The federal government will give Pemex a US $5-billion cash injection so that the beleaguered state oil company can reduce its debt.
The Secretariat of Finance and Public Credit (SHCP) said in a statement on Wednesday that the “action is part of the government’s ongoing efforts to strengthen the financial stability of Pemex and enhance its profitability and long-term strategic contribution to the Mexican economy.”
The news agency Reuters reported that the US $5 billion appeared to be in addition to a US $4.4 billion support package for Pemex that was unveiled on Sunday in the government’s 2020 budget proposal.
The SHCP said the cash injection “will be funded from financial assets held at the Treasury,” adding that it “will have no impact on the net debt of the Mexican public sector or on the historic public sector borrowing requirements, which is the broadest measure of public sector debt.”
Pemex, which has debt of US $104 billion, said it intends to use the capital for the prepayment of bonds that mature in 2020 and 2023.
The state-run company also said that to refinance short-term debt, it will issue new bonds to mature in seven, 10 and 30 years.
It didn’t disclose the value of the new bonds but said that “proceeds from this transaction will be used to ensure a reduction in the outstanding balance of Pemex’s debt.”
The ratings agency Fitch, which in June downgraded the company’s credit rating to junk, said it would also rate the new debt as one notch into junk status although it added that a successful transaction would “bolster Pemex’s liquidity profile.”
Fitch said that government support for the public utility, which it estimated could total US $9.5 billion in 2019, was only “moderate” considering Pemex’s ongoing heavy tax burden.
The ratings agency also said that “the company continues to severely underinvest in its upstream business, which could lead to further production and reserves decline.”
Pemex’s oil production has fallen for 14 consecutive years due to aging oil fields and a lack of investment but the budget predicts that output will increase to 1.95 million barrels per day by the end of next year.
However, t0 achieve that, Pemex will have to increase production by about 17%, the news agency Bloomberg said, something that hasn’t been achieved for almost four decades. Many analysts said that the forecast petroleum production increase, as well as other assumptions in the budget, are overly optimistic.
Despite Pemex’s problems, President López Obrador said this week that he sees a bright future for the company.
Finance Secretary Arturo Herrera said on Tuesday that the government will “defend the credit rating” of Pemex by making sure that it has money to invest and manage debt.
If Moody’s were to downgrade the state oil company to junk, as many analysts predict will happen in the coming months, institutional investors would be required to sell billions of dollars’ worth of Pemex bonds.