Federal Backing Both Hope and Harm for PEMEX

The COVID-19 crisis has not been kind to PEMEX. Negative pricing of the Mexican crude oil mix, retail sales falling by as much as 40 percent, and historical losses in 1Q20 of US$23.5 billion paint a grim picture. Despite this, bond investors are willing to bet on the giant.

A report published by Reuters today outlined the confidence that investors have in betting on PEMEX in the face of the losses it continues to make and its unwanted name as the world’s most indebted major oil company. As of April 28, the debt total sat at US$105 billion, according to the Washington Post.

Underlying this confidence is the absolute support, both financial and political, that the NOC receives from the federal government, particularly following the 2018 election of President Andrés Manuel López, a resource nationalist.

James Barrineau, the co-head of emerging market debt for the Americas at Schroders, told Reuters that NOC’s “importance to the sovereign means default risks are low.” Given the link between the two, PEMEX’s recent woes have from the perspective of investing experts, actually increased the likelihood of further packing from the government.

PEMEX has been the recipient of a host of beneficial government actions. Most recently, the administration lowered the company’s tax burden and freed around US$2.63 billion to be plied back into PEMEX’s activities.

But in contrast to the contentment that the Mexican government’s support of PEMEX brings to investors, the codependent relationship between these institutions is one of the reasons PEMEX was recently downgraded.

In giving the reasons for reviewing the PEMEX’s senior unsecure ratings grade, Moody's Senior Vice President Nymia Almeida said: “We downgraded PEMEX's ratings and maintained the negative outlook on its ratings following the downgrade of Mexico's rating and its negative outlook given the critical importance of the government's financial strength and support in the assessment of PEMEX's credit risk.”

Where investors see opportunity, Moody’s sees concern.

Moody’s is not the only credit agency to note the dependency PEMEX has on government support. Both Fitch and S&P both highlighted the relationship in their recent downgrades of the company’s.

The administration’s support of PEMEX has in turn caused concerns within Mexico’s burgeoning energy market, where private companies that have recently arrived have questioned whether the odds are being stacked heavily in  PEMEX’s favor.

Two recent examples standout. One is the government’s involvement in the Zama reservoir, a massive discovery made by US company Talos Energy. Despite Talos’ time and money spent in discovering the well, which have involved hundreds of millions of dollars up to this point, PEMEX is now contesting the American’s operatorship. The reservoir runs from Talos’ block into the adjacent PEMEX field and while PEMEX is yet to drill a well, it is staking a claim to its share of resources. Unitization talks cannot be progressed until the NOC has drilled a well on its block, a task it is yet to do.

The other is the elimination of the asymmetric regulation on PEMEX, intended to ensure that all companies have a level playing field in retail, made by Mexico’s Energy Regulation Commission (CRE). The action left Carlos Salazar Lomelín, the then president of Mexico’s Business Coordinating Council (CCE) “shocked and concerned”, reported El Economista.

Outside of oil and gas, the President Lopéz Obrador is also ruffling feathers in the renewable energy sector. CENACE, the regulator of Mexico’s power grid, has put roadblocks in the way of hundreds of renewable projects citing the weakness of the country’s grid as a problem. Private companies have taken the regulator to court.