March 23, 2020 / 3:54 PM / 8 days ago

The numbers don't add up at Mexico's Pemex as oil prices crash

MEXICO CITY, March 23 (Reuters) - Prices for Mexico’s main crude export plunged last week to 18-year lows, giving President Andres Manuel Lopez Obrador the harsh choice between pursing his nationalist energy agenda or taking unpopular steps to prevent ratings agencies from downgrading the credit of national oil company Pemex to junk.

With Petroleos Mexicanos due to stump up more than $30 billion by the end of his term in 2024 to pay bondholders, some industry experts are suggesting a restructuring including closing loss-making fields and layoffs to avoid a downgrade.

Pemex and the government are “feeling pressure from all sides now,” said Victor Gomez, senior economist at financial firm Finamex. Fitch said Pemex is the most vulnerable among national oil companies in Latin America.

This year alone, $6 billion are due for maturing bonds.

The benchmark price for Maya hit $12.92 last week, its weakest since January 2002, data from S&P Global Platts shows. Two months ago, before the coronavirus pandemic began to roil energy markets, Maya fetched $55.15 per barrel.

(GRAPHIC: tmsnrt.rs/2TTTtKB)

“The context has changed now. The oil price crash was completely unexpected,” said Jorge Sanchez, director at Mexican financial think tank Fundef. He described Pemex as financially “bankrupt” and “walking towards a downgrade.”

The perception Pemex may not be able to meet payments raises the likelihood a second rating agency strips its investment grade rating this year. This could hit the cost of borrowing for the government.

Pemex Chief Executive Officer Octavio Romero on Wednesday vowed to slash administrative costs and freeze hiring, acknowledging that the company’s oil price hedging strategy would not make a dent in the mounting debt problems.

Few in the industry think Romero’s measures will suffice, Yet options are limited, with investment appetite low as the world lurches towards recession.

In the past, the government has propped up Pemex with cash injections, but government finances are tight and it will be harder than ever for the finance ministry to lower the company’s high tax burden.

Pemex refinanced more than $29 billion in bonds last year, a strategy that created some breathing space and was intended to create cash flow for investments in production.

But raising capital again will be daunting during the economic chaos of coronavirus, as investors chose safe-havens over riskier bonds.

Lopez Obrador also threw Pemex lifelines in the form of cash injections and tax breaks last year.

However, it still had more than $105.2 billion in financial debt at the end of the year, and an additional $77.3 billion in pension obligations.

Most Pemex bond yields were above double digits on Friday, MarketAxess data showed. Its highly traded 2030 bond traded at 71.5 cents on the dollar at the close on Friday, with a yield of 11.808%.

It traded above par as recently as March 9.

The one bright spot for Pemex is a hedge to keep income above production costs, and a larger hedge the finance ministry says guarantees budgeted government income from oil this year.

Armando Armenta, senior economist at asset manager AllianceBernstein, said how much support the government can give depends on how deep the recession is, how long oil prices are low, and how Pemex’s production and profitability ratio evolves.

DEEPER INTO THE RED

The government, which has opposed private investment even in oil exploration, may not support more radical options to turn the company around, such as asset sales, stopping production at loss-making fields and mothballing an expensive new refinery.

“I doubt under the current circumstances the government and those who head Pemex have even the smallest intention of an important financial restructuring, making cuts,” said Sanchez, who recommends making Pemex smaller.

Pemex was sinking deeper into the red even before oil prices crashed: it posted a $18.3 billion net loss last year, nearly doubling the 2018 loss.

Even investors and private economists who favor more private participation concede the price drop may make this impossible, at least for now.

“If oil prices stay low over a long of time, they could strangle investments,” said Edgar Cruz, chief credit strategist at BBVA in Mexico. Still, he is sticking to his long term view that private capital should help drive Mexico’s energy strategy.

Armenta said a downgrade from Moody’s Investors Service is now “the most likely outcome”.

Fitch already downgraded the bonds to junk in June. All three ratings agencies have Pemex bonds on a negative outlook.

“Do they need a full-blown crisis to change course?” Armenta said. (Reporting by Stefanie Eschenbacher; Additional reporting by Rodrigo Campos and Ana Isabel Martinez; Editing by Frank Jack Daniel and David Gregorio)

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