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.
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