The state-owned Pemex has benefited from high oil prices: it has increased its income, it has seen profits and this has, to a certain extent, distanced it from its dependence on government support. But the hot streak may not be enough to meet all of its goals and it could face difficulties financing its heavy debt amid a challenging economic environment and a rate hike that appears to have no end in sight.
The federal administration decided to leave the state company in charge of its debt obligations a few months ago, after announcing at the beginning of last year that it would cover the oil company’s amortizations. With the rise in oil prices, Pemex has had higher income to take over, but crude oil prices have already registered a significant drop in recent weeks and a change in trend, with lower prices, could put the oil company in trouble .
Pemex, according to its latest data, has a short-term financial debt equivalent to 21,081 million dollars to cover during the next 12 months. One of the main goals of the administration has been the reduction of its liabilities that have placed Pemex as the most indebted oil company in the world. Its latest financial report places its debt at 108,903 million dollars, 4% lower than the figure with which it closed 2021.
Pemex’s strategy has been based on not acquiring more debt and to a large extent they have been able to do so, although they have increased the use of their lines of credit and this has increased their short-term debt.
The state-owned company has achieved some success in its strategy by making use of the stability in the exchange rate that has been registered in recent months, mainly as a result of the Bank of Mexico’s rapid response in terms of adjusting its monetary policy. But depending on the latter and on the variation in the price of crude leaves the oil company in an environment of great uncertainty. The Mexican mix has maintained prices above 100 dollars per barrel, but the main estimates from banks and rating agencies point to lower prices for the remainder of the year and 2023. Moody’s estimates that WTI – one of the main reference mixes – average $88 per barrel for the remainder of 2022 and $63 per barrel for the following year.
“They are depending very intensely on the behavior of the exchange rate and also on a very benign oil price environment, and this has not punished the rates that the market is willing to accept to finance Pemex debt. But if this phenomenon changes, if the exchange rate behaves differently and prices start to drop, we could see a very different episode for Pemex and the issue is that you don’t have safeguards or instruments that allow them to contain these changes beyond support. from the federal government,” explains Víctor Gómez Ayala, an academic from the Autonomous Technological Institute of Mexico.
The company has been left with fewer instruments to refinance its liabilities – it no longer has revolving lines available – and accessing the market for a new bond issue would be more expensive due to the record level that interest rates have reached to try to stop the inflation and after the rating agency Moody’s further reduced its credit rating at the beginning of last July. The state bonds have broken record levels in recent weeks, after the oil company put some of these papers up for sale to refinance part of its debt with suppliers. Previously they had also been pushed by the rise in interest rates and by the uncertainty generated by the war in Eastern Europe.
Analysts doubt Pemex’s ability to meet all of its goals: reduce its debt, pay its suppliers and increase its investment capital to levels not seen in at least the last five years. The oil company wants to add this year investments for 215,233 million pesos, well above what it has done in past years. And the high income derived from its oil sales may not be enough.
“My reading of the company is that earnings have improved a lot given high oil prices, but they have used a lot of that revenue to fund a lot of capital spending. On the one hand, it’s good that they’re investing in their business, but on the other hand, we’d like to see the company generate positive cash flow to reduce debt. The fact that they haven’t been able to do so at this point in the economic and market cycle is worrying but not entirely surprising,” says Aaron Gifford, an emerging-market sovereign debt analyst at T. Rowe Price Group in Baltimore.
Moody’s last downgrade of Pemex’s credit rating to “B1” from “Ba3” already took these variables into account. The agency said at the time that the company had high debt maturities, large interest payments and a strong need for external financing given the constant losses in the refining business.
The administration of the oil company has stressed in its last conference with analysts that they will continue with their debt reduction strategy, despite not having new capitalizations from the federal government and have emphasized that they will do so in constant communication with the Ministry of Finance.
The last capitalization that the oil company received to help with its debt was in the first quarter of the year, for 45,437 million pesos, but the support has continued with the reduction of the Shared Utility Rate and support for fuel imports, which for Pemex they represented more than 60,000 million pesos during the first semester.
Regardless, analysts aren’t entirely concerned that the company will default on its debt obligations. They consider that the federal administration will return to grant capitalizations to the oil company in the event that its income falls again. “Regardless, Pemex could struggle to cover its debt obligations as global financial conditions remain difficult, but I hope the Mexican government will be there to provide whatever support is needed ,” says Gifford, holder of state bonds.
