Pemex in the Eye of the Storm With AMLO Ruling Mexico’s Economy

Amy Stillman
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Pemex in the Eye of the Storm With AMLO Ruling Mexico’s Economy

(Bloomberg) -- The surprise departure of Mexico’s finance minister has the state oil company’s watchers biting their nails.Carlos Urzua resigned Tuesday, citing conflicts of interest and policy disagreements within Andres Manuel Lopez Obrador’s administration. That sent the peso plunging as much as 2.3%, and stocks sliding. Yields on both sovereign and Petroleos Mexicanos bonds surged, reflecting the tight link between the nation and the oil giant.The first major cabinet loss since Lopez Obrador, known as AMLO, took office in December could spark another junk rating for Pemex after Fitch downgraded its bonds last month, according to TD Securities. The average spread on all Pemex’s bonds rose 13 basis points on Wednesday.“This opens the door to fiscal slippage in the 2020 budget and, crucially, a lack of strong impetus to address the bubbling Pemex ‘crisis’,” Sacha Tihanyi, deputy head of emerging market strategy at TD, said in a note Wednesday.More SpendingRajan Vig, founder of oil trading company Indimex Marketing and Trading LLC in Mexico City, reckoned that Urzua’s resignation could lead to higher spending on Pemex’s refining business, which would detract from its core business of drilling.“Urzua was diligent and highly conservative when analyzing opportunities. That’s what I gathered the issue was,” said Vig. “There is only one person that runs economic policy in Mexico and that is AMLO.”While Urzua’s replacement -- former deputy finance minister Arturo Herrera -- is considered more market-friendly than his predecessor, analysts question how much sway over Lopez Obrador’s nationalist energy agenda he’ll actually have.In his morning press conference on Wednesday, Lopez Obrador said he had some disagreements with Urzua. He said he replaced Urzua’s draft for the government’s national development plan, and opted for one closer to his transformation goals.Five-Year PlanThe five-year plan includes goals to enhance Mexico’s self sufficiency in energy by expanding the role of state companies Pemex and the Federal Electricity Commission.Pemex’s oil output has declined consecutively for 14 years, while its refineries operate at about 35% of their capacity due to historic under-investment. Its debt is the highest of any oil company in the world, at $106.5 billion.If that weren’t enough of a challenge, Pemex has also been saddled with managing the construction of a new $8 billion refinery in three years, which investors fear could drain the resources of the already struggling oil producer.After his nomination Tuesday, Herrera told reporters that Pemex’s high fiscal burden must be reduced slowly and he said that the focus of Pemex’s business plan due in the coming days will be investment in oil production. He said that refinery investment is minor compared to the total.Herrera played down an episode where he was quoted by the Financial Times as saying that the government’s refinery project was on hold, only to be contradicted by Lopez Obrador hours later. He now says he wasn’t properly cited by the media.Herrera is likely to be “trodden on,” said Vig, “unless he can convince AMLO to act based upon economic indicators.”\--With assistance from Sydney Maki, Carlos Manuel Rodriguez and Nacha Cattan.To contact the reporter on this story: Amy Stillman in Mexico City at astillman7@bloomberg.netTo contact the editors responsible for this story: David Marino at dmarino4@bloomberg.net, Catherine TraywickFor more articles like this, please visit us at bloomberg.com©2019 Bloomberg L.P.

(Bloomberg) -- The surprise departure of Mexico’s finance minister has the state oil company’s watchers biting their nails.

Carlos Urzua resigned Tuesday, citing conflicts of interest and policy disagreements within Andres Manuel Lopez Obrador’s administration. That sent the peso plunging as much as 2.3%, and stocks sliding. Yields on both sovereign and Petroleos Mexicanos bonds surged, reflecting the tight link between the nation and the oil giant.

The first major cabinet loss since Lopez Obrador, known as AMLO, took office in December could spark another junk rating for Pemex after Fitch downgraded its bonds last month, according to TD Securities. The average spread on all Pemex’s bonds rose 13 basis points on Wednesday.

“This opens the door to fiscal slippage in the 2020 budget and, crucially, a lack of strong impetus to address the bubbling Pemex ‘crisis’,” Sacha Tihanyi, deputy head of emerging market strategy at TD, said in a note Wednesday.

More Spending

Rajan Vig, founder of oil trading company Indimex Marketing and Trading LLC in Mexico City, reckoned that Urzua’s resignation could lead to higher spending on Pemex’s refining business, which would detract from its core business of drilling.

“Urzua was diligent and highly conservative when analyzing opportunities. That’s what I gathered the issue was,” said Vig. “There is only one person that runs economic policy in Mexico and that is AMLO.”

While Urzua’s replacement -- former deputy finance minister Arturo Herrera -- is considered more market-friendly than his predecessor, analysts question how much sway over Lopez Obrador’s nationalist energy agenda he’ll actually have.

In his morning press conference on Wednesday, Lopez Obrador said he had some disagreements with Urzua. He said he replaced Urzua’s draft for the government’s national development plan, and opted for one closer to his transformation goals.

Five-Year Plan

The five-year plan includes goals to enhance Mexico’s self sufficiency in energy by expanding the role of state companies Pemex and the Federal Electricity Commission.

Pemex’s oil output has declined consecutively for 14 years, while its refineries operate at about 35% of their capacity due to historic under-investment. Its debt is the highest of any oil company in the world, at $106.5 billion.

If that weren’t enough of a challenge, Pemex has also been saddled with managing the construction of a new $8 billion refinery in three years, which investors fear could drain the resources of the already struggling oil producer.

After his nomination Tuesday, Herrera told reporters that Pemex’s high fiscal burden must be reduced slowly and he said that the focus of Pemex’s business plan due in the coming days will be investment in oil production. He said that refinery investment is minor compared to the total.

Herrera played down an episode where he was quoted by the Financial Times as saying that the government’s refinery project was on hold, only to be contradicted by Lopez Obrador hours later. He now says he wasn’t properly cited by the media.

Herrera is likely to be “trodden on,” said Vig, “unless he can convince AMLO to act based upon economic indicators.”

--With assistance from Sydney Maki, Carlos Manuel Rodriguez and Nacha Cattan.

To contact the reporter on this story: Amy Stillman in Mexico City at astillman7@bloomberg.net

To contact the editors responsible for this story: David Marino at dmarino4@bloomberg.net, Catherine Traywick

For more articles like this, please visit us at bloomberg.com

©2019 Bloomberg L.P.