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Pemex CEO Romero presents the oil company's new business plan. Pemex CEO Romero presents the oil company's new business plan.

Pemex business plan: tax cuts, capital injections and more oil

'We're sowing oil,' says AMLO, but analysts were unimpressed, say ratings downgrade inevitable

Tax cuts, large injections of capital and increased oil production are proposed in the new business plan for the heavily-indebted state oil company Pemex.

Company CEO Octavio Romero said today that the company will pay 7% less tax and duties next year and an additional 4% less in 2021.

The plan will reduce the tax rate paid by Pemex from 65% to 54% in 2021, he said.

The government will inject 141 billion pesos (US $7.4 billion) into the company over the next three years, including 66 billion pesos in 2020.

Pemex will reinvest 221 billion pesos of its own funds next year while the tax cuts will generate savings of 45 billion pesos and the private sector will provide 14 billion pesos in the form of service contracts, according to a presentation at this morning’s presidential press conference.

All told, investment in Pemex will total 347 billion pesos ($18.2 billion) next year, while in 2021 it will rise to 411 billion pesos ($21.6 billion).

President López Obrador said the plan, approved unanimously yesterday by the Pemex board, is designed to transform “an oil industry in ruins” to one with the capacity to finance national growth.

“We are sowing oil . . .” he declared. The president has also pledged that a new $8-billion refinery on the Tabasco coast will start operations in May 2022.

Romero said that in the second half of President López Obrador’s six-year term “it will be Pemex which supports the federal government to finance growth and development in our country.”

He said the state-owned company is focusing its exploration efforts in shallow waters and onshore areas.

Pemex, which has long been the biggest contributor to public finances, currently provides about a fifth of the national budget even as oil output continues to decline, falling to a historic low of 1.625 million barrels per day (bpd) in January.

However, by the end of López Obrador’s administration in 2024, the company expects to produce 2.697 million bpd, a 66% increase on January numbers.

According to the new business plan, production will average 1.707 million bpd this year, 1.866 million bpd in 2020 and 2.069 million bpd in 2021.

While the production figures cited are positive, further downgrades to Pemex’s credit rating are expected if the plan fails to convince, the Financial Times said.

Fitch downgraded the company to junk status last month, reducing its credit rating from investment grade to speculative with a negative outlook. Pemex has debt in excess of US $100 billion.

Analysts at the investment bank Citigroup said after the presentation of the new business plan that a downgrade for both sovereign bonds and Pemex is only “a matter of time.”

A cut to Pemex’s rating would likely place pressure on the peso, which fell 0.6% today on news of the plan.

In a note to clients, Citigroup also said the strategy “doesn’t solve the main structural problems of the company.”

Pablo Medina, vice president of Welligence Energy Analytics, told Bloomberg that “Pemex is trying to be too many things at the same time under the new government policy, and its portfolio is very inefficient.”

He said that to improve its financial situation, Pemex needs to sell non-core assets and restart joint ventures.

“They need to take advantage of what the energy reform allows, leverage capital and stop trying to do it all by themselves.”

Source: Financial Times (en), El Financiero (sp), Bloomberg (en)

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