PEMEX 4Q24: High Carry, But Risks Outweigh Rewards

Weak 4Q24 results, rising leverage, and lack of a clear plan heighten credit concerns.

Executive Summary

• We downgrade Pemex to Underperform. In our view, the absence of a clear financial plan under the current circumstances significantly undermines Pemex’s management credibility in addressing its serious debt challenges. We note that while Pemex’s bonds offer an attractive carry, we do not find them compelling given the deteriorating operating and credit metrics, the lack of concrete actions to resolve its debt with suppliers and contractors, and the absence of a clear financial plan.

  • For investors with a high-volatility tolerance and an appetite for Pemex’s carry, we find bonds at the belly of the curve with low prices more compelling due to their attractive yield pickup. In contrast, longer-dated bonds offer less value given that the curve is relatively flat and bonds maturing before 2029 trade at or close to par, limiting upside potential. Consequently, we prefer the Pemex (B3/BBB/B+) 5.950% 2031 bond, yielding 9.0% with a 5.0-year duration, the Pemex 6.700% 2032 bond, yielding 8.9% with a 4.9-year duration, and the Pemex 6.625% 2038 bond, yielding 10.1% with a 7.9-year duration. These bonds offer a favorable yield relative to sovereign bonds and are currently trading wider than the overall Pemex curve. They also trade well below par at $87.3, $84.5, and $78.9, respectively.

• Pemex reported a very weak 4Q24, highlighting its vulnerability and heavy reliance on government support. Adjusted EBITDA plunged to $726 million, an 83.9% QoQ and 87.7% YoY decline, marking a recent low. The sharp drop was driven by significantly higher costs despite falling revenues (-3.5% QoQ, -10.4% YoY), with cost of sales and operating expenses rising, pushing EBIT negative to -$2.1 billion. The company failed to clearly explain these cost increases. Production volumes also declined, averaging 1,653 kbpd (-5.4% QoQ, -9.9% YoY), another recent low. As a result, the adjusted EBITDA margin fell sharply to 3.3% from 20.0% in 3Q24 and 24.3% in 4Q23.

• From a credit perspective, results were marked by a 27.1% sequential decline in LTM adjusted EBITDA, while total debt decreased by $2.1 billion. Despite weak operating performance, net free cash flow remained manageable at an outflow of $934 million, supported by a $3.1 billion inflow from financial instruments, $3.0 billion in positive working capital, $299 million in government contributions, and lower capital expenditures, reinforcing Pemex’s heavy reliance on government support. However, significant taxes and profit-sharing payments further pressured cash generation despite Pemex’s outstanding obligations to suppliers. Gross leverage increased to 7.0x from 5.2x in the prior quarter, while net leverage rose to 6.6x from 4.9x. Liquidity remained weak, with short-term debt representing 365% of cash and short-term investments.

• We remain highly concerned about the persistent payment delays to suppliers and contractors. Despite management’s assurances that supplier debt will be significantly reduced in the coming months and that bank loans are being secured to facilitate these payments, outstanding obligations increased by 18.8% sequentially to P$506.2 billion (US$24.3 billion).

• Management provided little detail on the potential impact of U.S. tariffs on Mexico, stating only that Pemex, through its trading arm, has developed a strategy to ensure flexibility without affecting prices if exports need to be redirected. The U.S. market remains a key destination for Pemex’s crude exports, accounting for 460 kbpd in 2024, or 57.1% of total exports and 26.5% of total production. In our view, potential U.S. tariffs could have a significant negative impact on Pemex. While the company has some capacity to shift exports to Europe and other regions, this could result in higher logistical costs and lower realized prices, further weighing on operational performance.

• There were some positive signals, though no concrete actions. Pemex’s financial strategy under the new administration reinforces strong government support, maintaining close coordination with the Ministries of Finance and Energy. The company continues to uphold its zero net indebtedness policy while implementing fiscal reforms, with a 2025-2030 business plan expected in the third quarter of 2025. The 2025 federal budget allocates P$136 billion (US$6.6 billion) to cover debt maturities, highlighting the government’s role in ensuring financial stability. Pemex is also working to address overdue payments to suppliers through financial mechanisms to reduce commercial debt and strengthen strategic partnerships. Additionally, liability management options, including the potential use of the company’s debt ceiling, are being explored, though no concrete actions have been taken.