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Having already downgraded the debt of Mexican state oil company Petróleos Mexicanos (Pemex) to junk status in 2019, Fitch Ratings on Friday lowered the firm’s long-term foreign and local currency issuer default ratings (IDR) another notch to ‘BB’ from ‘BBB+’ with a negative outlook.

The downgrades, which apply to about $80 billion of notes outstanding, reflect “the downturn in the global oil and gas industry, Fitch’s lower oil price assumptions and the weakening credit linkage between Mexico and Pemex,” said Fitch analysts, who also cited the company’s “limited flexibility to navigate the downturn in the oil and gas industry given its elevated tax burden, high leverage, rising per barrel lifting costs and high investment needs to maintain production and replenish reserves.”

The Fitch team said it expects Pemex free cash flow (FCF) to range from negative $15 billion to negative $20 billion annually, citing that with Mexico’s crude oil export basket price below $20/bbl, the firm’s upstream unit “does not generate enough cash flow to cover operational and financial costs (half-cycle costs) of more than $25/bbl…”

Fitch has also revised its assessment of government support for Pemex to “weak” from “moderate,” citing “the delay and uncertainty of exceptional support from the government towards the company in light of the financial difficulties Pemex will face as a result of the decrease in oil prices.”

Analysts said that additional downgrades could occur “in the absence of proactive and extraordinary government support.”

Fitch estimates that Pemex contributions accounted for about 10% of government revenue or $22 billion in 2019, and that during the past five years, transfers to the government equaled more than 30% of the company’s sales. Government support for Pemex, meanwhile, amounted to $9.5 billion in 2019.

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