Experts say Mexico cash injection is not enough to fix Pemex

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Analysts and bondholders warn that Mexico’s injection of billions of pesos into state oil company Pemex to help it repay debt should calm markets in the short term but will not address the debt-laden company’s deeper problems. Hierarchy issues.

In Friday’s draft budget, the government set aside for the first time explicit financial support – worth 145 billion pesos ($8.2 billion) – that will help Pemex repay $11.2 billion of its $110 billion debt due next year.

The strategy allows Mexico to use cheaper sovereign debt to fund the company’s bond payments. While that may ease lenders’ concerns in the short term, investors and analysts warn Pemex’s operational problems require fundamental reforms. The company’s debt is in junk status, and rating agency Fitch further downgraded the company in July, while Moody’s gave its outlook a negative rating.

“This is the first time explicit support for the company has been provided in the budget, which should help address concerns from markets and (more importantly) credit rating agencies that the government is more reactive than proactive,” the emerging market sovereign said. Said Aaron Gifford of. Analyst T Rowe Price, a $1.4 trillion Pemex bond holder.

“That doesn’t mean it’s going to be a magic bullet,” Gifford added. “There are still a lot of issues that need to be addressed,” he said, pointing to the company’s negative free cash flow, large capital expenditures budget and huge tax payments to the Mexican government.

These issues are likely to draw deeper scrutiny as Mexico prepares for elections in June 2024.

The change in leadership will raise new questions about the future of the state-owned company, which relies heavily on government support under current President Andres Manuel Lopez Obrador. Opposition candidate Xóchitl Gálvez told Bloomberg she would open the industry to more private investment, but the president refused. Both Galvez and the ruling party’s former climate scientist Claudia Scheinbaum have said they will accelerate the shift to renewable energy.

Petronationalist López Obrador has vowed to “rescue” Pemex and has given the company about 1.32 trillion pesos since taking office in 2018, according to think tank IMCO. financial help. Despite this, oil production continues to decline, falling from more than 2.1 million barrels per day in 2016 to a low of 1.5 million barrels per day in 2022.

Some investors and analysts expected direct government support for Pemex earlier this year. However, the company issued $2 billion worth of 10-year bonds in February with a yield of 10.375%, which is relatively high compared with previous years.

On Friday, the bond, which matures in 2033, was trading at just over 91 cents on the dollar, well above the 70-cent level typically considered distressed.

But the bond’s yield has risen since its issuance, reflecting its price decline – reaching over 12% in late August before falling back to close last week at 11.5%.

Meanwhile, some of Pemex’s long-term bonds, including those maturing in 2050, are trading below 70 cents on the dollar, hinting at investor uncertainty about the company’s long-term future.

One Pemex bondholder, who spoke on condition of anonymity ahead of Friday’s draft budget release, said that in order for long-term bonds to “really work, you need more of a wholesale solution for the company itself.”

Bondholders said the capital allocation to Pemex in the budget would help increase short-term liquidity.

“Perhaps after the election, the company may have bigger plans,” the bondholder added. “Or maybe just more of this piecemeal (strategy).”

Experts recommend a series of reforms, including significantly reducing tax burdens, increasing investment in exploration and production, and allowing more private companies to contribute.

Pemex said it was on a path to a more solid financial footing, including increasing refining capacity and developing new oil development projects. The company said in July that its debt stock had fallen by more than 15% in constant dollar terms since the end of 2018.

Old-school leftist López Obrador became known for his fiscal conservatism during his five-year term, including refusing to provide significant economic support to individuals or businesses during the pandemic and keeping national debt levels below 50% of gross domestic product. .

But the extra money provided to Pemex on Friday is part of a draft 2024 budget that estimates a deficit of 4.9% of GDP, the highest since the 1980s.

Government spending has also been skewed to support state-owned energy companies, López Obrador’s expanded social programs and some large projects in the country’s poorer south.

The ruling Morena party secured a simple majority in both houses of its coalition, enough to pass the budget. But the next president will find funding increasingly tied to pensions, social programs and projects, leaving them little room to address their own priorities.

Carlos Serrano, chief economist at BBVA Mexico, said analysts are concerned about high deficits while the economy is already growing, which could lead to them spending money to fight a recession or oil prices. Falling funds decrease.

“If oil prices fall in 2025, they won’t have the ability to react or they will have to adjust spending in a way that hurts the economy,” he said.

Barclays economist Gabriel Casillas is more optimistic about the impact of the 2024 budget on the economy and the next leader, with the exception of Pemex. “It seems to me that all the fiscal problems can be solved easily, except Pemex,” he said.

He said the government had muddled its way through financial aid to Pemex and that despite the company’s efforts on environmental, social and governance indicators (ESG), it still lagged behind its global peers. “Pemex needs to address the problem structurally,” he said.

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