(Bloomberg) — Moody’s Investors Service Inc. has downgraded Petroleos Mexicanos’s bonds to junk as sinking oil prices and a fast-spreading pandemic pummeled the beleaguered Mexican driller.
Moody’s cut Pemex’s bonds to the second-highest junk rating Ba2, from Baa3, because of its failure to deliver a viable strategy to stem long-term production declines and its excessive debt burden, it said.
“Pemex’s cash flow generation and credit metrics will remain weak in the foreseeable future as the company grapples with low oil prices, high debt maturities, and underinvestment in exploration and production in favor of an expansion of its refining business, which has generated losses for several years,” Moody’s said in the statement.
Pemex’s 6.5% notes maturing March 2027 traded around 77 cents on the dollar as of 2:53 pm in New York, according to Trace bond trading data.
Ratings agencies have been skeptical that Mexico’s leftist president Andres Manuel Lopez Obrador, known as AMLO, has a credible plan to reverse Pemex’s 15 years of oil production declines and chip away at financial debt of 1.98 trillion pesos ($83.9 billion) at the end of last year, the highest of any oil major. Pemex’s losses almost doubled in 2019, its first year under the Lopez Obrador administration.
Pemex is at the heart of AMLO’s strategy to upend three decades of neoliberal policies and make Mexico self-sufficient in energy. It is now saddled with a mandate to build a new $8 billion refinery in Lopez Obrador’s home state, even as its six existing refineries are operating less that 30% of their capacity. Today, Pemex faces a fuel glut as demand wanes in Mexico because of the coronavirus containment measures.
AMLO has also canceled oil and gas auctions and joint-venture contracts with Pemex that enabled it to share the burden of developing Mexico’s vast deep-water oil territory, and boost depleted reserves.
Moody’s has been the outlier among the rating agencies, as both Fitch Ratings and S&P Global Ratings have already cut Pemex’s bonds this year.
Fitch plunged Pemex deeper into junk for the second time this month, cutting to BB-. S&P Global Ratings took the company’s credit assessment to BBB, two notches above junk, in March.
Pemex expects to receive 7.5 billion pesos from its annual oil hedge, and the government has promised to provide additional tax breaks of 65 billion pesos for the company this year.
But it is not nearly enough to move the needle, say analysts. The crude oil price crash will hit Pemex especially hard since more than half of Pemex’s oil production is unprofitable at $30 a barrel, according to energy consultancy Welligence. If Mexican oil trades at $30 a barrel, Pemex will have a negative cash flow this year of $20 billion, reckoned Anne Milne, a strategist at Bank of America.
“The actions took in consideration our expectations for an extended period of negative free cash flow and the need for external funding, despite the company’s efforts to adjust costs and investments to low oil prices,” Moody’s said.