(Kallanish Energy, 18.Oct.2018) — The incoming Mexican government’s announcement to end oil exports is credit negative to both Petroleos Mexicanos (Pemex) and to the government’s credit quality, says Moody’s investors Service, in a new report.
The oil company’s operating cash flow would decline and become more volatile under the new refining-focused business model, Moody’s believes.
“Pemex would be exposed to greater foreign exchange volatility, since its income from fuel sales would be in Mexican pesos, while 87% of its $104 billion debt as of June 2018 is in U.S. dollars or other hard currencies.” said Moody’s senior vice president Nymia Almeida.
“The new plan could also force Pemex to import crude, which would add to its cash-flow and foreign-exchange risk.”
The oil company’s credit quality would weaken depending on how much crude it needs to import to feed its refining capacity, Kallanish Energy understands.
Moody’s believes the risk of Pemex posting lower operating cash flow within the next three years is even greater considering the upward momentum on crude prices, and the new government’s stated intention to not increase domestic fuel prices.
Although the federal government has decreased its reliance on oil revenue since its 2013 tax reform, the loss of oil revenue from a loss-generating Pemex could substantially widen Mexico’s fiscal deficit.
Plans to halt oil exports would deprive the government of nearly 2% of GDP (Gross Domestic Product) in revenue, forcing it to raise taxes or abandon its pledge of fiscal discipline.