On Wednesday, rating agencies gave a cautiously positive assessment of Mexico ’s USD $5 billion cash injection into state oil company Pemex , but it did not dispel the risk of another downgrade of its bonds to speculative-grade, or junk, in the next few months.
The step was the latest by President López Obrador to plot a brighter future for the cash-strapped oil and gas producer with ballooning debt and years of declining output .
The USD $5 billion aid package appeared to be in addition to a USD $4.4 billion contributions, including cash and tax relief , unveiled in the government’s 2020 budget plan last weekend.
Saddled with more than USD $104 billion of financial debt , Pemex said it plans to use the capital for the prepayment of bonds that mature in 2020 and 2023 . It also will issue new bonds in maturities of seven, 10 and 30 years to refinance short-term debt. It did not give a value for the new bond placements.
“Proceeds from this transaction will be used to ensure a reduction in the outstanding balance of Pemex ’s debt ,” the company said in a statement.
S&P Global Ratings
, one of the three major credit agencies , described the cash injection positively, saying it underscored the “overarching and unconditional federal support” for Pemex .
In a statement, the agency rated Pemex ’s new bonds at BBB+ or three notches within S&P’s investment-grade rankings.
Pemex
bonds were the most traded by volume among emerging market corporates following the morning announcement, according to MarketAxess. The news sent both the 6.5% Jan. 2029 and the 6.5% Mar. 2027 over 2 points.
In June, Pemex Chief Financial Officer Alberto Velázquez told Reuters the company planned to refinance USD $2.5 billion this year.
The Finance Ministry said the fresh capital will have no effect on net public sector debt or on public sector borrowing requirements, the broadest measure of public sector debt .
Meanwhile, Finance Minister Arturo Herrera has vowed to defend Pemex’s credit rating , saying the firm has money to invest and to manage its debt profile so it is “more adequate.”
Today, Pemex said it had launched a tender offer to prepay around a third of USD $14.7 billion in bonds maturing between 2020-2023 , in president López Obrador ’s latest effort to shore up the state oil firm.
The offer says Pemex is looking to prepay up to USD $5 billion of those bonds, using a major capital injection announced by the Mexican government for this purpose on Wednesday.
The offer will expire next Wednesday.
Pemex's new strategy
Pemex will offer a new set of oilfield service contracts to interested firms, the Finance Minister said on Tuesday, as it embarks on the challenge of ramping up production by 17% to meet 2020 budget targets .
Pemex
will open bidding between the end of this year and early next year for 15 so-called integrated exploration and extraction contracts ( CSIEE ), the same model of service contracts the firm is using to develop another 20 priority projects mostly clustered in the southern Gulf of Mexico.
Finance Minister Arturo Herrera
touted the contracts as public-private partnerships in an interview with broadcaster Televisa.
But the contracts, which do not offer equity stakes in Pemex projects or a share of production or profits , were greeted with skepticism from industry experts .
“This looks to me like a step backward,” said Pablo Medina, a Mexico City-based oil analyst with Welligence. He noted that the contracts pay a fixed fee per barrel produced under a base scenario that can rise if more oil is produced.
“The competition for capital in Latin America is intense and many countries are offering more attractive terms than before,” he said.
Mexico’s previous government lured a wide range of international oil majors by offering dozens of contracts sharing both risks and rewards, something the service contracts do not do.
López Obrador’s 2020 budget blueprint, unveiled on Sunday, forecasts Mexican production, almost all from Pemex , of 1 .95 million barrels per day of oil , up 17% from current levels. That target follows 14 straight years of slumping output thanks to a mixture of aging fields and a lack of investment .
The government says it has already stemmed the decline and is now confident production will quickly rebound thanks to a strategy of investing in easier-to-reach shallow water and onshore field s rather than the longer-term deepwater projects.
“What makes us feel optimistic regarding production?” Herrera asked. “ Pemex’s change in strategy wherein it is investing more in shallow waters and on land where it is easier to extract,” he said, referring to tax breaks and a federal government cash injection outlined in the budget.
A business plan published by Pemex earlier this year says the s ervice contracts could extend up to 20 years, paying a fee set in U.S. dollars that can vary based on the complexity of the project and based on production achieved. In all cases, Pemex would not cede control of the operatorship of the projects.
The world’s most indebted oil company, Pemex is at risk of a second downgrade of its bonds to so-called junk status after Fitch did so in June, which would trigger forced selling of bonds worth billions of dollars.
Herrera said the government will “defend the credit rating ” of Pemex, assuring the firm has money to invest and managing its debt profile so it is “more adequate.”
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