Alberto Jones Tamayo
Director General
Moody’s Investors Service
Rosa María Morales Cid
Senior Analyst Oil & Gas Latin America
Moody’s Investors Service
View from the Top

Pemex Goes Exacerbated by Credit Downgrade

Wed, 01/20/2016 - 08:32

Q: What has been the impact in the drop in oil prices for PEMEX, and on Mexico’s current credit rating?

AJ: The government announced intentions to reduce public expenditure by around MX$147 billion, MX$100 billion of which will be borne by PEMEX. This is positive for PEMEX’s credit, although it falls short of the actions required by the NOC, and it will help adjust the necessary reduction in expenditures for the year. There is a possibility where we would consider a scenario of downgrading Mexico’s credit in the next 18 to 24 months, considering that the sovereign rating now has a negative outlook. Such a scenario will occur if the fiscal consolidation efforts of the government are stalled and if the government has to provide direct support to PEMEX or the broader public sector in contingent liabilities. This would entail further increase in debt metrics to levels beyond 40% of debt to GDP and Moody's would review the plans that the government would implement to address any further rise in debt and the corresponding lower growth.

Q: To what extent do you believe that PEMEX’s Adjustment Plan could improve the NOC’s credit rating, or at least help the company in other aspects?

RM: This is certainly a positive step, but more must be done to bridge the gap created by the conditions we have discussed. Another factor that we did not consider at the beginning of the year was PEMEX’s access to markets, since we were comparing the situation to other similar companies such as Petrobras that lack this characteristic. The fact that PEMEX possesses access to markets can certainly be seen as a positive factor.

AJ: So far, PEMEX has been able to go to the market several times, both in dollars and in euros, to the equivalent of over US$8 billion, and today it announced it would trade in pesos both domestically and abroad to the equivalent of US$450 million. We have calculated that PEMEX should have a gross financing need of approximately US$23 billion for 2016, which includes CAPEX, OPEX, and debt refinancing. Roughly US$12 billion of PEMEX debt will mature this year, the remaining US$11 billion includes CAPEX and OPEX, and roughly US$5-6 billion of this amount will be cut by  the government. Therefore, we calculate that the gross financing needs will reduce to US$18 billion, which is a positive development, but is not enough to sustain the NOC. Of this amount, US$8 billion has been raised, and a further US$10 billion is needed, and this is even after generation. PEMEX has the option to issue debt for US$10 billion, but the ceiling for this year approved by Congress is around US$18 billion incrementally.

Q: How is PEMEX performing compared to other NOCs in the region?

RM: All the companies in the region are facing the same problem, and several are facing greater issues wherein local prices are fixed, and due to the devaluation of currencies, this is severely impacting cash flows. Major companies such as Petrobras and Ecopetrol are benefitting from the diversity of the business as they are integrated and therefore do not depend entirely on E&P. Last year, Petrobras was performing more efficiently due to the refining segment, but then when the currency began to sink, so did the company’s cash flows. Petrobras now has a liquidity problem and, compared to PEMEX, this poses greater risks due to the fact that the former has no access to the markets and lacks the support of the government- owned banks and the general government of Brazil.

Q: What role do you expect Mexico to play in the global oil and gas industry in the medium to long term?

RM: We have seen a reconfiguration of the industry, not only in Mexico, but globally, and the companies most affected are those rendering auxiliary services like rigs, which are normally the first cost to be cut due to the lack of E&P right now. Some of the companies will even merge, and this can be perceived as a positive development since there was an oversupply of these companies in the past.

AJ: Certainly Mexico is poised to play an extremely relevant role, among the five most important countries in the world. This is a temporary situation experienced by the country, but it clearly has the right natural conditions to position itself at the forefront of the market. It has the correct economic and credit conditions and an improved legal framework, which will enable the players to develop the industry thoroughly. I think this is what the international investors from the bidding rounds, as well as financial investors, can see when evaluating Mexico.