Moody’s Ratings indicated that Pemex will continue to have credit risks and financial problems in the medium term, in the event that Claudia Sheinbaum’s government does not implement a structural change in the firm’s operating strategy.
He said the company’s credit metrics continue to weaken, with negative free cash flow as the oil company focuses on a loss-making refining business to increase fuel production, while limiting its investment in exploration. and production.
The rating agency anticipated that Sheinbaum’s government will continue to support Pemex with the payment of debt maturities, and that the company’s operating strategy will remain practically unchanged.
changes, at least during 2025.
“However, Pemex’s main credit risks are shifting towards the financial sphere, away from oil production, in particular, how it will manage and address growing debt obligations in 2026-2027,” he noted in an analysis published this Wednesday. .
He explained that Pemex’s strategy will determine the extent to which it will reduce its liquidity needs, reduce its dependence on government support and mitigate the risk of a forced debt exchange.
He considered that forced debt swaps are a form of default and that in either of the two foreseen scenarios, the company will continue to generate highly negative free cash flow for the next few years, unless it implements a structural change in its operating strategy. .
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The rating agency pointed out that one of the two scenarios for the Mexican oil company is that the Sheinbaum administration maintains the fiscal policies that were carried out during the government of Andrés Manuel López Obrador, with the focus on fuel self-sufficiency through refining and production. commercialization, and possibly include tax reform.
“In this scenario, Pemex would require greater support from the government in the coming years to cover
its debt obligations and liquidity requirements,” Moody’s considered.
He asserted that supporting Pemex is increasingly costly for the Mexican government and that the need for subsidies will almost double by 2026 compared to 2019-2023 levels, given significant debt maturities and continued negative free cash flow. .
“Pemex’s debt amounted to approximately $97.3 billion as of September 2024 and, in view of its current business strategy, the company would need significant and continued support from the government to meet its liquidity needs each year,” he highlighted.
It indicated that by 2026, about $17.4 billion will be required by the government to continue its current policy focused on refining, including about $12.7 billion in long-term debt maturities, which far exceeds the annual average of $9.2 billion. dollars during 2019-2023, the period in which López Obrador governed.
Weakened Mexican finances
Moody’s Ratings further noted that the government’s ability to support Pemex “has weakened over time.”
He explained that the expense structure has become more rigid since 2018, in part, due to recurring support for Pemex, as well as an increase in pension expenses and increased interest payments, which has reduced fiscal means. of the government to support the company.
“In addition, since 2023, Pemex’s payments to the government have decreased, which in part reflects the decrease in the shared utility right rate (DUC) and tax offsets,” he stated.
The rating agency recalled that the DUC is an extraction tax that Pemex pays to the government for the right to produce oil in sovereign territory, which is protected in the Constitution.
“The DUC rate has fallen to 30% in 2024 from 65% in 2018,” Moody’s contrasted.
“We expect Pemex’s direct contributions to the government alone to be around $7 billion in 2024, including DUC payments, up from $17.4 billion in 2023,” he added.
In this scenario, Moody’s highlighted that they do not contemplate Pemex and the government considering refinancing the debt to alleviate the company’s financial burden.
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A second best scenario?
Moody’s stated that in a second scenario, Pemex would undertake a debt restructuring process with government help in 2025.
He asserted that this strategy would significantly improve Pemex’s cash flow, although the company would still need additional support, since around $44 billion matures in the period from 2025 to 2030, as of September 2024.
He added that a debt refinancing/restructuring process would save Pemex $4.7 billion in 2025, including maturities and interest payments, plus $8.9 billion in 2026 and $7.2 billion in 2027, but would not eliminate the company’s need for government support.
“Even if debt refinancing eliminated Pemex’s need to rely on government support to cover its long-term debt maturities, it would still increase the company’s risk of going through a forced debt swap, which we define as an event of non-compliance,” he noted.
For the rating agency, this second scenario would cause Pemex to refinance most of its 2026 and 2027 maturities with government help, in June 2025. However, it indicated that both assumptions account for the credit implications of the company’s current strategy. and its ability to navigate “imminent” financial hurdles under the new government.
“A greater likelihood of a forced debt swap and excessive losses for bondholders would increase pressure on Pemex’s credit quality and even lead to higher interest rates on future debt issuances,” he warned.
He added that depending on the refinancing or restructuring of the debt, the possible subordination could create rating differentials between the different issues.
“We would probably rate the new issues higher than the unsecured debt if the new issues had formal guarantees from the federal government,” he estimated.
The agency expects that Pemex, in both scenarios, will begin to invest together with the private sector and through association schemes, that is, the transfer of interests in oil or natural gas to third parties for their development in the form of exploration blocks or surfaces. drilling.
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