Fitch lifts Pemex’s rating by two notches on Mexico issuance

Fitch Ratings upgraded Petroleos Mexicanos after the government sold $12bn in global debt markets to help shore up the driller’s finances.The ratings firm lifted Pemex’s score by two notches, bringing it to BB, citing the government support for a company that is struggling under the weight of about $100bn of debt. The outlook is stable.The debt sale, which took place Monday, "supports Fitch’s assessment of the federal government’s commitment to provide stronger support to Pemex,” analyst Adriana Eraso wrote in a Friday statement. "The linkage between Pemex and the sovereign has strengthened, supporting a higher rating for the company.”The upgrade is a sharp turnaround for the driller, whose plummeting production and mounting debt load have led to multiple rating cuts by the three major firms in recent years.Pemex’s woes are partially due to flagging output of its signature heavy Maya crude, which has slid to its lowest levels in at least 15 years, according to a report by the nonprofit Mexican Institute for Competition. In addition to its financial debts and the roughly $20bn it owes its service providers, the company has also been saddled by fires, accidents and oil spills in recent years that have caused many sustainability-minded investors to flee.Moody’s Ratings scores Pemex six levels below investment grade with a negative outlook, while S&P Ratings, which takes a more generous view of government support, has it at two notches above junk with a stable outlook. The last upgrade by Fitch, which the government stopped paying to rate Pemex in 2021, was 12 years ago.Through the Monday debt issuance, Mexico will buy US Treasuries and pass them onto the company, which will use them as collateral to borrow from banks. Pemex will then use the funds at its discretion, according to an offering memorandum seen by Bloomberg.Pemex has said Monday’s sale will help the company repay its roughly $19bn in bonds coming due next year, in addition to refinancing the short-term loans it holds with various banks.Fitch’s move was telegraphed as early as September last year, when the agency said in an investor conference hosted by JPMorgan Chase & Co, that reclassifying Pemex as a "public company” would result in a tighter relationship with the driller and potentially trigger a rating upgrade.After Mexico’s debt sale announcement in July, Fitch put Pemex under Ratings Watch Positive, adding in a statement that if the transaction was successful, it may result in a multi-notch upgrade for the company.The company’s bonds have returned 14% to investors this year, beating a 6.5% average return for global peers, according to a Bloomberg index as money managers bet President Claudia Sheinbaum’s government will take a longer-term approach to support the driller.So far, Sheinbaum’s strategy, which includes attracting private companies into doing business with Pemex to boost production, is perceived as a shift from former President President Andres Manuel Lopez Obrador, who boasted about being Pemex’s biggest champion and splurged $80bn on last-minute bailouts that failed to improve operations or finances for the driller.As part of Sheinbaum’s plan, Pemex will open some key oil and gas fields to joint investment projects with private energy companies. So far, it’s attracted partnerships from Mexican billionaire Carlos Slim’s Grupo Carso SAB and Australia’s Woodside Energy Group Ltd. to develop offshore gas assets.In addition to the debt sale, the driller is preparing to publish a business plan on Tuesday, Sheinbaum said at a press conference this week.