Moody’s Doesn’t Plan to Review Pemex Bond Rating Till Mid-Year

(Bloomberg) -- Moody's Investors Service doesn't expect to review Petroleos Mexicanos's bond rating in the first half of the year, seeing no major catalyst for change as the debt-laden driller improves its liquidity and is expected to increase production by 1% this year.

Pemex's fourth quarter earnings were in-line with expectations from a cash flow perspective, Nymia Almeida, lead Pemex analyst for Moody's, said in a phone interview on Thursday. Pemex's rating is on a negative outlook because of Mexico's rating, she said.

Pemex, the most indebted oil major, has seen production fall every year since a 2004 peak. That helped trigger a downgrade by Fitch Ratings to junk last year. A similar move by either Moody's or S&P Global ratings would almost certainly lead to Pemex's removal from investment-grade indexes around the world and a subsequent forced sell-off.

“If nothing major happens, positive or negative, we are not taking Pemex again to the committee to review the rating before mid-year,” Almeida said. “It would be triggered basically because of any change in the rating of Mexico. The question is how sustainable these positives are.”

Moody's needs “two-to-three years of visibility at least to revise a rating or intrinsic risk,” she added.

Moody's has a negative outlook on Pemex's Baa3 rating, which is one notch above junk. It also has a negative watch on its A3 sovereign rating for Mexico.

Last week, Pemex posted a net loss of 346.1 billion pesos ($17.7 billion) for 2019, of which half came in the fourth quarter alone. The reason for the slump wasn't fully explained. The yield spread on Pemex bonds maturing in 2027 over the Mexican sovereign soared to the highest since September on Thursday after hitting a record low in February.

“They're taking their time,” Alonso Cervera, chief Latin America economist at Credit Suisse Group AG said in response to Almeida's comments. “I think the implicit message is that the 2019 results were not enough to change the rating, at least for now.”

Almeida said that April will be an “important month” for Pemex, because of a reserves report expected at the end of it, along with the company's first-quarter 2020 results.

Pemex's 2020 investment budget of $16.7b, 81% of which would be allocated to exploration and production, would require much higher crude and fuel prices supporting cash generation or external funding, according to a Moody's note on Friday.

Despite an accelerated drilling program at a group of onshore and shallow-water fields, crude and condensate production was 1.69 million barrels a day in the fourth quarter, little changed from the previous three months. Its refining business contributed to the losses, with the six existing plants operating at about 34% of their capacity.

--With assistance from Justin Villamil.

To contact the reporter on this story: Amy Stillman in Mexico City at astillman7@bloomberg.net

To contact the editor responsible for this story: David Marino at dmarino4@bloomberg.net

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