Analyst View: Investors divided over Mexico’s bailout of state oil company

MEXICO CITY (Reuters) – The Mexican government promised on Friday to do what it takes to strengthen the finances of ailing state oil company Petroleos Mexicanos with an injection of at least $3.6 billion to prevent a further credit downgrade.

Investors were divided over whether the plan, which includes previously announced measures as well as tax cuts and refinancing some of the firm’s roughly $106 billion in financial debt, would be sufficient to compensate for the losses from falling oil output, corruption and high labor costs.

“It’s injecting resources, it’s lowering the tax obligation,” President Andres Manuel Lopez Obrador said of the plan to help the company, which credit ratings agencies Fitch and Moody’s rate one notch above junk. “But above all, it’s cleaning out corruption.”

MARKET REACTION

The price of Pemex’s most heavily traded bond on Friday fell after the announcement. The yield for the 2047 bond, rose 14 basis points, according to MarketAxess data.

Meanwhile, the price on a Pemex bond maturing in 2024 71654QBH4= also dropped, with its yield up 32 basis points, reflecting bondholder skepticism of the plan.

The Mexican peso weakened by more than half a percent against the dollar after the announcement, but recovered later in the day.

WILBUR MATTHEWS, FOUNDER OF VAQUERO GLOBAL INVESTMENT

“It is a good sign that the Lopez Obrador administration recognizes that Pemex needs to change profoundly.”

“One of the things that people have not noticed in the past is how badly it fell apart under the prior administration: you have declining production, debt is sky-rocketing, refining capacity is at all times low.”

“Mexico needs to make some bold moves to reform the hydrocarbon sector.”

JULIE MURPHY, LATIN AMERICA CORPORATE RESEARCH AT JP MORGAN

“We are extremely disappointed with the measures. After two weeks of allusions to extraordinary additional support for the company, we think $207 million in additional measures is a stunning disappointment.”

“Importantly, we do not think today’s measures move the needle at all on the rating agency front for Pemex, where we think fallen angel risk is relevant over the next 12 months, or on the sovereign side, where we also see downgrades as likely.”

LUIS GONZALI, PORTFOLIO MANAGER AT FRANKLIN TEMPLETON INVESTMENTS

“I believe the market was expecting more.”

“Even with the capital injection, (it) will only be enough for Pemex not to need refinancing this year.”

“However, the unconditional support they expressed for the oil company is positive.”

EDWARD GLOSSOP, LATIN AMERICA ECONOMIST AT CAPITAL ECONOMICS

“[The plan is] unlikely to arrest the alarming decline in oil output and prevent yields on Pemex debt from rising this year.”

“At the margin, the bailout and the apparent pledge of more government support if needed may help to ease fears about Pemex’s balance sheet over the next year or so.”

“But the measures are not a long term fix and won’t be enough to stabilize oil output, which has halved since 2004.”

EDGAR CRUZ, GLOBAL MARKETS CREDIT RESEARCH, BBVA

“We believe the announcement is positive and could be enough to remedy the company’s additional financial needs for 2019. However, we still believe Pemex will need to roll over maturities for more than $6.0 billion.”

“In our opinion, Pemex could face a similar scenario for 2020 as we expect [free cash flow] to remain negative due to the construction of a new refinery and as we do not see any drastic increasing in production due to strong under-investment in [exploration and production].”