Pemex needs $23bn to right itself: Moody’s

José Antonio González Anaya is still getting his feet under the table at Pemex, the floundering Mexican state oil company he has been parachuted in as CEO to turn around, and there are frustratingly no answers yet to the questions of what Pemex’s new strategy is and how much money it needs to get back on its feet.

But Moody’s, the ratings agency which last month put its rating of Pemex under review, has had a stab at answering that last question: at least $23bn, writes Jude Webber in Mexico City.

It said in a note: “Pemex would need to raise about $23bn in 2016 to cover all spending, including maturing debt, if it reduces operating costs by 10 per cent but does not adjust its roughly $15bn planned capital budget for the year.”

The oil price rout has forced many oil companies into financial trouble, and Pemex is not alone in facing a ratings scrutiny: Moody’s has put another 130 oil companies’ ratings under review. Whereas Pemex has struggled to grow output and cut costs more than peers like Petrobras of Brazil and Ecopetrol of Colombia, the government of Mexico has made clear that it is standing by to bail out Pemex – once the company has outlined its own new strategy.

The key question Moody’s will be asking in its review is how much Pemex can slash operating costs, expenses and capital spending without jeopardising production. Crude output has been declining for a decade. Moody’s said it would set little store by any announcement of asset sales given the current market environment. But on the positive side, Pemex recently sold $5bn in bonds – the offering was 3.5 times oversubscribed – after the government pledged to provide (yet to be quantified) financial support to the ailing company.

So how bad are things inside Pemex’s balance sheet? The company faces as much as $11.7bn of debt maturities in 2017, with only $6.5bn of cash on hand as of September 30 – before the latest bond – to pay debts. As Moody’s noted:

At current oil prices, Pemex’s credit quality will worsen significantly in 2016 without drastic spending cuts. Assuming Brent crude prices average $33per barrel (bbl), a USD10/bbl differential for Mexican Mayan crude, and production at 2.5m barrels of oil equivalent par day, PEMEX can expect EBITDA in 2016 of close to $10bn and taxes of about the same amount.

Under these conditions, Pemex’s leverage ratios would weaken considerably by the end of 2016. Its Moody’s-adjusted debt/EBITDA ratio would skyrocket to well above 10x and its ratio of retained cash flow to net debt would plummet, to minus 5 per cent. Pemex’s interest. coverage ratio would also deteriorate, with a 1x EBIT/interest ratio. In 2017, metrics would worsen even further if the company’s business and financial strategy remain the same and oil prices do not recover significantly.

The government has made clear it will not throw good money after bad and that its support will only come after Pemex has put in place a plan for painful adjustments. The good news: Moody’s said it was “unlikely that any single event would trigger a downgrade of Mexico’s [sovereign] rating, including financial support to the national oil company”.

What might the government offer? A temporary or permanent tax cut for Pemex, transfers funded by extrabudgetary revenues, or, less probably, government guarantees or a direct capitalisation, Moody’s reckons. It does not expect the government to take over Pemex’s debt lock, stock and barrel. The government says only that all options are on the table.