The surge in oil prices has done little to rescue battered bonds from Petroleos Mexicanos, as falling exports mean it might not seize on higher energy prices as much as its competitors.

The state-run oil producer’s dollar bonds traded close to multi-month lows last week even as Russia’s invasion of Ukraine sent prices above $100 a barrel. Notes due 2047 and 2050 fell to the lowest since late 2020 and the cost to protect Pemex’s debt from default for five years surged.

Pemex is in a weak position to take advantage of soaring crude prices in international markets as its exports dwindle amid Mexico’s plans to completely halt crude sales overseas by 2023. This not only reduces the firm’s dollar revenue to repay its foreign debt, but may also lead the country to import crude oil in the short term to feed its refineries as production dwindles, Moody’s Investors Service analyst Nymia Almeida said in an interview earlier this month. 

“Stopping exports means stopping inflows of hard currency into the country,” said Rafael Elias, a managing director of Latin American corporate credit strategy at Banctrust & Co. 

Mexico’s crude exports slid to a 32-year low and Pemex’s sales abroad tumbled 20% in January as President Andres Manuel Lopez Obrador seeks to make the country self-sufficient in energy. The government plans to more than double crude processing in the national refining system by next year to reduce imports of refined products—60% of Mexico’s gasoline came from abroad last year.

Moody’s Almeida said earlier this month the export halt risks making Mexico a net importer of crude, since Pemex doesn’t have the oil volumes necessary to meet the country’s fuel consumption. It would also reduce the the state-run firm’s ability to generate dollar revenue to repay its foreign debt. 

The Mexican driller faces a myriad of problems, including debt that is the highest of any major oil company at $109 billion as of the end of 2021, declining heavy crude production and losses from its refining business. Investors fret that Lopez Obrador’s nationalist energy policy will add further strain to the beleaguered firm’s finances.

The company, which reported fourth-quarter earnings on Monday, has received billions of dollars in government aid, helping it stay afloat amid a growing debt pile. Still, investors are increasingly concerned that it lacks a viable business strategy to stem losses. Some Pemex bonds have recovered after the earnings release. Its 6.49% notes due 2027 are trading at 102.9 after trading as low as 102.1 early in the morning in New York. Similarly, its 6.5% notes due 2027 are now trading at 102.6 from 102.1 earlier.

Oil Shock

Russia’s attack on cities across Ukraine sparked fears of a disruption to the region’s critical energy exports, sending Brent oil above $100 a barrel. The escalation also triggered a selloff in risk assets, hammering emerging-market bonds, stocks and currencies.

“Pemex is liquid and easy to sell,” said Aaron Gifford, an emerging-market sovereign analyst at T. Rowe Price Group. He expects investors to buy the dip as at current prices the bonds are cheap, given he sees the company’s fundamentals improving.

While Pemex was among the worst performers in the sector, other Latin American oil bonds were also hit. Investors ditched Colombia’s Ecopetrol and Brazil’s Petrobras dollar notes citing risks posed by this year’s presidential elections, as remarks by left-wing front-runners in each country on halting oil production and controlling prices have scared off investors.

Despite the recent selloff, Mexico and some of its regional peers are well-structured to support themselves if the conflict in Europe continues to spook markets, said Saverio Minervini, head of Latin America energy, utilities and natural resource at Fitch Ratings.

“At the end, what Russia produces Latin America also produces,” said Minervini. “It’s expected that Latin America can compensate for any deficit that Russia leaves behind.”