AMLO’s Big Pemex Rescue Plan Hobbled by Record $23 Billion Loss
Forced Selling on Pemex Downgrade Makes Bonds Low-Hanging Fruit
(Bloomberg) -- Mexico’s state-owned oil company posted a staggering $23 billion record loss for the first quarter in yet another sign of trouble for President Andres Manuel Lopez Obrador’s big plans to rescue the country’s battered cash cow.
The results show Petroleos Mexicanos, which is struggling to pay down more than $100 billion of debt and halt more than a decade of production declines, had been hit hard by crude’s historic crash and the pandemic-driven collapse in energy demand even before the height of the crisis this month.
The company’s strategy of accelerating drilling in onshore and shallow-water fields has hit a snag as cities all over the world came to a halt amid efforts to stem the Covid-19 outbreak. Because of the crisis, AMLO, as Mexico’s president is often called, has recently said new wells would be shut, dealing a blow to the country’s biggest single source of tax revenue.
Lopez Obrador made Pemex’s recovery and Mexico’s energy self-sufficiency into one of the pillars of his government. A nationalist that made his first steps in politics in his native oil-producing state of Tabasco, Lopez Obrador has sought to reverse a move by the previous administration to open the energy industry to private investors.
Under his leadership, Mexico is building the $8 billion Dos Bocas refinery even as international gasoline prices collapse.
Earlier this month, the president put on hold for three days a historic OPEC+ oil output cut deal because he didn’t agree with his nation’s share of a proposed 23% reduction by each member of the group, which would have amounted to 400,000 barrels a day for Mexico. Eventually, he convinced the Saudi Arabia-led alliance of oil exporters to let Mexico cut far less than the others.
Pemex’s first-quarter loss, the biggest on record in data going back to 2004, coincides with the announcement Thursday that Mexico’s gross domestic product in the three months through March fell 1.6% from the previous quarter, the worst result in 11 years. The Latin American country faces a significant economic contraction this year amid a deterioration of business confidence and a shutdown of daily life to contain the pandemic.
Ratings agencies have downgraded Pemex’s bonds several times in the past few months. In April, Moody’s Investors Service slashed its rating to junk and Fitch Ratings cut the company to BB-. S&P Global Ratings also downgraded its bonds in March.
Investors are wary of Lopez Obrador’s nationalist strategy to rescue Pemex. The leftist leader has canceled oil and gas auctions and joint-venture contracts with Pemex that enabled it to share the burden of developing Mexico’s oil fields with private companies. The company’s benchmark 2027 notes rose more than 3 cents to trade at 80 cents on the dollar.
Pemex also faces a mounting fuel crisis as demand in Mexico has more than halved in recent weeks because of coronavirus containment measures. As ships sit offshore waiting to unload due to a lack of storage capacity, the company has been racking up hefty ship fees.
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