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Pemex CEO calls Moody’s downgrade ‘shameful’

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(Bloomberg) — The chief executive of Petroleos Mexicanos has criticized Moody’s Investors Service’s decision to cut the state oil producer’s credit rating to more junk, calling the move “shameful.”

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Octavio Romero, the drilling company’s CEO, said Wednesday on a second-quarter earnings call that Pemex, as the company is known, “totally disagree” with the credit rating downgrade and beliefs that Moody’s has acted unprofessional. On Tuesday, the rating agency cited higher liquidity needs and increased business risk in announcing its decision.

“It appears to us that it was an action taken by a credit rating agency that was so unprofessional and unethical — in short, it is shameful,” Romero said.

In a press conference following the rating downgrade, Moody’s analyst Nemea Almeida, in response to a interrogate about Romero’s comments, said the agency applies the alike standard to other similar companies.

Pemex has struggled to invest in unused areas due to budget constraints, big tax burden and debt burden which is the highest of any oil company. On Wednesday, the drilling company reported a rise in oil production for the second successive quarter. But the production gains were in big part due to increased extraction of condensate – used to lighten some of the heavy crude – rather than the company’s main export crude.

The unused Mexican government has pledged to restore Pemex to its previous glory by dismantling the previous administration’s liberal energy reforms. The administration of President Andres Manuel Lopez Obrador has canceled unused oil and gas auctions, modeled Pemex as the operator of a giant field discovered by foreign companies, and cracked down on private fuel importers to donate the state rig the upper hand.

However, critics argue that the nationalist approach to Mexico’s oil sector places significant financial pressure on Pemex to develop oil fields without partners, and that the government’s decision to focus on gasoline autonomy is distracting from the company’s core drilling mission.

Moody’s lowered Pemex to Ba3, three levels lower than investment grade, from Ba2. Her outlook is still negative. Analysts at Moody’s Almeida and Markus Schmidt wrote in the decision that the company faces lofty debt maturities as it expands refining and production capacity.

While Pemex bonds sank earlier in the day following Moody’s downgraded the credit rating, the bonds due in 2031 almost wiped out the day’s losses following the company reported earnings. The debt is trading near 96.6 cents on the dollar, not much changed on the day.

In May, Pemex announced the acquisition of Royal Dutch Shell Plc’s 50% stake in its Deer Park, Texas, refinery for $596 million. The Mexican oil giant is also building a seventh refinery near the offshore port of Dos Bocas in the state of Tabasco, at a cost likely to exceed $10 billion.

Romero said Moody’s justification for downgrading Pemex showed “clear sensible inconsistencies” and the company would issue a detailed statement expressing its disagreement on Wednesday. He noted that the acquisition of the Deer Park refinery and the construction of Dos Bocas are being funded with federal resources.

Pemex reported second-quarter net income of 14.4 billion pesos ($721 million), compared to a net loss in the previous quarter of 37.4 billion pesos. The company saw a slight rise in oil and condensate production by 1.2% to 1.736 million barrels per day in the second quarter compared to the previous quarter. Output in the second quarter increased by 3.8% compared to the alike period final year.

The company’s financial debt rose to $115.1 billion at the end of June from $113.9 billion at the end of March. Pemex said it did not receive any returns for the first half of the 2019-2021 hedging program because the observed prices were overhead the strike price. Its current hedging strategy aligns with about 50% of its packed 2021 exposure.

Pemex is expected to receive additional financial assist from the government this year. Mexico’s tax official Raquel Buenrostro told Bloomberg earlier this month that incoming Finance Minister Rogelio Ramirez de la O will prioritize refinancing Pemex.

In March, Pemex said the government would absorb about $6.4 billion of its debt amortization payments. President Lopez Obrador also announced in February a unused credit stimulus that will apply to taxes paid by Pemex on hydrocarbons, up to a greatest of $3.6 billion.

(Updates with Moody’s comment in fourth paragraph)

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