Weekly Credit Risk Monitor /

Weekly Credit Risk Monitor

    Stuart Culverhouse
    Stuart Culverhouse

    Head of Sovereign & Fixed Income Research

    Tellimer Research
    1 August 2019
    Published by

    In Focus: Pemex – Q2 weakness is clear, despite management spin; reiterate Hold 

    Pemex’s management has tried to put a positive spin on the Q2 results, but the numbers speak for themselves: they show continued deterioration, operationally and financially. 

    On the positive side, the company managed to stabilise crude oil production – at c1.661mn barrels per day (b/d) – and reduce non-operational losses (which includes fuel theft, an accounting line items that we believe should be reflected in sales and not in costs). 

    However, it also reported lower sales, EBITDA and cash levels, and higher debt and leverage. In addition, natural gas production decreased, resulting in record-low total hydrocarbons production. 

    Total sales in Q2 19 were US$19.713bn, lower than the US$22.465bn of Q2 18 and slightly higher than the US$18.554bn reported the previous quarter. EBITDA was US$5.756bn, lower on a sequential and a yoy basis. EBITDA was US$7.713bn in Q2 18 and US$6.026bn in Q1 19. 

    Cash and equivalents stood at US$2.311bn at end-Q2 19, compared with US$4.216bn at end-18 and US$5.501bn a year ago. Debt reached US$109.26bn (incl. financial leases) or US$104.091bn (excl. financial leases), from US$107.18bn at end-18 (when financial leases were still not segregated as per IFRS rules) and US$103.996bn at end-Q2 18. 

    The net loss was US$2.763bn in Q2 19, apparently lower than the net loss of US$8.404bn in Q2 18. However, including “other comprehensive results”, which management omitted in its presentation, the Q2 19 comprehensive net loss was US$10.649bn from US$7.789bn a year ago. 

    We believe Pemex’s bonds are trading tight given the company’s challenges and a looming risk that Moody’s and S&P might take action, but, for purely technical factors, we maintain our Hold rating. 

    Read the full report here

    Recap of the week’s key credit developments 

    South Africa (SOAF): On Friday, Fitch revised the outlook on its long-term foreign currency rating of BB+ to negative from stable. Fitch cited a deteriorating fiscal position, amid a slower growth environment and increased SOE spending, as well as fiscal risks from ESKOM.  

    Ghana (GHANA): Finance Minister Ken Ofori-Atta presented the mid-year budget review to parliament on Monday. The key takeaway was the upward revision to the 2019 fiscal deficit target (excluding financial sector costs), to 4.5% of GDP from 4.2% (contained in the 2019 Budget presented in November). Markets saw this coming, but investors may have hoped to see a more concerted fiscal effort to reverse the H1 underperformance and retain an unchanged 2019 overall deficit to build fiscal credibility.  

    Nostrum Oil (NOGLN): The company reported weak H1 19 operating update. It has not yet reached conclusive results from testing of the new wells 41 and 42, and reiterated production guidance at 30,000boepd. In H1 19 the company lifted 31,096boepd of crude oil, gas and gas condensate. The closer we get to the end of 2019 and the longer there are no additional flows secured by new drilling, the more likely the scenario in which production could decline further in 2020. The market reacted positively to the news with NOGLN 22s and 25s indicated 1-2pts higher in terms of price. We have a Hold recommendation on NOGLN 22s and 23s.  

    Seplat (SEPLLN): The company reported flat H1 19 results as operating headwinds disrupted production. In H1 19, working interest production came to 48,000boepd (-6%yoy), close to the low-end of the FY 19 guidance, revenue was at US$355mn (+4% yoy) supported by the first-time recognition of gas tolling revenues from NPDC, and EBITDA was down 2% at US$224mn.  

    Liquid Telecom (LIQTEL): The company reported US$154mn in revenue (-13.3%yoy), US$50mn in EBITDA, an EBITDA margin of 33% and net leverage of 3.0x (vs 3.75x covenant) in Q1. Performance was mainly affected by depreciation of the Zimbabwean dollar, ZAR normalisation after a remarkably strong start in 2018 and accounting effect of IFRS 16 (operating leases). 

    Metinvest (METINV): The company released H1 operating results posting a 3% decline in total metal products output reported at 4.5mt and a shift in product mix from semis to finished products. Production of iron ore concentrate (14.5mt) increased by 3% yoy and merchant iron ore products (those not used internally by the metallurgical segment) spiked 20% to 9.0mt largely due to lower intergroup consumption. We have Hold recommendations on METINV 21s, 23s and 26s.  

    Ecobank Transnational (ETINL): The issuer announced that Ayo Adepoju has been made Group Chief Financial Officer (CFO). He was appointed Acting CFO in April this year, after the previous CFO left, and has been at ETINL for some time. This appointment addresses concerns there may have been about senior management changes. We have a Buy recommendation on the ETINL 2024 bond. See our comment on Q2 performance here.

    TBC (TBCBGE): The Group reported preliminary unaudited results for H1 earlier than planned due to a share buyback announcement. TBC Group expects to report fully-audited H1 19 results on 15 August, and plans roadshows in September. Management does not expect the audited figures to differ materially from what was disclosed.