Pemex Investors Face Crude Reality With Credit Downgrade Threat

(Bloomberg) -- More than a year after Mexico rewrote laws to give oil giant Petroleos Mexicanos the financial independence needed to compete with global peers like Exxon Mobil Corp., things aren’t looking good for the state-owned driller.

With crude near a six-year low, output dropping and Moody’s Investors Service warning that it’s considering a cut to Pemex’s credit rating, investors are demanding a widening premium to own the company’s bonds instead of government notes. The extra yield they demand to hold the dollar debt from Pemex is at a six-month high of 1.1 percentage points.

That wasn’t how President Enrique Pena Nieto’s push to break Mexico’s energy monopoly was supposed to play out. Far from making it easier for Pemex to form partnerships with the world’s biggest producers and gain their expertise in deep-water drilling, Mexico has struggled to attract their interest amid the 52 percent plunge in crude prices over the past year. Oil’s drop pushed Pemex sales down 28 percent in the first half of the year from the same period in 2014. Meanwhile, output continues to drop, hitting the lowest since at least 1990 as total debt surged to 1.3 trillion pesos ($85 billion), the highest since at least 1998.

Moody’s said Aug. 25 it expects Pemex to boost borrowing next year and in 2017, pushing debt balances “far above historic levels at a time when production is stagnant and profitability and cash flow are very weak.”

In response to Moody’s, Pemex said last week that “the company has been working on different fronts to contain and reduce its costs.”

--With assistance from Adam Williams, Rafael Gayol and Carlos Manuel Rodriguez in Mexico City and Bob Brennan in New York.

To contact the reporter on this story: Ben Bain in Mexico City at bbain2@bloomberg.net; to contact the editors responsible for this story; Brendan Walsh at bwalsh8@bloomberg.net; Dennis Fitzgerald.

Copyright 2017 Bloomberg News.

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