Pemex 1Q25: Upgraded to Market Perform, but Structural Risks Persist

Spreads are compelling at current levels amid stronger government support, though structural risks in production and liquidity constrain significant tightening potential.

Key Insights and Recommendations

Pemex reported mixed 1Q25 results. The company’s top line declined 11.0% QoQ and 19.0% YoY to $19.35 billion, primarily due to ongoing production declines, lower sales volumes, and weaker pricing. However, a significant reduction in costs led to adjusted EBITDA reaching $6.08 billion in the quarter, marking a substantial sequential increase from a recent low of $726 million in 4Q24 and an 11.7% YoY improvement. The adjusted EBITDA margin expanded by 28.1 pp QoQ and 8.7 pp YoY to 31.4%. Despite this improvement in operating profitability, production continues to deteriorate. In 1Q25, Pemex’s oil and condensate production averaged 1,596 kbpd excluding partners, down 3.4% QoQ and 11.3% YoY. Including partners, total production reached 1,621 kbpd, reflecting a 3.4% QoQ and 11.4% YoY decline.

From a credit perspective, the results were marked by a 4.6% QoQ increase in LTM EBITDA and a 3.3% decline in LTM cash interest paid, while gross and net debt decreased by 5.5% and 1.2%, respectively. Free cash flow was an outflow of $471 million in 1Q25, as higher EBITDA was insufficient to cover increased capex and interest paid. However, net cash generation turned positive sequentially, driven mainly by governmental contributions and tax benefits. This underscores Pemex’s vulnerability and continued reliance on government support. As a result, gross leverage increased modestly QoQ to 7.1x from 7.0x, while net leverage improved to 6.4x from 6.6x, and interest coverage rose by 0.1x sequentially to 1.8x as of March 2025. Liquidity remained weak, with short-term debt representing over 300% of the company’s cash and short-term investments.

Management provided little detail regarding the potential impact of U.S. tariffs on Mexico but noted that the company could redirect its production to other markets such as Europe or Asia. However, we note that the U.S. market represents a meaningful portion of Pemex’s crude exports. In 2024, the company exported 460 kbpd to the U.S., accounting for 57.1% of total exports and 26.5% of total production of 1,741 kbpd, including contributions from partners. While Pemex has some capacity to redirect exports, doing so would likely involve additional logistical costs and lower realized prices, further weighing on operational performance. We believe potential U.S. tariffs on Mexico could significantly impact Pemex’s results. Moreover, such tariffs would likely put additional pressure on the broader Mexican economy, with knock-on effects on the company’s domestic operations.

During the quarter, Pemex reduced its highly concerning overdue debt to suppliers and contractors by $4.54 billion sequentially, representing a decline of 18.7% in USD and 20.1% in MXN. However, the balance remained elevated at $19.76 billion (MXN404.4 billion) as of March 2025. We note that management indicated payments on overdue supplier debt were reactivated in December 2024 and have continued in line with the established schedule, with a monthly average of MXN50 billion (approximately $2.5 billion).

Also, management reaffirmed its commitment to the new administration's financial strategy, reflecting strong government support and continued coordination with the Ministries of Finance and Energy. The company reiterated its commitment to zero net indebtedness in 2025, a feasible target only with sustained governmental support. A 2025–2030 business plan is expected in 3Q25, which could support liability management exercises with Pemex buying back bonds. The 2025 federal budget allocates P$136 billion (approximately US$6.9 billion) to cover debt maturities, underscoring the government’s role in ensuring financial stability. While the company is considering partnerships with private entities to address declining production from mature fields, it aims to consolidate at least 17 oil areas by year-end 2025 and reach an average output of 1.8 million barrels per day.