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Moody's reaffirms new Mexican energy plan could dent Pemex's credit ratings

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Moody's reaffirms new Mexican energy plan could dent Pemex's credit ratings

The incoming Mexican government's announcement to essentially halt oil exports is negative for the credit ratings of the government as well as state-run oil and gas company Petróleos Mexicanos SA de CV, or Pemex, according to a new report from Moody's Investors Service released Oct. 18.

Under the new administration of left-wing Andrés Manuel López Obrador, who won Mexico's July 1 national presidential election and takes office Dec. 1, the construction of a new $8.0 billion refinery, with a capacity of 600,000 barrels per day, is expected to be completed within three years. In addition, under the new regime, Mexico's existing refinery system, which has an aggregate capacity of more than 1.6 million barrels per day, would operate at full capacity in three years after capital investments of $2.5 billion.

"We estimate that, if investments in refining are executed as planned and in time, which we consider improbable due to the size and complexity of the projects, Pemex by late 2021 would become a net importer of over 400,000 bbl/d of crude in the unlikely best-case scenario of crude production remaining stable," the report said.

Although the new government plans to increase capital investment in exploration and production by $4 billion in 2019 to help increase domestic crude production, Moody's considers this outcome unlikely within three years because natural production declines and Pemex's high operating costs make this level of capital insufficient.

Pemex's crude production could remain stable with adequate capital investment, but domestic production would still not meet the planned refining capacity expansion by 2021. "And, if Pemex's crude production continues to decline at a more than 7% annual rate, its crude imports could reach more than 600,000 bbl/d in the period. As a reference, at today's Brent price of about $80 per barrel, this would translate to annual import expenses of $17 billion," Moody's said.

The likelihood of Pemex posting lower operating cash flows in the next three years is even higher due to the ongoing uptick in crude prices, as well as the new government's stated intention to freeze domestic fuel prices.

While the Mexican government has decreased its reliance on oil revenue since 2013, the loss of oil revenue from Pemex could blow out Mexico's fiscal deficit. "Plans to halt oil exports would deprive the government of nearly 2% of GDP in revenue, forcing it to raise taxes or abandon its pledge of fiscal discipline," the report said.