(Bloomberg) -- Jennifer Gorgoll was feeling the heat. A bond investor at Neuberger Berman Group LLC, Gorgoll had staked out a big position in debt issued by Mexico’s state-oil company, Petroleos Mexicanos, and executives at Neuberger were getting nervous. 

Pemex’s ESG record had deteriorated so much — fatal accidents and toxic spills were piling up and methane emissions were soaring — that it was getting hard for the firm to justify owning the bonds when pressed by clients.

Either Pemex cleaned up its act, they concluded, or they would likely have to unload all their holdings. 

So Gorgoll, a long-time Pemex bull, pulled some of the oil giant’s top finance officials into a Zoom call and, over the course of an intense 60-minute conversation, pressed them again and again to take environmental, social and governance issues more seriously. 

“We hold bonds in size,” Gorgoll recalls saying, “this is a very important investment for us and we’ve been invested in Pemex for a very, very long time. But we made it clear to them that there’s consequences to actions and inactions.”

That tough talk was part of an 18-month-long campaign by Pemex creditors — a broad group that ranged from Wall Street firms like JPMorgan Chase & Co. and BlackRock Inc. to boutique investment shops — that would ultimately lead the company to unveil its first-ever sustainability plan in March, according to people who were part of the talks. In a 67-page document, Pemex committed to slash emissions by 50% over the next six years and become net zero by 2050, a stunning reversal for a company that had long ignored concerns about how harmful its oil operations were to the environment.

Some of the actions by creditors were coordinated but, in a sign of how potent the ESG movement has become in the world of finance today, much of the push was a hodge-podge of lobbying efforts that firms initiated on their own. 

Even if Pemex fails to deliver on all of its pledges, as some investors fear, its decision to agree to give in to the ESG demands underscores how beholden the company has become to creditors who have lent it a combined $102 billion, an amount greater than the debt taken on by any other oil producer in the world. If Pemex wants to survive, it will need many of those creditors to roll over their bonds and loans. 

The company’s ESG committee declined to comment on its engagement with creditors over its sustainability plan.

Financial Support

Doubts about that continued financial support mounted last year, when a series of accidents, including a platform explosion in July that left two dead, led investors to fear the government wouldn’t continue backing Pemex. That triggered a selloff that sent the company’s bond yields soaring to as high as 12.5%.

“Pemex is at the mercy of credit markets for new funds and refinancing,” said Philip Fielding, co-head of emerging markets at MacKay Shields LLC who holds Pemex bonds. “It’s been suffering from a high tax and interest burden pushing the free cash flow from operations into the red.”

At their peak in 2020, the extra yield on Pemex’s short-dated bonds ballooned to 9 percentage points over Mexico’s sovereign debt, highlighting concerns that the company was too reliant on support from President Andres Manuel Lopez Obrador, who has helped the driller with 1.37 trillion pesos (about $80 billion) in cash injections and tax breaks since coming to office in 2018.

Market jitters have eased of late. Pemex’s bond spreads over the sovereign have shrunk to their lowest in at least a year as investors grow more confident presidential candidate Claudia Sheinbaum will continue to support the company. The frontrunner in the June 2 presidential elections, Sheinbaum has called for Pemex to refinance bonds ahead of large maturities in 2025. The finance ministry has said it’s assessing various options for Pemex and its debt, but will wait to coordinate a strategy with the president-elect.

Read More: Big Pemex Debt Plan Is Far From Imminent, Finance Minister Says

The bonds have roundly outperformed emerging market corporate debt. While EM corporate bonds have returned about 5% over the past five years, Pemex notes — many of them with high coupons — have returned close to 30%, according to data compiled by Bloomberg as of May 24. 

It was those kinds of returns that first got Neuberger’s Gorgoll hooked. The 53-year-old began investing in Pemex over 20 years ago, including in private placements and structured oil receivables.

“It was the darling of investment opportunities and we were like, wave it in. We can’t get enough of this paper,” says Gorgoll, whose firm owns around $300 million of Pemex debt after cutting holdings over the past two years.

Neuberger escalated its engagement in May 2023, handing the company a whole list of concessions. To Gorgoll’s surprise, Pemex sent top financial officers, operations managers and its head of sustainability to the meetings — more representatives than on Neuberger’s side. 

Chorus of Creditors

There were over half a dozen banks involved in the chorus of creditors ratcheting up the pressure on Pemex, including the likes of HSBC Holdings Plc, Bank of America Corp., Citigroup Inc., Banco Bilbao Vizcaya Argentaria SA and BNP Paribas SA, according to people familiar, who asked not to be named. HSBC, BofA, Citigroup, BBVA and BNP declined to comment, as did JPMorgan and BlackRock. 

Banks with open credit lines needed Pemex to have a credible ESG plan to roll over around $8.3 billion in debt. Other fund managers pressed for basic improvements like sustainability reports in English — not just Spanish — and disclosing emissions targets prominently on Pemex’s website, according to the people.

In late 2022, calls for engagement from investors — including the Emerging Markets Investors Alliance, whose members hold some $13 trillion of assets under management — had grown so strong that the company created its own internal sustainability committee, and by the second quarter of 2023 hired S&P Global Commodity Insights to help write a sustainability plan, according to the people.

A spokesperson for the Emerging Markets Investors Alliance said the organization facilitated dialogue between bondholders and the company and that it did not pressure Pemex into crafting its ESG plan.

Not all firms are sold on this new plan. “It is an uphill battle for the company, given its past reputation issues. It may take more than just marginal improvements on sustainability matters, so Pemex will still be excluded from stricter portfolios,” said Sergey Goncharov, a money manager at Vontobel Asset Management Inc.

That may change if Sheinbaum wins the election and makes good on her promise to revitalize Pemex with a new focus on clean energy. Her plan would cap its oil production at around 1.8 million barrels a day — an increase from about 1.5 million barrels now — while broadening Pemex’s scope to include technologies such as lithium extraction and electric-vehicle infrastructure.

Read More: Mexico’s Sheinbaum Wants Debt-Laden Pemex to Go Green

Still, Gorgoll awakes daily bracing for more grim headlines, a risk that is inevitable with an evolving corporate strategy, she says. Quarterly check-ins are critical.

“It’s moving a boat — you can’t change this and improve the situation one day to the next,” Gorgoll said. “But for the first time in a long time, I feel there’s something here we can get our arms around.”

--With assistance from Michael O'Boyle.

(Updates data in 14th paragraph.)

©2024 Bloomberg L.P.