Fitch cuts rating of Mexico’s troubled Pemex
MEXICO CITY — Fitch Ratings downgraded Mexico’s highly indebted state oil company Petróleos Mexicanos, stripping it of its investment-grade rating.
The cut to BB+ from BBB- followed Fitch’s downgrade Wednesday of Mexico’s sovereign credit rating to BBB from BBB+. The ratings firm lowered Pemex by two notches in January.
Pemex’s outlook remains negative, reflecting the potential for further deterioration in the company’s standalone credit profile, Fitch said.
"Although Pemex has implemented some cost-cutting measures and received moderate tax cuts from Mexico, the company continues to severely underinvest in its upstream business, which could lead to further production and reserves decline," Fitch said.
Mexico’s finance ministry said it strongly disagrees with Fitch’s reasoning.
"On the sovereign side, they argue that risks to public finances have increased because Pemex’s debt represents contingent liabilities for the federal government," while at the same time the ratings firm "penalizes Pemex’s rating because it considers that federal government support is moderate and insufficient," the ministry said in a statement.
Both the federal government and Pemex are working to solve the structural and financial problems at the state company, the ministry added.
Mexican President Andrés Manuel López Obrador has said his administration intends to raise output at Pemex, which has seen its crude-oil production fall steadily for the past 15 years. While production fell, Pemex’s debt ballooned in recent years and stood at about $106.5 billion at the end of March.
Mr. López Obrador, who put a freeze on new oil-block auctions for private companies after taking office in December, has given Pemex more money to invest in service contracts aimed at increasing crude-oil output in the near term from shallow water and onshore deposits.
But he is also going ahead with a controversial $8 billion plan to build a new oil refinery in three years in southern Mexico, which he said Pemex will do after private companies invited to submit offers said the project would cost more than that and take longer to complete.
"Despite a continued debate over how much money Pemex ultimately requires to reverse its multi-year production and reserves decline, no amount of money alone will resolve what ails the company in our view," John Padilla, managing director at energy consulting firm IPD Latin America, said in a report this week.
Mr. López Obrador is "doing little to convince investors that he will fundamentally fix Pemex," he added.
A downgrade to below investment grade would likely lead to significant forced selling of Pemex bonds, said Shamaila Khan, director of emerging-market debt at investment management and research firm AllianceBernstein. "It just takes one of three [ratings firms] because investors start anticipating the second downgrade," she said.
Mr. López Obrador’s favoring of state energy companies over private involvement is behind heightened concern about Pemex’s financial health, according to Ms. Khan.
"I think what was happening prior to the López Obrador administration was that the burden of investment for Pemex was being reduced so that the leverage could be kept under control, by allowing for the energy reform, by reducing the capex requirement," Ms. Khan said.
Pemex has said it doesn’t expect to take on any additional debt this year to fund its projects.
The company signed an agreement in May with international banks for $8 billion in syndicated credit that includes the refinancing of existing debt for $2.5 billion and the renewal of two revolving-credit lines for as much as $5.5 billion.
Moody’s Investors Service, which cut Pemex to its lowest investment grade in 2016, on Thursday changed the outlook for the company to negative from stable, a day after changing the outlook on Mexico’s sovereign debt to negative from stable.
We changed the outlook to negative consistent with the change in Mexico’s outlook, given the critical importance of the government’s financial strength and support to Pemex’s Baa3 ratings," Moody’s said. Moody’s rates Mexico at A3, three notches above its minimum investment grade.
Write to Anthony Harrup at [email protected]
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