Page 4 - LatAmOil Week 09 2020

LatAmOil COMMENTARY LatAmOil
President Andres Manuel Lopez Obrador’s political fortunes are tied to Pemex’s fate (Photo: Energy and Commerce/Mexico)
Pemex’s precarious position
The company has continued to avoid further ratings downgrades, but it is still facing substantial risks
WHAT:
The NOC’s fourth-quarter production and revenue figures were worse than anticipated.
WHY:
Trouble for Pemex would lead to trouble for Mex- ico’s economy – and for Mexico’s president.
WHAT NEXT:
Moody’s and S&P Global are likely to retain their negative outlook for Pemex without opting for a downgrade in the near term.
MEXICO’S national oil company (NOC) Pemex has been in a bind for some time. It has seen production levels decline consistently for the last 15 years, and its financial obligations have ballooned to the point of making it the world’s most indebted oil operator.
As such, the Fitch Ratings agency’s deci- sion to downgrade the company’s bonds to junk status last June came as no surprise. It also generated considerable speculation about the possibility that other top credit ratings agencies – namely, Moody’s Investors Services and S&P Global – might follow suit.
Further downgrades might spell disaster for Pemex. From a financial standpoint, the com- pany would have a hard time borrowing money on sustainable terms. It might also be forced into a sell-off, as its securities would be removed from investment-grade indexes around the world. (Such events would, in turn, exert pres- sure on Mexico’s economy, since the NOC gen- erates about 20% of budget revenue.)
Meanwhile, from a political perspective, the company’s woes would be a problem for Andres Manuel Lopez Obrador, Mexico’s populist president. Lopez Obrador has long argued that Pemex’s woes stem largely from the market-ori- ented reform agenda of his predecessor Enrique
Peña Nieto. He has also asserted that the NOC’s financial and operational performance would improve if the state invested more, especially in projects designed to reduce dependence on imported fuel such as a massive new refinery in Tabasco state.
So far, these predictions of trouble have remained in the theoretical realm. Fitch Rat- ings is still the only agency to have downgraded Pemex, and the company saw its bond prices surge to near-record highs last month on expec- tations that the fourth-quarter earnings report for 2019 would show a slight increase in oil out- put and that Lopez Obrador’s administration would continue to provide financial backing.
Fourth-quarter disappointments
Nevertheless, there are signs of trouble, in that Pemex’s latest quarterly report was less favour- able than hoped.
Last week, the NOC said that oil and con- densate production levels had remained flat at 1.69mn barrels per day (bpd) in the October-De- cember period, even as drilling activity ramped
up at a group of onshore and shallow-water off-
shore sites. It also reported that revenues had declined in the fourth quarter, bringing about a
net loss of MXN169.8bn ($8.8bn). 
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w w w . N E W S B A S E . c o m Week 09 05•March•2020