Sheinbaum's choice – Mexico's options for refinancing Pemex

For Mexico's national oil company Pemex, it is the best of times and the worst of times. As president-elect Claudia Sheinbaum prepares to take office from her mentor Andrés López Manuel Obrador (AMLO) in October, Pemex's role in the Mexican energy industry is as prominent as it has ever been. 

Over the course of AMLO's six-year administration, Pemex has more or less stabilized its reserves and production of oil and gas. Meanwhile, downstream investments such as the Olmeca refinery have brought Mexico close to self-sufficiency in fuels. Under Sheinbaum, Pemex is poised to make a greater contribution in areas such as renewable energy, fertilizers and lithium.

But these conquests have come at a high cost. Pemex is the most indebted oil company in the world and one of the most unprofitable. According to credit rating agencies, without the support of the government Pemex would face real challenges to its solvency. Its downstream investments are burning through cash, it is paying its suppliers late and it does not have the resources to fund major exploration campaigns.

BNamericas asked two credit analysts at global asset management firm T. Rowe Price, one of Pemex's largest bondholders, to share their ideas on what Sheinbaum can do to put Pemex's finances on a stronger footing.

In this email interview, senior emerging markets sovereign analyst Aaron Gifford and Andrew De Luca, head of Latin America corporate credit research, discuss the legacy of AMLO, the ways in which Sheinbaum's government could support Pemex, and the NOC's options for the future.

BNamericas: What do you think is the main legacy of AMLO’s administration for Pemex? 

Gifford and De Luca: AMLO’s legacy with regard to Pemex is unprecedented government support on the order of US$100bn. This includes tax breaks, capital injections and other measures. While closer coordination with the government has not been able to revert the poor profitability and negative free cash flow, it has helped reduce debt by US$10bn and proved that Pemex is an essential part of the Mexico story and is too big to fail.

BNamericas: What does the election of Claudia Sheinbaum mean for Pemex and what would Pemex bondholders like to see from the new administration?

Gifford and De Luca: In many ways, a Sheinbaum administration should lead to continuity for Pemex, as the president-elect is a close ally of AMLO and they share similar ideologies. Indeed, Sheinbaum has committed to supporting the company and is keen on refinancing Pemex’s 2025 maturities.

One difference, however, is Sheinbaum’s focus on energy transition, including saying that Pemex will play a role in renewables. There are still few details about what future policies will look like, but any measures taken to improve Pemex’s ESG credentials will be positive for the company, country, and investors given Pemex’s tainted history on the environmental front. 

There’s also a perception that Sheinbaum will be more pragmatic than AMLO when it comes to policymaking. This could extend to the energy sector, though it’s too soon to know whether that will include more private participation in E&P, a greater focus on profitability for Pemex, etc.

BNamericas: Pemex has a lot of maturities coming due soon. What are Mexico’s best options for meeting these obligations and refinancing the debt, at a time of a high fiscal deficit?

Gifford and De Luca: Pemex has had elevated maturities for a long time and they have always been able to deal with them with the government’s help. This shouldn’t change. The main challenges are Pemex rolling over debt at more punitive interest rates and the government playing more of a role given its own fiscal issues. It’s worth noting that the Mexican government consolidates Pemex’s financials within its own fiscal and debt metrics so the challenges there have already been recognized. 

But what can the government do to help Pemex given these constraints? We see three options: 1) use cash on hand to inject capital into Pemex to cover its maturities, 2) borrow from the market and use the proceeds to inject capital into Pemex, and 3) extend a partial or full guarantee of Pemex’s debt to lower the company’s borrowing costs and facilitate it issuing bonds on its own. 

BNamericas: How do you assess these options?

Gifford and De Luca: On option 1, even though the AMLO administration has already run down a lot of its financial buffers, we believe there are still enough resources to make a significant dent in Pemex’s upcoming maturities. This would also be neutral on a fiscal basis. 

Option 2 is essentially what the government has been doing. By including Pemex as a line item in its budget, the government has been able to adjust its financing plans to incorporate any funds required for Pemex. This was introduced in the 2024 budget and we believe it can happen again for next year. The fact that Sheinbaum is committing to a large fiscal adjustment, however, means they’ll need to cut spending in other areas (likely) or raise additional revenues such as through a tax reform (unlikely, as Sheinbaum has so far ruled it out). 

Option 3 would be the most significant for Pemex, but it would weigh on the sovereign’s own borrowing costs, have the potential of leading to a ratings downgrade of government debt, and require a constitutional change. We believe there are ways to go about this without much damage (e.g., guarantee just a single issuance), but it would require more political will. Fortunately, Sheinbaum’s near-supermajority in congress means that she likely has the votes if she decides to go that route. Long story short, there are enough options for the government to continue supporting Pemex and we see that happening for the foreseeable future.

BNamericas: Has Pemex done enough to meet ESG concerns?

Gifford and De Luca: Over the years, Pemex's funding costs have been directly impacted by its challenging ESG story. There have been lenders (bondholders, banks) who have curtailed exposure to the state-owned enterprise because of ESG concerns. That said, the publication of their long-awaited sustainability plan is a big step forward from an ESG perspective. But they still have a long road ahead given its challenging starting point, and they now need to deliver on the plan. This could take several years of consistent delivery before the market assigns them credit.

BNamericas: On the operational side, what actions would you like to see the government taking to turn Pemex around? What are the possible new directions for Pemex?

Gifford and De Luca: Ideally, we would like to see Pemex focusing on profitability and reducing indebtedness. This could include: 1) reducing investments/activity in areas where they are burning significant cash, such as the downstream operations; and 2) divesting non-core assets which require significant capital but don’t really move the needle for the company (similar to what occurred in Brazil). We would also like to see the government playing a more proactive role in refinancings going forward, helping to structurally reduce the company’s cost of funding.