Mexico's Pemex highly vulnerable to oil prices below $20/bbl: Fitch

MEXICO CITY (Reuters) - Mexico’s heavily-indebted state oil company Petroleos Mexicanos is increasingly vulnerable to low crude prices as the fast-spreading coronavirus outbreak erodes demand and sends markets tumbling, Fitch Ratings said on Friday.

The logo of Mexican state oil company Petroleos Mexicanos (Pemex) is pictured at a gas station in Ciudad Juarez, Mexico February 27, 2020. REUTERS/Jose Luis Gonzalez

The ratings agency called Pemex, as the company is known, the “most vulnerable” among its peers in Latin America, warning it will likely need more government support and higher revenue from its refining business to weather the fall in prices.

“At the current Mexico’s crude basket price of below $20 per barrel, Pemex upstream business (exploration and production) does not generate enough cash flow to cover operational and financial costs,” it said.

Mexico’s oil basket plummeted to $14.54 per barrel on Wednesday, the company said, its lowest level in 18 years.

Pemex has been on the verge of losing its coveted investment grade rating since last spring. That is when Fitch Ratings became the first agency classifying Pemex bonds worth tens of billions of dollars at speculative grade, or junk.

Investors widely expect Moody’s Investors Service, which rates the bonds just one notch above junk and has them on a negative outlook, to downgrade the bonds also, which would give Pemex bonds an official status as junk.

The statement did not mention ratings changes.

Fitch said Pemex’s liquidity position is currently adequate as a result of low amortizations and available credit lines, but its weak standalone credit profile limits its resilience to the downturn in oil prices.

The agency estimates Pemex’s full-cycle costs before taxes at approximately $50 per barrel and more than $80 per barrel after taxes. It also calculates Pemex’s free cash flow to range between a negative $15 billion and a negative $20 billion per year, before government injections.

Even so, Fitch said potential mitigating factors for Pemex’s cash flow generation are its oil hedge and revenue from retail gasoline sales in Mexico.

Reporting by Stefanie Eschenbacher; Editing by Dave Graham, Marianna Parraga and Tom Brown