Mexico to inject USD$5.2 billion in Pemex

Investors deemed the measures insufficient to revert Pemex’s financial deterioration

Mexico’s plan to inject USD$5.2 billion in Pemex met with skepticism
The Mexican peso weakened by more than half a percent against the dollar after the announcement, before recovering later on Friday - Photo: Daniel Becerril/Reuters
English 16/02/2019 13:41 Newsroom & Agencies Mexico City Ana Isabel Martínez, David Alire García/Reuters & Antonio Hernández/EL UNIVERSAL Actualizada 13:41
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Mexico will inject USD$5.2 billion into ailing state oil company Pemex, officials said on Friday, promising to strengthen its finances and prevent a further credit downgrade, although investors saw the plan as only a short-term fix.

Falling oil output, corruption and high labor costs have contributed to the decline of the company that was once a symbol of national pride. It now holds roughly USD$106 billion in financial debt, the highest of any national oil company in Latin America. Fitch and Moody’s rate its credit one notch above junk.

Fitch said on Friday that the plan, which includes additional tax cuts, more government spending on the company and debt refinancing, would likely not be enough to prevent “continued deterioration” in Pemex’s credit quality. The agency cited an ongoing “significant level of underinvestment” for Pemex.

In an address to Pemex investors, the Citibanamex group warned that “the biggest problem we see is that neither Pemex’s administration nor its business plan have changed. We believe that the Mexican government has not diagnosed the company’s problem properly.”

In their analysis “Strike Two: Pemex’s plan proves insufficient yet again,” the bank’s head office claimed that the state oil company had a serious solvency problem, and that the government of López Obrador did not offer a convincing business plan.

Pemex will receive USD$1.8 billion in pension liability monetization as part of the new plan and finances will be helped by a corruption clampdown, officials said in a presentation that was short on details. They vowed the Mexican government will not take on new debt in 2019.

Pemex must make more than USD$27 billion in debt payments over the next three years.

Investors said they had expected stronger measures, and while encouraged by government vows of support, they said the plan offered only short-term relief.

“The measures are not a long term fix and won’t be enough to stabilize oil output,” said Edward Glossop, Latin America economist at Capital Economics.

If oil prices and output decline further, he estimated yields on Pemex bonds could rise by around 1 percent this year.

The price fell after the announcement for Pemex’s most heavily traded bond on Friday, maturing in 2047, as its yield rose 14 basis points, according to MarketAxess data.

The price on a Pemex bond maturing in 2024 also dropped, with its yield up 32 basis points, reflecting bondholder skepticism of the plan.

What’s more, the measures will do little to shore up Pemex’s standing with the ratings agencies, said Julie Murphy, a Latin America analyst at JP Morgan.

“We are extremely disappointed with the measures,” she said.

The Mexican peso weakened by more than half a percent against the dollar after the announcement, before recovering later on Friday.

Over time, Pemex taxes will go down and the capital injection will allow debt refinancing over the year, Finance Minister Carlos Urzúa told a press conference.

If Pemex requires more help, the government will do whatever it takes to keep Pemex’s finances healthy, he added.

Fitch downgraded debt issued by Pemex by two steps last month, making it the second agency after Moody’s to put the company just barely within its investment grade category.

The move stoked fears that further credit downgrades could significantly raise Pemex’s financing costs and result in dire fiscal consequences for the government.

President Andrés Manuel López Obrador, who took office in December and ran on a promise of strengthening Pemex, did not fully detail in his comments at the news conference how the government would finance the company’s lower tax bill and capital injection.

He said efforts since late December to battle rampant fuel theft would result in savings of about $1.6 billion, however, while a plan to increase production will generate more resources.
“It’s injecting resources, it’s lowering the tax obligation,” López Obrador said. “But above all, it’s cleaning out corruption from Pemex.”

Investors had expected a stronger response, said Luis Gonzali, a portfolio manager at Franklin Templeton Investments. Even so, he praised the administration’s “unconditional support” to double down on relief measures if necessary.

Wilbur Matthews, founder of Vaquero Global Investment, also saw the announcement as positive.

“It is a good sign that the López Obrador administration recognizes that Pemex needs to change profoundly,” he said.

The company is in talks with lenders to potentially raise up to $7 billion this year, Refinitiv IFR reported on Friday. The company has previously said it would refinance around $6.6 billion in 2019.


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