The Mexico City-based company's US$725 million of debt due in 2019 has dropped almost 18 cents this year, pushing yields to 19.6 per centage points over Treasuries.

Oro Negro, whose named means black gold in Spanish, charged a day rate of about US$160,000 for the so-called jack-up rigs listed in its prospectus.

Neus Bohigas, Oro Negro's vice president of communications, said the company declined to comment on bond prices and day rates, citing a confidentiality agreement.

Fees "have come down precipitously, and they're going to be lower" still, Terence Wheat, who helps manage US$30 billion in debt as a money manager at Prudential Investment Management Inc, said by telephone from Newark, New Jersey. "Oil companies are going to continue to cut capital expenditures, and somebody's got to take it on the chin."

BLOOMBERG