Pemex strategy fails to convince
Sceptical agencies consider further cuts to their ratings of the company's debt
Debt issued by Mexico's national oil company Pemex is at risk of losing its investment grade status—compounding the challenge of the firm achieving its twin priorities of reducing its considerable debt and reversing its declining oil and gas output.
The economic policy direction of the country has also alarmed credit agencies. S&P highlights government restrictions on private investment, as well as the financial burden on Pemex, as key reasons for their one-in-three prediction that Mexican sovereign debt will be downgraded before the end of the year.
$111.27bn – Pemex’s debt
Pemex's debt came under attack in June. US ratings agency Fitch lowered its rating from BBB- to BB+, citing underinvestment in the upstream sector. Both S&P and Moody's revised their outlooks for Pemex from stable to negative just days later.
Government policy is vital to the Mexican state oil company's finances. Pemex was obliged to hand over an amount equivalent to around 38pc of its sales revenues, or 83pc of its Ebitda, to its sole shareholder each year across 2012-17, according to a report by Dutch bank ING. Over this period, negative cash flow meant investment declined and, in turn, oil reserves fell to just 7.7 years and production dropped by 46pc to 1.82mn bl/d in 2018, from a peak of 3.4mn bl/d back in 2004.
The government has pledged to significantly reduce Pemex's tax burden and stabilise its debt profile. In its latest business plan, the company will have its tax rate cut by 11 percentage points over the next two years—by seven points in 2020 and a further four in 2021. These rate reductions will provide Pemex an additional $2.4bn next year and $4.4bn in 2021. Capital injection will total around MXN141bn ($7.4bn) over the next three years.
Credit agencies are doubtful whether the strategy will be enough to finance Pemex's ambitious upstream and refining strategy. Moody's suggests Pemex would need to invest around $19.3bn by 2024 to reach its 2.7mn bl/d production target, a difficult task while stabilising its debt profile. Pemex says its total debt will be roughly MXN2.123tn ($111.27bn) in 2019, the same figure as last year.
Since 2006, the depletion of the Akal field, in the Cantarell complex, has been among the biggest production losses for Pemex. Output has collapsed by 1.6mn bl/d, having previously accounted for more than 50pc of total output. Last year, production from the Xanab field saw the largest year-on-year drop, falling around 10,000bl a month. In its efforts to compensate, Pemex increased activity in the shallow Ayatsil and Maloob fields, and significantly boosted the contribution of the Xux field.
Following the decision to reverse the previous administration's focus on deepwater, as part of its new strategy, Pemex will develop 22 new onshore and offshore fields. It plans to begin operations in 13 fields this year, with a further five in 2021 and two in 2022. Central to its short-term plans will be the Ixachi onshore field, discovered in 2017. The field is estimated to hold over 1.3bn bl oe and will produce up to 80,000bl/d over the next three years. By the end of 2019, Pemex plans to raise production to 1.829mn bl/d, mostly from Ixachi and Xikin.
Pemex is also prioritising the development of a new refinery in the state of Tabasco. Crude processed in the country's six refineries has more than halved since 2006, from just below 1.3mn bl/d to slightly north of 610,000bl/d, despite a combined installed capacity of around 1.64mn bl/d.
"$8bn, which is supposedly the cost of the refinery, is going to be paid by Mexico," says Edgar Cruz, head of credit research at Spanish bank BBVA Bancomer. "[But] Mexico produces c.1.68mn bl/d and exports c.1mn bl/d. It seems additional [refining] capacity will only make the capacity utilisation even lower."
Credit agencies are equally dubious about the plan. S&P says increasing its investment in refining risks further eroding Pemex's finances. While Pemex's Q2 results showed that cash flow was less negative than during Q1, the company will likely require further government support, says Moody's. It recommends Pemex delays expenditure on the Das Bocas refining project to focus on its upstream production targets.