Investor Strategy

Oil price plunge ramps up pressure on Pemex; hedge programs in focus

imageStock Markets7 hours ago (Mar 09, 2020 07:46PM ET)

By Dave Graham

MEXICO CITY (Reuters) – A crash in crude prices has intensified pressure on the finances of Mexican state oil firm Petroleos Mexicanos (Pemex), which is facing the threat of a ratings downgrade after posting one of its worst-ever losses last year.

Mexican President Andres Manuel Lopez Obrador took office 15 months ago vowing to revive the struggling company, but he was unable to prevent another drop in crude production and has had only limited success in steadying its crushing debt load.

International crude prices on Monday experienced their worst daily rout since the 1991 Gulf War. Top producers Saudi Arabia and Russia began a price war that threatens to inundate global oil markets with supply and slash Mexico’s oil revenues.

“The fact the oil market outlook has deteriorated due to this war is negative for Pemex, no question,” said Raul Feliz, an economist at the CIDE think tank in Mexico City. “And this could increase talk of a ratings downgrade.”

All three leading rating agencies have put Pemex’s creditworthiness on a negative outlook, indicating that the company faces a significant risk of further downgrades.

Pemex’s net loss of $9 billion in the final quarter of 2019 did little to ease those fears.

Fitch last year downgraded the firm’s bonds to junk status. If another of the agencies followed suit, it would trigger a forced sell-off of billions of dollars in Pemex debt by investors who are obliged to hold investment-grade assets.

Rating agencies Moody’s, Standard & Poor’s and Fitch did not reply to requests by Reuters for comment.

The government initially had some success in lightening Pemex’s debt load via various financial market measures.

But financial debt crept up again and ended the year above $105 billion, almost back where it started, while Pemex’s pension liabilities leapt by a third.

Not everything on the horizon is gloomy.

Mexico reported a 6.2% year-on-year increase in crude output in January, bucking the trend of years of decline.

The government and Pemex have also locked in higher crude revenues by contracting options through an annual hedging program used as insurance against price shocks.

Pemex’s chief executive, Octavio Romero, said in January the company had contracted a “small portion” of its hedge for this year. He did not say at what price or how many barrels.

That same month, Mexico said the larger Finance Ministry hedge was completed at $49 a barrel, for $1.37 billion in total.

Feliz at CIDE noted Pemex’s hedge would directly cushion the blow of the oil price slump, while the ministry’s program could generate funds that could be plowed into the company.

But if the Saudi-Russian oil war is prolonged, Pemex’s finances will likely come under increasing strain.

New oil discoveries or a bid by the government to lure private capital into the energy sector could mitigate that risk.

But there has been little indication of that from Lopez Obrador, who has set about carving out a bigger role for the state in energy, much to the chagrin of the business community.

At the center of rating agencies’ gaze will be how Pemex’s debt compares with its proven crude reserves, Feliz noted.

“Pemex’s investment levels are not sufficient to stabilize production and simultaneously keep up proven reserves,” he said.

Oil price plunge ramps up pressure on Pemex; hedge programs in focus

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