(Fitch, 16.Dec.2024) — Fitch Ratings has affirmed Petroleos Mexicanos’ (Pemex) Long-Term Foreign and Local Currency Issuer Default Ratings (IDRs) at ‘B+’ with a stable outlook. Additionally, Fitch has affirmed the rating of approximately $80bn of Pemex’ international notes outstanding at ‘B+’ with a Recovery Rating of ‘RR4’.
Pemex’ ratings are four notches below the sovereign reflecting Fitch’s view that Pemex remains financially vulnerable and its ESG track record further impairs its ability to raise capital.
KEY RATING DRIVERS
Linkage to Sovereign Rating: The inclusion of Pemex in Mexico’s annual budget, for the second year in a row is credit positive, signaling increased visibility on timing and magnitude of government support. The approved budget included $6.7bn of support for Pemex in 2025, covering most of its $8.9bn of debt maturities for the year. Although still unclear, it is likely that the balance will be covered with tax reductions and deferrals, and possibly refinancing of some sort. Additional support is needed to address the company’s $18.2bn of short-term debt reported in 3Q24.
Fitch believes continuing inclusion of Pemex in the annual budget will make further support easier. Fitch estimates Pemex will need to address a $75bn cash shortfall between 2025 and 2027, in addition to $20bn in maturities between 2025 and 2027, assuming no capital injections and no contribution from the government past 2025. A continuing trend of support and enhanced visibility could prompt a reassessment of the linkage score, which could, in turn and per Fitch’s Government-Related Entity Criteria, trigger a change in the approach to notching to Pemex’ rating.
Cash Flow Generation: Fitch forecasts negative FFO margins through 2027, due to rising interest expenses potentially surpassing EBITDA if debt issuances continue at current rates. Assumptions include a $6.7bn government contribution in 2025, with no further contributions. Expected EBITDA compression is due to lower crude prices through 2027, and losses in the downstream business. Pemex will need additional government support to cover Capex, estimated at $12bn annually. Pemex had fires at critical assets in 2023 and 2024, remaining vulnerable to operational disruptions.
Persisting Elevated Leverage: Pemex’ indebtedness remains a key factor in its financial deterioration. As of 30 Sep. 2024, Pemex reported $97bn in debt. Fitch estimates Pemex’ 2024 interest expense at $8.3bn, over half of the expected EBITDA. On a per barrel basis, Pemex pays roughly $9/boe in interest, compared to $2-$3/boe for regional peers. Expected leverage is 8.8x, placing its standalone credit profile in the lower range of the corporate rating scale. Debt to 1P reserves exceeds $14/boe, underperforming against Petrobras and Ecopetrol, who are below $10/boe.
Operational Track Record: Fitch believes the multiple fires at critical assets and infrastructure that resulted in injuries and fatalities to employees and contractors raise operational management concerns and the lack of maintenance Capex. High debt service and need for the government to cover cash deficit are key reasons for under investment. The message of the new administration regarding a cap to upstream production and intensified efforts in the downstream poses a threat on liquidity unless more tangible and timely government support is provided to address Capex and debt service.
Pemex’ track record regarding GHG emissions, hazardous materials management and ecological impacts is an ESG concern. Pemex experienced multiple fires at critical assets, which will likely have impacts on the local communities and environment. Fitch believes operational management and the lack of maintenance capex in core assets and infrastructure will further challenge Pemex’ financial profile. This was a key consideration in the ‘B+’ rating, as Pemex’ ESG track record can further impair its ability to raise capital.
Employee Wellbeing is also an ESG concern when assessing Pemex’ credit profile. Several incidents stemming from underinvestment in critical assets have caused injuries and fatalities of employees and contractors. Many of these have also had damaging environmental impacts, that are likely to affect the company from a financial and reputational standpoint.
DERIVATION SUMMARY
Pemex’ link to the sovereign is weaker compared to Petroleo Brasileiro S.A. (Petrobras) (BB/Stable), Ecopetrol S.A. (BB+/Stable), and Empresa Nacional del Petroleo (A-/Stable), which benefit from strong government support. However, Pemex compares favorably to Petroperu (CCC+), as Peru’s government only meets Petroleos del Peru’s immediate needs without improving its capital structure. Petroperu’s market share drop from 45% to 25% caused minimal disruptions due to alternative fuel imports. Fitch believes regional governments, except for Mexico and Peru, have taken steps to ensure their national oil and gas companies’ SCPs remain viable long-term.
Fitch views Pemex’ SCP as commensurate with the ‘ccc-‘ level, which is 10 notches below Petrobras’s SCP ‘bbb’ and 9 notches below Ecopetrol’s of ‘bbb-‘. The differences are primarily due to Pemex’ weaker capital structure and increasing debt. Pemex’ SCP reflects the company’s large transfers to Mexico’s federal government, large and increasing financial debt balance when compared with 1P reserves and elevated EBITDA-adjusted leverage. Comparatively, Ecopetrol and Petrobras significantly strengthened their capital structures and maintained stable operating profiles.
KEY ASSUMPTIONS
–Average West Texas Intermediate crude prices of $75/bbl in 2024, $65bbl in 2025, $60bbl in 2026, and $57bbl for the mid-cycle;
–Henry Hub prices of, $2.25/mcf in 2024, $2.25/mcf in 2025, $3.0/mcf in 2026 and thereafter;
–Oil Production stays flat at 1.75 MMboed;
–Annual capex average of $12bn;
–Government take to average 60% of EBITDA per annum;
–All short-term debt and debt maturities are refinanced at 11%;
–Pemex will receive necessary support from the government to ensure adequate liquidity and debt service payments;
–Refined product volumes growth moves aligned with Fitch’s Real GDP growth forecasts of 1.5% in 2024, 1,4% in 2025, and 2.0% thereafter.
RECOVERY ANALYSIS
Pemex receives preferential treatment under Mexican bankruptcy law. The company cannot technically default under the current code. Still, the company has $97bn in debt of which $80bn is in international bonds, which translates into an implied recovery using the liquidation approach of 40%. Company assets are predominately in Mexico, with the exception of its Deer Park refinery in Texas and senior unsecured debt.
Given the government ownership and strategic importance of these assets, it is highly unlikely that creditors will have claims to assets. Further, on a going concern basis, the company’s equity value is negative and going concern EBITDA does not properly reflect cash flow available for debt service, given the high government take, which makes FFO negative.
RATING SENSITIVITIES
Factors That Could, Individually or Collectively, Lead to Negative Rating Action/Downgrade
–A downgrade of Mexico’s sovereign rating;
–Weakened ability and/or willingness of the government to meaningfully support Pemex;
–Inaccessibility of financing and/or material increase in interest expense;
–Cash balance falling below $3bn on sustained basis;
— An inability to successfully manage supplier liability.
Factors That Could, Individually or Collectively, Lead to Positive Rating Action/Upgrade
–An irrevocable guarantee from Mexico’s government to sustainably cover more than 75% of Pemex’ debt;
–A material change in Pemex’ debt structure or material capitalization, coupled with continued track record of support in the way of budgetary considerations to provide liquidity for debt service;
–Further reduction of taxes, with a business plan that results in neutral to positive FCF through the cycle, while implementing sustainable upstream Capex that is sufficient to replace 100% of reserves and stabilize production profitably.
LIQUIDITY AND DEBT STRUCTURE
Pemex’ liquidity position remains weak as a result of negative FCF, which resulted in a relatively low cash position and reduced availability of its lines of credit. The company reported total cash and equivalents of around MXN93bn as of 3Q24 and reported MXN1.910tn of total debt with MXN359bn in short-term debt.
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