Mexico teases Pemex plan, banks say unimpressed

Mexico unveiled part of its keenly-awaited business plan, meant as a road map to bring the world's most indebted oil company back to financial health, but failed to impress banks who warned it did little to reduce a ratings downgrade risk.

Under the plan, the government reiterated that it will reduce taxes on national oil company Petroleos Mexico, or Pemex, by some $7 billion over the next two years, while injecting capital for higher output.

Pemex Chief Executive Officer Octavio Romero said about $2.1 billion had been set aside next year to finance the new $8 billion Dos Bocas refinery, a project ratings agencies see as adverse to getting the ailing company back on track.

With few new details, the outline of the plan did not excite markets. Citi said Pemex's future was still mired in uncertainty and on the verge of losing investment grade.

Fitch downgraded Pemex's credit to speculative, or junk, earlier this year while Moody's puts Pemex, which has some $106 billion in financial debt, as just one notch above.

"The probability of a downgrade to junk by Moody's has gone higher," Citi Research said in a report, adding that it predicted such an action within the next six months.

"The disappointing plan reinforces our view that Mexico is a slow deteriorating credit."

A downgrade from Moody's would formally confirm Pemex as a junk credit. If that happens, some funds whose mandates prohibit holding such assets would have to sell their Pemex bonds.

Mexico's peso weakened 0.5% against the dollar after the presentation.

Romero said the plan addressed an onerous profit-sharing tax that hands much of the company's income to the federal government and makes the company financially unsound.

He reiterated that the tax will be reduced 11 percentage points to 54% by 2021. The company has previously said that reduction would save the company $7.1 billion in 2020 and 2021.

Former Finance Minister Carlos Urzua cited his opposition to the refinery after he resigned last week, saying experts believed it would be far more costly than projected. Other critics say the refinery will not help Pemex meet its immediate aim to boost production, and could become a risk factor for Mexico's economy.

Focusing on easy to access on shore and shallow water fields, Romero vowed to raise Pemex production within three years, and to reach 2.7 million barrels per day (bpd) of oil by the end of the government of President Andres Manuel Lopez Obrador in 2024, from a current 1.8 million bpd.

Sticking to the government's position since it took office in December, Romero said it made more sense to invest in these fields to rapidly increase output, rather than the deepwater area of the Gulf of Mexico which the last government wanted to tap.

Luis Gonzali, a portfolio manager at Franklin Templeton Investments, warned that a capital injection would not yield fast results.

"The cycle of investment and return in Pemex, and in any oil company in the world, takes from 5 to 7 years," he said in an investor note. "Pemex has to fix its problem today."

Lopez Obrador said he hoped ratings agencies would act "professionally" in response to the news. He had previously lashed out at Fitch after it downgraded Pemex, saying it was not objective.

Moody's, Fitch and S&P Global did not reply to requests for comment on the business plan.

Investors are now watching to see how ratings agencies respond, CI Banco said in a report, paying particular attention to whether the plan will allow Pemex to reach its production goals without disrupting public finances.

"Doubts still remain about whether the capital to be injected and the reduced tax burden are sufficient," said James Salazar, a CI Banco economist. "I believe ratings agencies will give the benefit of the doubt at least through this year." (Reporting by Diego Ore and Ana Isabel Martinez, Additional reporting by Stefanie Eschenbacher, Miguel Angel Gutierrez; Writing by Frank Jack Daniel and Daina Beth Solomon; Editing by Jonathan Oatis and Marguerita Choy)

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