Pemex: Lack of Concrete Action Weights on the Outperform Thesis
We need to see concrete action from the Mexican government to maintain an Outperform recommendation.
Downgrading Pemex to Market Perform
Since before Claudia Sheinbaum’s election, both the previous and current administrations have emphasized that government financial support for Pemex is in the country’s best interest, positioning the company as a strategic asset for Mexico’s economy. The new administration has continued efforts to reclassify Pemex as a public entity rather than a productive enterprise, incorporating it into the 2025 government budget with a promised ~US$6.7 billion in support. Additionally, the administration has made some positive statements in recent weeks, including assurances that Pemex will not tap the debt market in 2025. President Sheinbaum also announced in a press briefing that Pemex's outstanding payments to suppliers are expected to be settled by March 2025, while the administration has signaled openness to joint ventures in the exploration and production sector. On January 29, 2025, Sheinbaum further proposed an energy reform aimed at reinforcing state control over the sector.
We see these comments as positive for a credit story that remains highly dependent on financial support from the Mexican government, given Pemex’s unsustainable standalone credit profile, which is characterized by a significant debt burden, weak liquidity, high debt service costs, and persistent negative cash flows. However, since the administration took office in October 2024, we have yet to see sufficient action, which we believe weighs negatively on Pemex’s credit outlook.
The ongoing payment delays to suppliers and contractors, with outstanding debts amounting to P$402.9 billion (US$19.6 billion) as of September 2024, remain highly concerning. Thus far, the only response has been partial payments made in December 2024, covering just 3–5% of the total debt, leaving many businesses, particularly in key oil-producing regions like Tabasco and Campeche, struggling with liquidity issues. These prolonged delays have led to widespread economic repercussions, including layoffs, operational disruptions, and heightened unemployment among subcontractors. Protests have erupted in Tabasco, with suppliers criticizing Pemex for failing to meet prior payment commitments.
In her inauguration speech to Congress, Sheinbaum also stated that Pemex would stabilize production at around 1.8 million barrels per day (mboed). However, production, including contributions from partners, has declined, reaching 1.718 mboed in October, 1.673 mboed in November, and 1.619 mboed in December 2024, representing YoY declines of 7.8%, 9.9%, and 12.3%, respectively.
Moreover, the slower-than-expected ramp-up of the Dos Bocas refinery suggests that any operational improvements may take longer than anticipated. Designed to process 340,000 barrels per day of heavy sour Maya crude, the refinery has faced persistent challenges since its inauguration in July 2022. Issues related to crude quality, electricity, and financial constraints have caused repeated delays in reaching full operational capacity. While intended to be a cornerstone of Mexico’s strategy to achieve energy independence, Dos Bocas has struggled to perform as expected.
At around 319 bps, the current spread difference between PEMEX 10Y and Mexican Sovereign 10Y is 48 bps below the one-year average of 367 bps, though still wider than the one-year low of 258 bps reached on November 8, 2024. Year-to-date, the PEMEX 10Y–Mexico 10Y spread difference has ranged between 278 bps and 326 bps, placing current spreads near the wider end of this range. Over the past twelve months, the spread difference has ranged between 258 bps and 450 bps, currently sitting closer to the tighter end of this range. However, spreads remain 31 bps tighter than when we initiated coverage with an Outperform recommendation on September 29, 2024. For context, in early 2019, when Pemex still held an investment-grade credit rating, the average spread difference between the company and the sovereign was 243 bps, significantly tighter than current levels. However, Pemex’s overall credit profile was also stronger at that time, with significantly better credit metrics.
At this point, we need to see concrete action from the Mexican government to maintain an Outperform recommendation. As a result, we are downgrading Pemex to Market Perform. In our view, current spreads accurately reflect the level of government support, but further spread compression will require tangible actions. Meanwhile, Pemex’s deteriorating operational metrics will likely increase its need for government assistance.
Within Pemex’s capital structure, we continue to prefer the PEMEX (B3/BBB/B+) 5.950% 2031, yielding 9.0% for a 5.0-year duration; the PEMEX 6.625% 2035, yielding 9.8% for a 6.9-year duration; the PEMEX 6.625% 2038, yielding 10.1% for a 7.8-year duration; and the PEMEX 7.690% 2050, yielding 10.4% for a 9.0-year duration. These bonds offer an attractive yield pickup relative to sovereign bonds and are currently trading wider than the overall Pemex curve. The spread pickup to the sovereign is more favorable at the belly and long end of the curve than in shorter-dated notes. Furthermore, most Pemex bonds maturing before 2029 trade at or near par, reducing their upside potential, while the 2031s, 2038s, and 2050s trade well below par at $84.0, $72.7, and $74.6, respectively.
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