Credit Research
11 January January 2019 11 2019
LatAm Oil & Gas
Petróleos Mexicanos (PEMEX): Crude Awakening; Initiating at Underweight We initiate on Petróleos Mexicanos (PEMEX) with an Underweight rating. Even with PEMEX trading close to all-time wides to EM corporates and the sovereign, the lack of a comprehensive overhaul of its tax regime in the near term will result in further credit deterioration, which should weigh on ratings and valuations. We initiate coverage on Petróleos Mexicanos (PEMEX; Baa3/BBB+/BBB+) with an Underweight rating. 2019 offers little reason for optimism, as we think fundamentals will deteriorate further, reflecting the company’s heavy tax burden, incremental debt funding for capex deployment, disappointing production and worsening credit metrics. Even with PEMEX trading flat to EM and Mexican BBs and close to all-time wides to the sovereign, we think bonds are still expensive.
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Tax Burden: PEMEX’s fiscal burden is among the most onerous in LatAm and continues to weigh heavily on the credit, even after recent reforms. We think that this will inevitably result in the company issuing more debt to fund its capex program in 2019 and beyond. We think a comprehensive overhaul is necessary to create a sustainable path forward, but do not yet see the government’s incentive to do so in the near term.
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Capital market dependence expected to increase: Absent a change in PEMEX’s tax regime, we think that capital market dependence will become more challenging. For 2019, we think the company needs USD5.5-10.0bn in gross debt (assuming Brent prices of USD45-75/bbl), but think that this number will be larger in 2020 and beyond.
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Ratings actions and forced selling: We think that Fitch will downgrade PEMEX by up to two notches, given the recent changes to its methodology for government-related entities and ongoing fundamental deterioration. If this occurs, PEMEX would only be rated one notch above high yield at two agencies. We have identified about USD6bn of potential forced selling from US IG investors if PEMEX were excluded from the US Agg index.
This document is intended for institutional investors and is not subject to all of the independence and disclosure standards applicable to debt research reports prepared for retail investors under U.S. FINRA Rule 2242. Barclays trades the securities covered in this report for its own account and on a discretionary basis on behalf of certain clients. Such trading interests may be contrary to the recommendations offered in this report. Please see analyst certifications and important disclosures beginning on page 27 . Completed: 11-Jan-19, 14:29 Completed: 10-Jan-19, 15:53 GMT GMT Released: Released:11-Jan-19, 11-Jan-19,14:35 14:00GMT GMT
FOCUS Andrew De Luca +1 212 412 3428 andrew.deluca@barclays.com BCI, US Badr El Moutawakil +1 212 526 8907 badr.elmoutawakil@barclays.com BCI, US Dennis Kilic +1 212 526 4007 dennis.kilic@barclays.com BCI, US