Observers in Mexico concerned by Sheinbaum's plan to 'fix' Pemex; eyes on 2025 budget

It is premature to fully evaluate the Mexican government's plan to restructure Pemex, the state-owned oil and natural gas company, as key details are still lacking but the information available so far is not encouraging, given the company's huge financial debt and declining production, according to observers and experts.

Mexican President Claudia Sheinbaum Pardo and her cabinet announced on Nov. 13 a plan for Pemex that included a new fiscal regime and measures to cut costs.

"We still don't know for sure. What the government presented is not a plan, it looks more like a list of wishes on a few power point slides," Rosanety Barrios, an independent analyst told S&P Global Commodity Insights.

While the fiscal regime they presented may be labeled as new, it fundamentally remains unchanged: the government receives its share of the revenues, leaving the company to manage what remains, Barrios said, emphasizing that the government should release a "serious" document outlining the plan, detailing how they intend to achieve the results they promise, like reducing costs and maintaining production levels.

"They should present a document with figures that shows that professional work has been done," Barrios said. "There is nothing more important for the public finances of the country. They should take it seriously."

It remains unclear how the government will calculate Pemex's taxes under the new regime. However, even if these taxes are lower, the savings are unlikely to offset the company's financial burdens, making an increase in liquidity improbable, credit analyst at Moody's Investor Services Roxana Muñoz said.

According to Muñoz, on Nov. 15 we will know if the administration begins to implement these changes, as the federal government will present its budget for 2025.

"It will be a key day," she said during a panel discussion in Mexico City organized by local media outlet Oil & Gas Magazine on Nov. 14.

Moody's downgraded Mexico's sovereign rating outlook from stable to negative on Nov. 14, as the agency identified increased spending and institutional weakness. The agency's currently rating for Mexico is Baa2.

S&P Global Ratings has assigned Mexico a rating of BBB with a stable outlook. For the 2025 budget, S&P Global Ratings expects fiscal discipline; however, analysts have noted particular attention will be paid to the managing of the country's debt and Pemex's debt. An increase in debt could negatively impact the rating, analysts said on Nov. 12.

While many details remain unclear, the plan presented by the government does not seem to address the company's fundamental issues: its inability to face debts, streamline operations and focus on productive sectors like crude production, stated Mexican bank Intercam in a note to clients on Nov. 14.

"Although there is more willingness to invite the private industry, the capital needs of the oil company are considerable to turn around its troubled financial situation," Intercam wrote.

Many observers agree that the company's situation is dire; it needs capital and technology. Although there is interest from the private sector, the overall conditions in the country have deteriorated, partly due to the government's ongoing reforms, including a complete overhaul of the judiciary and the elimination of independent regulators such as the anti-trust watchdog, Cofece, and the two energy regulators, CRE and CNH.

Without new opportunities and amidst concerns about the rule of law, attracting investors' attention will be challenging, observers said.

"When clients come to the office and ask me if the government can take their assets if they decide to invest in Mexico, the answer is yes," a lawyer from a global firm in Mexico City said.

Without legal certainty in the country, enforcing an international arbitration ruling in Mexico could be challenging, even if a company wins, he said.

Many upstream companies have left the country, relinquishing rights to exploration blocks in deepwater, shallow-water and onshore deposits, data from the CNH shows.

"Without any more rounds, or joint ventures and without CNH, there is the risk that the few [companies] who still remain [in the country] decide to go too," he said noting that not everyone will leave, as there will still be money to be made in service contracts.