Time’s Running Out for World’s Most Indebted Oil Company

US rating agencies pressure Pemex and the new Mexican government. But Pemex is too big to fail. 

By Don Quijones, Spain, UK, & Mexico, editor at WOLF STREET.

The financial pains and strains continue to grow for the world’s most indebted oil company, Petroleos de Mexico (Pemex). Standard & Poor’s became the latest in a succession of rating agencies to downgrade the company. Pemex is state-owned. So S&P has two credit ratings for the company: One, as if it were a stand-alone company; and one for the company as part of the Mexican state.

S&P slashed its stand-alone rating of Pemex three notches to ‘B-‘ from ‘BB-‘ on growing worries that financial support pledged by the government might not be enough to prop up the company and might not be enough revive declining production. Anything below ‘BBB-‘ is non-investment grade, or “junk.” ‘B-‘ is six notches into junk (see our corporate credit rating scales by Moody’s, S&P, and Fitch).

S&P left unchanged its rating of Pemex-as-part-of-the-Mexican-state, at ‘BBB+’, the same as its rating of Mexican government debt, but lowered its outlook for both to negative from stable, and warned that Mexico faces a one-in-three chance of being downgraded in the coming year. This, in turn, triggered a cascade of outlook downgrades for many of Mexico’s biggest corporations and 72 financial institutions, including the country’s biggest banks and insurance companies.

“The government’s financial support, in order to restore credit fundamentals, falls well short of the company’s multi-annual capital investment needs,” S&P said in a statement. To avoid “further deterioration”, Pemex could require at least $20 billion over multiple years. These moves are piling yet more pressure on the government to pour more money into the debt-laden oil firm as well as reverse its nationalist energy policy.

In February, Mexico’s new president, Andres Manual Lopez Obrador (AMLO), pledged to inject $3.9 billion into Pemex to bolster its finances and forestall a further credit downgrade. He also emphasized the cost savings Pemex stands to gain from his government’s multi-pronged offensive against the rampant oil theft that is draining the state-owned oil company of an estimated $3 billion a year.

But that wasn’t enough to placate Fitch, which in February slashed Pemex’s rating two notches to “BBB-‘. Moody’s has also done so . If it slips one more notch, and therefore into junk territory, investors, including many pension funds and sovereign wealth funds that are contractually bound to hold assets of investment grade quality, may have to dump Pemex debt, which would tighten the screws further for Pemex and Mexico.

For Mexico, Pemex is too big to fail. Its total debt load currently stands at $107 billion, up from around $40 billion ten years ago. That’s the equivalent of over 5% of Mexico’s GDP. And it doesn’t even include the company’s pension liabilities which, together with those of the Electric Utility of Mexico (CFE), are estimated to be worth an additional 9% of GDP. It currently has $84 billion of bonds in circulation — more than any other energy company — $6.5 billion of which needs to be financed this year.

As the debt grows, production continues to shrink. In January, Pemex’s crude output dropped to 1.62 million barrels per day, the lowest since public records began in 1990 and down from a daily average of 2.6 million in 2009. Its natural gas production also hit a fresh record low in January, of 4.6 billion cubic feet per day, down from 6.5 billion in 2015.

A dizzying array of factors lie behind the company’s decline, including shrinking oil reserves, bad management, a bloated workforce, severe budget cuts, lack of investment resulting in poor or obsolete infrastructure, negligence, systemic oil theft from criminal gangs helped by Pemex employees, and the huge tax burdens the government imposed on the firm in the years preceding Mexico’s oil reforms, while lavishing foreign companies with massive fiscal incentives to invest in Mexican oil fields. Plus the rampant corruption that infects just about level of the organization.

The former Peña Nieto government did next to nothing to tackle the theft or corruption, while its widely lauded energy reforms are yet to deliver on many of their lofty promises, from lower prices at the pump to increased oil production. The irony, as AMLO pointed out this week, with some justification, is that while Pemex’s performance massively deteriorated over the last six years and its debt burden grew by over 70%, only one ratings agency, Moody’s, reduced its rating.

Now, all three ratings agencies are warning of the direst consequences if AMLO does not fill Pemex up with significantly more public funds and stage a retreat from his nationalist energy strategy, which is popular among voters and loathed by investors. Of particular concern are the government’s plans to curb the private sector’s role in the energy industry as well as build a new refinery in Tabasco at a projected cost of $8 billion, all in the name of reducing Mexico’s dependence on gasoline imports from the US.

But AMLO — backed by an approval rating of 78%, a record for the first trimester of a presidential term since polling began in the 1980s — shows little sign of yielding to the pressure, insisting that the ratings agencies are “punishing” the country for the flawed “neoliberal” policies pursued over the past three decades.  By Don Quijones.

GM’s Mexico-built vehicles now account for 23% of its US sales. And the Japanese have massively discovered Mexico’s cheap labor too. Read…  Just How Huge Are Mexico’s Auto Exports to the US? How Fast Have They Grown?

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  23 comments for “Time’s Running Out for World’s Most Indebted Oil Company

  1. Dave
    Mar 10, 2019 at 12:33 pm

    This might not be the most appropriate spot for a request, but is there a new report on who’s been buying up the US Federal Debt since the start of the year?
    That might be Wolf’s specialty…

    • Javert Chip
      Mar 10, 2019 at 2:04 pm

      Yes, probably not the most appropriate spot.

    • Iamafan
      Mar 10, 2019 at 2:12 pm

      I think he already answered this earlier. You (plural) as in Americans are buying more and more of your own Treasury’s debt.

  2. nick kelly
    Mar 10, 2019 at 1:26 pm

    I see only one hope: that the entire mess is turned over to a foreign operator, for obvious reasons not a US one, and Mexico gets a royalty on what would be much better production.

    Because only about half (third?) of current employees would be kept on, a tough sell.

    A big loan is going to be needed. Could Norway possibly be lured into this? Pemex declares bankruptcy (or is sold for a dollar) and Norway becomes operator AND supplies debtor- in-possession financing!

    OK, crazy, but the next stop is Venezuela at least as far as the oil component is concerned.

    • Lion
      Mar 10, 2019 at 2:15 pm

      I think the only thing the Norwegians will be buying soon is Tesla, after it emerges from bankruptcy. They love those cars.

      Maybe China could help Mexico. That would be interesting

    • Maximus Minimus
      Mar 10, 2019 at 7:03 pm

      Why would a Norwegian company want to have physical presence in a country where the police covers their faces, and the criminals walk free? Not to mention sophisticated oil pipeline theft (not). There is a name for such place, but I cannot put my finger on it.
      The only dumber thing is to have visa free travel with such country.

      • Javert Chip
        Mar 10, 2019 at 9:45 pm

        Just for perspective:

        Norway has 5.5M citizens, and a 2018 GDP of $435B

    • Aravind
      Mar 11, 2019 at 6:06 am

      It does not seem to be a problem caused by Pemex’s management of oil fields or lack of technology. The Cantarell supergiant field (which at one time was second only to the Ghawar field in Saudi Arabia in terms of production volume) has been in a steep decline for the last 15 years. Its peak was in 2003. The nearby Ku-Maloob-Zaap has not approached, and will not likely ever even approach, Cantarell’s outputs in its heyday. Seems it is a simple problem of not enough crude oil reserves beneath the ground.

      • Bankers
        Mar 11, 2019 at 7:57 am

        That is part of the problem

        https://oilprice.com/Energy/Energy-General/Why-Mexicos-Oil-Production-Could-Fall-Even-Further.html

        however the other is mismatch in refining leading to high cost of gasoline imports in exchange for crude exports ( crude @ 1.75 mbpd production of which 1 mbpd exported) with 0.5 mbpd gasoline imports . Gasoline consumption has been increasing, doubling in two decades.

        So it just looks like General Plunder and Major Mismanagement have been at work.

        Sources:
        probdes.iiec.unam.mx/en/revistas/v49n193/body/v49n193a5.php

        reuters.com/article/mexico-oil/crude-oil-output-exports-drop-in-october-for-mexicos-pemex-idUSL2N1Y11JD

        .theglobaleconomy.com/Mexico/gasoline_consumption/

        tradingeconomics.com/mexico/imports-of-petroleum-gasoline

        ( note WS your page is really glitchy on Android today, playing with settings, input keyboard jumping up slow then down etc. – only goes on when I switch to your tab on browser, associated with adds loading)

        • Bankers
          Mar 11, 2019 at 9:32 am

          That was on Opera, seems to be behaving now, so unless you tweaked something, it must have been a certain ad. or combination of scripts – that’s computers.

          Have watched site after site change format from more “newspaper” format which is closer to a “site layout” to “full in your face choices are made” where navigation is overcomplex and filled with gizmo like swipe to next article etc. Google news is the worst for that, sometimes it loads tons of same story, you cannot expand or zoom well etc.. There was a website that converted it all to older format, but new script ruined that too. All this especially on mobile devices. Oh well… there are workarounds that work for most sites.

      • Javert Chip
        Mar 11, 2019 at 5:07 pm

        I’m not an oil guy, but, technology-wise, I know just having a hole in the ground with some oil flowing out of it is not enough to sustain healthy extraction.

        Pemex needs capital investment; unfortunately, somebody-not-the-USA keeps stealing theirs. It’s hard finding anybody who will sell them the new technology or loan them money. The way around this is to sell “participators” in the oil fields, but Mexico won’t do this because of the big, bad USA…so 10% of the Mexicans born in Mexico since 1960 have up and moved to…wait for it…the big, bad USA.

      • Kasadour
        Mar 13, 2019 at 3:07 pm

        Exactly. And since you mentioned Ghawar, there is somewhere between 50 and 70% sea water that has to be extracted from the oil before it’s able to begin processing. That adds another layer of production on top of the overall production of Saudi oil. One could postulate that Ghawar is finished, or near finished, just as Cantarell.

    • Perplexed Pete
      Mar 13, 2019 at 6:41 am

      WRONG! The only solution to the banker’s debt trap is not more debt, transferring debt, changing creditors, etc. The only answer is default and complete debt-forgiveness for everyone, everywhere. There needs to be a “jubilee,” and an abolition of banker-controlled money. Please remember, all this “money” that PEMEX and everyone else in the world borrows is actually created out of thin air when the bankers issue the loans. The interest being paid is not a return on actual capital invested, but is a user fee paid to private bankers who have a monopoly on money creation. The “money” they loaned PEMEX is actually a series of blips in the banker’s computer that took almost nothing to create. However, the labor and resources extracted in interest are quite real and onerous, and are a leading cause to the impoverishment of nations.

  3. Steve clayton
    Mar 10, 2019 at 1:37 pm

    Hi Wolf, which banks are on the hook ref the huge debts? Regards Steve

    • Mar 10, 2019 at 3:04 pm

      $84 billion of the debt of Pemex is in form of publicly traded bonds. They’re own by investors, such as pension funds or the bond mutual fund in your 401k.

  4. Mar 10, 2019 at 1:41 pm

    So there bank funding rate is over 8% and their CPI is almost 5% (negative real rates) Why not drop rates to zero and use high yield debt to pump more oil? They need to repeal those 2013 laws allowing direct foreign investment, or slap tariffs on exports. They will be growing internal demand, and it might make more economic sense to buy someone else’s oil rather than use their own, the US had that policy for years.

    • Wisdom Seeker
      Mar 11, 2019 at 10:08 am

      Ambrose, Interest rate at 8% and CPI of 5% is a real rate of +3%. Not negative.

      Also, Mexico has no control over the rates on their bonds, which are issued internationally. This is why S&P/Moody’s ratings are important.

  5. Iamafan
    Mar 10, 2019 at 2:10 pm

    Probably a reason why Norway’s wealth fund is getting rid of some oil stocks. Not only are they exposed to the North Seattle oil production, but they have doubled down on oil stocks, too.

    • Rowen
      Mar 10, 2019 at 3:13 pm

      I love that Norway, instead of privatizing oil profits, has the world’s largest sovereign wealth fund.

      • Realist
        Mar 11, 2019 at 1:16 am

        The Norwegians did apparently learn their lesson from the Dutch disease while most other oil producing countries haven’t learned anything.

      • Timo Leary
        Mar 13, 2019 at 3:00 pm

        Yeah and that wealth fund is managed by Douche Bank Deutsche Bank.

  6. Kasadour
    Mar 10, 2019 at 8:32 pm

    “The [Mexican] government’s financial support, in order to restore credit fundamentals, falls well short of [Pemex] multi-annual capital investment needs. . . To avoid ‘further deterioration’, Pemex could require at least $20 billion over multiple years. “

    Correct me if I’m wrong, but isn’t, or wasn’t, it the other way around? Namely, Pemex oil is that which relieves the Mexican fiscal annual budgetary constraints. How or with what is the Mexican govt. supposed to support the very state-owned oil company that supports its own day to day operations? There is something very wrong, in a very big way, but, sadly, nothing the drug cartels can’t fix. What a hopeless situation.

  7. Kye Goodwin
    Mar 12, 2019 at 4:36 pm

    I’m with Aravind on this. Mexico’s single biggest oil problem is running out of extractable crude, as has been well known since the first wave of interest in Peak Oil back in the early aughts. Its wishful thinking to hope that if they could just fix their corruption problems they could start production rising again. Maybe they could briefly, the criminality is severe, but we should face up to the fact that oil is a non-renewable resource.

Comments are closed.