Mexico City — Petróleos Mexicanos (Pemex) will suffer greater difficulty in access to capital and will have liquidity problems as a consequence of Fitch Ratings having downgraded the state-owned oil company’s rating, from ‘BB-’ to ‘B+’, a level considered in the financial sector as a “junk bond”.
After the rating cut, two analysts told Bloomberg Línea that the government of President Andrés Manuel López Obrador is expected to inject resources into the oil company again to support it in its financial commitments amid expectations of a decrease in the price of oil and the dollar in Mexico.
Fitch also placed Pemex’s ratings on negative outlook due to concerns about the Mexican government’s ability and willingness to materially improve the company’s liquidity position and capital structure over the next two years without concessions from creditors.
Pemex, which accumulated $107 billion in debt in the first quarter of 2023, faces international debt bond maturities of $4.6 billion in 2023 and $10.9 billion in 2024, according to information from Pemex.For Fitch, the refinancing of this debt would expose the company to higher interest expense that would further pressure its cash flow. “The inability to refinance the debt in the capital markets with similar or other long-term financial instruments would aggravate its liquidity risk at the end of 2024″.
Diego Diaz, Energy researcher at the Mexican Institute for Competitiveness (IMCO), said that Fitch’s action impacts Pemex’s access to international capital markets to refinance its debt, which also occurs at a time when Pemex has serious liquidity problems.
He indicated that last year Pemex paid 162 billion pesos ($9.65 billion) in interest, while Fitch mentioned in its statement that debt service could represent up to $13 billion by 2025, compared to the $8.2 billion paid in 2022.
“The risk of limiting the oil company’s access to capital is that it will not be able to refinance its debt, or refinance at higher rates than those it is already paying, resulting in high financial costs.
Diego Díaz, IMCO researcher
The backdrop to this scenario is the decline in oil prices and the dollar in Mexico.
The average annual crude oil price set by the Organization of Petroleum Exporting Countries (OPEC) stands at $78.45 per barrel, lower than the price observed in January of this year, which was $81.62 per barrel. The Mexican government projected for 2023 the price of the Mexican oil mix at $66.60 per barrel; the price observed as of May is $67.20 per barrel.
Although the oil price in May is practically in line with the government’s estimate, the falling dollar in Mexico is affecting Pemex’s revenues, which exports oil in dollars. For 2023, the government projected the dollar at 20.20 pesos for the January-May period, but the observed price resulted in 18.70 pesos per greenback.
Government would support Pemex
In spite of the millions of dollars of support that AMLO’s government has granted to Pemex during his six-year term, these seem to have been insufficient in the face of the downgrade by Fitch.
The government has injected Pemex with more than 690 billion pesos ($41.1 billion) between January 2019 and March 2023 by way of certificates and equity contributions, according to the company’s financial statements and data from the Finance Ministry.
On June 6, Finance Minister Rogelio Ramirez said the government is ready to help Pemex if liquidity is lacking.
Carlos López Jones, director of consulting at Tendencias Económicas y Financieras, said that at the beginning of the year the finance ministry assumed that oil would not fall below $70 per barrel, but currently the Mexican mix is below that amount, so the government will have to support Pemex.
“I do not see any more downgrades for Pemex during this six-year term, but with B+ I would place bonds at 11% or 12% per annum. I do not think it should do it, and the best thing would be swaps that the government would place and give that money to Pemex to pay its future maturities.
Carlos López Jones, chief economist at Tendencias Económicas y Financieras
López Jones mentioned that, as Fitch rightly points out, the constant accidents at Pemex reflect a lack of maintenance, so there may be more unfortunate accidents and the rating agencies may make decisions.
And a global issue, he added, is that the International Energy Agency estimates that the world demand for crude oil in 2024 will only increase by 1.2 million barrels per day, so if during 2024 it estimates that the world demand for crude oil will no longer increase, this news will generate a lot of volatility among oil companies around the world, including Pemex.
Diego Díaz said that in view of the company’s liquidity pressures, the federal government is going to have to return to supporting Pemex to a greater extent, which, although it is something that would be fine if it is in the short term and is justified, it is not really clear when these monetary transfers will cease to be necessary, with the negative implications for the treasury.
“It would not be surprising if the federal government continues to support the company because in the end the government is the de facto guarantor of Pemex’s debt (...) the problem is that there have been no fundamental changes in the company’s operation and unfortunately in terms of public finances it is increasingly becoming a burden for the government”, he said.