Petroleos Mexicanos (Pemex) moved to shore up its finances in early February with a $4 billion bond placement, but Moody’s Investors Service sees potential clouds on the horizon for the Mexican state-owned oil giant.
Pemex issued $2.5 billion in 5.35% notes due 2028 and $1.5 billion in 6.35% notes due 2048, the company reported earlier this month. The company plans to use the proceeds for general corporate purposes, including investments in strategic projects and debt refinancing, Moody’s said.
Of the total amount raised, $2 billion would be used to repurchase bonds that expire in 2019 and 2020. The company is also executing an offer to exchange bonds set to mature in 2044 and 2046, totaling $5.56 billion, with new 30-year bonds.
“The results of both the repurchase and the exchange will be announced as soon as the final conditions of these offers are defined,” according to Pemex.
CEO Carlos Treviño said last month that Pemex’s financing needs were covered through 2018, and that its main focus this year would include maintaining its financial health and enforcing fiscal discipline. Last year, the company announced a new debt offering in February and another in July.
“Pemex has strengthened its liquidity position by contracting committed long-term revolving credit facilities for a total of $8 billion, in U.S. dollars and in Mexican pesos,” Moody’s analysts said. “In addition, the company has a hedging program on crude production, which somewhat reduces earnings volatility.
“However, Pemex's liquidity position is still weak: $8 billion in cash and equivalents, as of September 2017, negatively compares to $4 billion in debt coming due in 2018 and $8 billion in 2019. Management's goal is to hold at least $4.5 billion in cash at all times.”
The two new bond issues represent Pemex’s third transaction with a liability management component since 2016. The transaction was 6.5-times oversubscribed, attracting investors mainly from the United States, the Middle East, Asia and Mexico, the company said.
Moody’s assigned a “Baa3” senior unsecured rating with a negative outlook to both issuances, noting the company’s “heavy tax burden and the resulting weak free cash flow, high financial leverage and low interest coverage.”
Pemex also faces “challenges related to production, which, according to the company, will reach a bottom level in 2017 and marginally increase starting in 2018,” the analysts wrote. “Production has been affected by the natural decline of certain fields and a lower quality of crude oil, as well as the company's limited ability to invest efficiently given thin funding and lack of technological expertise in deepwaters, where future growth is located.”
Pemex met by only a hair’s breadth the production targets set out inMexico’s 2017 national budget, averaging 5.069 Bcf/d of natural gas and 1.948 million b/d of crude. Per this year’s budget, the target for gas production has been scaled down to 4.828 Bcf/d, while crude output is expected to grow, albeit marginally, to 1.951 million b/d.
The 2013-2014 energy reforms ended Pemex’s decades-long monopoly over the oil and gas business in Mexico. The government, through the reforms, plans to transform the company into a productive, and profitable, enterprise.
Pemex is carrying out an aggressive farmout program to attract private capital and know-how , as well as migrating its pre-reform oilfield services contracts to the new regulatory regime. This year, it is expected to seek farmout partners for seven onshore blocks in Veracruz and Tabasco states in southern Mexico.
The state oil company has also committed to drilling at least 128 wells, including 56 by August, on the exploration areas it was assigned during the reforms. The August drilling target consists of 19 onshore, 18 shallow water, nine deepwater and 10 unconventional wells.
Last August, the Mexican Energy Ministry (Sener) granted Pemex a two-year extension for the exploration areas. By August 2019, the company must fulfill a minimum work program on the blocks, 93 in total, or return them to the government.
Pemex also picked four new blocks at January’s deepwater licensing round for areas in the Gulf of Mexico. It won two of the areas, both in the Perdido Fold Belt, in a consortium with other companies, and the remaining -- one each in the Salina and Cordilleras Mexicanas basins -- as a solo operator.