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Time for Pemex to step up to fend off downgrade, deputy finance minister says

MEXICO CITY (Reuters) - After a $5 billion government lifeline to pay off debt, Mexico’s struggling state oil company Pemex must now do its part to fend off a threatened credit downgrade by keeping promises to increase production and lowering costs, a top official said.

Mexico's Undersecretary of Finance and Public Credit Gabriel Yorio smiles during an interview with Reuters in Mexico City, Mexico September 11, 2019. REUTERS/Edgard Garrido

Saddled with more than $104 billion of financial debt, Pemex bonds are under threat from Moody’s of losing their investment grade rating. The bonds were already downgraded to speculative grade, or “junk”, earlier this year by Fitch.

President Andres Manuel Lopez Obrador has shown considerable largesse in his efforts to save Mexico’s largest company, which came into being as the result of an oil nationalization in 1938 and is a source of Mexican pride. Pemex has had 14 straight years of slumping output due to a mixture of ageing fields and a lack of investment.

However, investors warn that it is not yet out of a deep hole.

Deputy Finance Minister Gabriel Yorio told Reuters in an interview on Wednesday that the $5 billion transaction, which also includes a debt refinancing plan, should allow the company to make improvements to head off further ratings actions.

“We think that by controlling this part of the finances, it permits (Pemex) to concentrate more on production,” he said, adding that he wanted to see Pemex meet a target of producing an average of 1.8 million barrels of oil per day in December, up from around 1.65 million currently.

“More than the government, they have to turn round the financial and production indicators,” he said. “They have to work now on cost efficiencies.”

Yorio said the company had made progress in the right direction already, and he defended a strategic shift to developing shallow water and onshore oil fields as necessary to save money and produce more quickly than costly projects in the deepest reaches of the Gulf of Mexico that take years to start pumping oil.

Mexico’s last government launched a major energy reform that attracted oil majors to explore the deep water projects. Lopez Obrador has long been a critic of the reform and has given priority to raising oil output via Pemex.

The deputy finance minister said the latest bailout was a one-off that would not be repeated every year.

“A transaction like this is only this time. We don’t plan to do it every year,” he said, referring to the type of transaction that took $5 billion from funds accumulated in treasury coffers.

The government will, however, continue to support Pemex with cash and tax breaks over the next several years, according to the company’s business plan. It has budgeted for another $4.4 billion of similar support in 2020.

Yorio also said the latest capitalization would be the last support the government gives to the world’s most indebted oil company in the fiscal year of 2019.

Pemex did not immediately respond to a request for comment.

The company said in its announcement of the package on Wednesday that it will issue new bonds in maturities of seven, 10 and 30 years to refinance short-term debt, although it did not give a value for the new bond placements.

Yorio also declined to give the scale of the refinancing Pemex was targeting, beyond saying it should be larger than a similar program launched by Brazil this week. [nASC0AAYU]

IFR, a news service, reported on Thursday that the Pemex was seeking to place $7.5 billion in bonds with maturities of seven, 10 and 30 years.

“We think is will be a transaction with enough volume that we can eliminate the company’s credit risk in the short term,” Yorio said.

Reporting by Stefanie Eschenbacher and Frank Jack Daniel; Editing by Tom Hogue and Marguerita Choy