Moody's rating downgrade to Pemex reflects that the cost of “bailing out” the oil company has risen

Andrés Manuel López Obrador in the company of Adán Augusto López, governor of Tabasco;

Rocío Nahle, Secretary of Energy, and Octavio Romero Oropeza, head of Pemex, in 2020. President / CUARTOSCURO

It is becoming increasingly expensive for Mexico to support the state-owned company Petróleos Mexicanos (Pemex). President Andrés Manuel López Obrador's decision to invest in refining has generated losses of some 17,000 million dollars, worsening the financial situation of the world's most indebted oil company. As a result, the rating agency Moody's cut its credit rating on Tuesday, which is expected to be reflected in higher interest rates.

This has drawn attention to the thinning line between public and corporate finances.

López Obrador promised in the campaign that he would "rescue" Pemex, since in the previous Administration and from the energy reform that allows private participation in the energy sector, the authorities wanted to "bankrupt" the State company.

The President has transferred billions of dollars in public money to Pemex, reduced its tax burden, ordered a swap of oil company debt for government debt, and affirmed that Pemex's debt is fully backed by the government.

Moody's estimates that aid to Pemex has cost the equivalent of 1% of the country's gross domestic product (GDP).

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This helps Pemex's credit rating, the rating agency said in its statement, but it is not enough to assure investors that the oil company can meet its debt payments.

In addition to the rating, Pemex's future outlook is negative, so the sovereign debt outlook is also negative.

Pemex's rating takes into account "very high support from the Government in case of need and a very high correlation of default between Pemex and the Government of Mexico," Moody's said in its report, which places it six notches above what your credit risk would be if you didn't have that support. “The liquidity requirements and negative free cash flow of the company will increase in the next three years due to the high levels of debt maturities and the lower operating cash flow derived from the expansion of its refining business, which has generated operating losses in recent years, "says the agency.

On Wednesday, Pemex reported a net profit of 14,364 million pesos (718.6 million dollars) in the second quarter of the year, the first gain reported in a second quarter since 2017, as a result of the increase in oil prices internationally. It also increased its production to 1.7 million barrels per day - an increase of almost 4% compared to the same quarter the previous year. In the last two years, Pemex has not been able to reverse the drop in production and reserves, but these gains have less impact when the investment in refining has generated losses of 17,000 million dollars, according to Moody's.

López Obrador has promised that production would improve, but his priority is on refining, which costs more when international oil prices rise.

One of its main projects is the construction of a new refinery in Dos Bocas, located in its home state of Tabasco, with an estimated cost of more than 8,000 million dollars.

It is not clear when the refinery will come into operation.

The resources to build “Dos Bocas 100% come from the federal government, and the payment of the debt as well,” said Octavio Romero, CEO of Pemex on Wednesday, “[Moody's] were informed that the maturities [of debt] they will be paid for by the Government… Moody's knew about this situation and still ignored it ”.

Romero added that he disagrees with the rating cut.

The negative outlook for Mexico's sovereign bonds is due to the financial risk that Pemex represents. "We have reflected the possibility that support for Pemex may have to be greater than what we are currently considering," Renzo Marino, an analyst at Moody's, explained at a press conference on Wednesday. Marino assured that Pemex went from contributing about 2% of GDP to public finances to contributing "almost zero." In the future, "this will depend on the price of oil, if the contribution is kept relatively high it can be positive, but clearly there is a structural change between Pemex and the fiscal accounts," he said.

Pemex lost investment grade last year, when both Moody's and Fitch downgraded its rating and labeled its bonds as "junk" or "speculative grade." The new cut implies a deterioration in the rating, which does not translate into a lack of future investors, but rather a different profile of investors who, willing to finance Pemex projects, will demand a higher interest rate in exchange. . The success of a debt bond in the international market is not measured by how many investment funds they are interested in buying, but by how high the rate agreed with investors is.

The unconditional support of the Government for Pemex links the oil company with the country's economic performance at a time when Mexico is emerging from the deepest economic crisis since 1932. The lower the growth, the lower the collection, says Rodrigo Morales, economist and professor of the Monterrey Free Law School.

"It is not feasible for this Administration to correct the course, I think that is very clear," says Morales, "it will have to be the Administration that follows, in 2024, which will have to rethink the company's global strategy, reallocate capital towards the most profitable businesses such as the exploration and production of crude oil ”.

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