UPDATE 2-Mexico's Pemex slides deeper into 'junk'

(Adds details, investor quotes)

By Stefanie Eschenbacher

April 3 (Reuters) – Mexican national oil company on Friday slid deeper into “junk” territory after Fitch Ratings cut the rating of its bonds by another notch to BB with a negative outlook amid fears that its stand-alone credit profile will deteriorate further.

While the ratings agency had previously singled out Pemex as “the most vulnerable” to low oil prices among its Latin American peers, the decision to cut the rating further comes just as the market rebounded in recent days.

“This was too fast,” said Luis Gonzali, a portfolio manager at asset manager Franklin Templeton, adding that oil prices might well rebound next week. “If oil prices had stayed low for months, I would have understood.”

Mexican Energy Minister Rocio Nahle told Reuters on Friday that oil prices would not stay this low. “We’re going to wait, just like the rest of the world,” Nahle said, adding that the crash did not merit a change in strategy.

(GRAPHIC: reut.rs/3axFfEX)

The new rating and the negative outlook, which signals a further downgrade is likely, applies to $80 billion of bonds, which are widely held by investors ranging from sovereign wealth funds to pension funds. It reflects a “limited flexibility to navigate the downturn in the oil and gas industry given its elevated tax burden, high leverage, rising per barrel lifting costs and high investment needs to maintain production and replenish reserves,” the statement said.

In June, Fitch Ratings became the first of the three main ratings agencies to label the bonds junk ,and investors have warned that Moody’s Investors Services, which rates the bonds one notch above junk, could follow soon.

Patti McConachie, a senior analyst at asset manager Columbia Threadneedle Investments, said for Pemex to avoid a second downgrade it needs to invest in stabilizing reserves and production, and the government needs to lower its tax burden.

“When we analyze their cost structure per barrel, the largest difference versus peers is the high level of taxes and duties,” McConachie said, adding that the current market volatility should be “a wake up call” for energy companies.

S&P Global Ratings downgraded both Mexico and Pemex last week but maintained the coveted investment grade rating. If another were to flip to junk, it would likely substantially increase the cost of borrowing for Mexico and Pemex. (Reporting by Stefanie Eschenbacher in Mexico City and Kanishka Singh in Bengaluru; Editing by David Gregorio, Grant McCool and Cynthia Osterman)

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