What Will Happen to PEMEX After López Obrador?

President López Obrador has showered PEMEX with attention, lightening its tax burden and providing financial injections, which garnered the attention of emerging market bond buyers. However, analysts warn that this attention might not last once López Obrador leaves office, making the NOC’s future unclear.

Pramol Dhawan, Head of Emerging Market Debt, Pacific Investment Management Co. (PIMCO), suggested that Mexico’s next government may not be “Pro PEMEX,” which could hamper the NOC’s plans to be self-sufficient. PIMCO, the world’s biggest bond investor, is reducing its exposure to PEMEX debt and maintaining a lower investment compared to other options. “The current administration is perhaps the most Pro PEMEX one could probably get. The subsequent government may not be so credit friendly,” says Dhawan.

Recently, JPMorgan analysts recommended investing in the NOC’s bonds, considering the impact of global risk aversion on prices. Additionally, Goldman Sachs sees an attractive entry point in the front end of the PEMEX bond curve, contingent on a reduction in market volatility. However, despite these recommendations, the company’s debt has performed poorly, causing investors to suffer losses of 2% in the past month. This stands in contrast to the 0.4% average return for Latin American corporate bonds.

“After the elections, the investors will be very worried,” says Dhawan. He highlights other technical concerns, including the low production levels and substantial debt of over US$100 billion. Furthermore, the Salina Cruz refinery, a crucial component of PEMEX’s ambitious plans to modernize and enhance its refining capabilities, is likely to miss its targeted completion date of 2024. According to the company’s estimates, the refinery may not be completed until 2025, significantly surpassing the initial deadline. This acknowledgment highlights the magnitude of the delays and the challenges faced in executing the construction project.

Despite this, Octavio Romero, Director General, PEMEX, stated earlier this year that the country is on track to achieve energy selfsufficiency by 2024, as it aims to produce 26.2Mb/d of fuel. This target is being driven by the significant repairs already scheduled and the successful performance of the Deer Park Refinery.

As oil prices skyrocketed last year, the NOC benefited from extraordinary profits reaching US$9.63 billion during the first three quarters of 2022. After years of receiving financial government aid to free up some liquidity for exploration and production investments, the company started paying its own debt when oil prices increased. However, as oil prices stabilized and lowered by the end of 2022, PEMEX announced that it was in talks with the government to receive support once again. Although the government said it would fully support the state company, it did not clarify how. Following these statements, the NOC resorted to releasing more debt into the market. The government is expected to grant support to PEMEX but only if it was necessary and oil prices tumbled. Meanwhile, the NOC plans to pay its upcoming amortizations out of its pocket.