MEXICO CITY— Moody’s Investors Service MCO 2.00 % on Tuesday placed Mexican national oil company Petróleos Mexicanos on review for a possible downgrade in its credit rating, citing falling earnings at the company because of lower crude oil prices and a likely increase in financing needs.

The review was prompted by the company’s weak cash generation and financial profile so far in 2015.

“Cash generation has weakened due to lower oil prices and will result in large borrowing needs in the near future,” Moody’s said in a release.

Pemex is rated A3 by Moody’s, which is the same as Mexico’s sovereign rating. The Mexican government’s outlook is stable. Fitch Ratings and Standard & Poor’s rate Pemex triple-B-plus, the equivalent of one notch below Moody’s.

The state company, which pays much of its earnings to the federal government in royalties and taxes, has been steadily increasing investment budgets over the past decade. At the same time, Pemex’s crude oil output has fallen to around 2.3 million barrels a day so far this year from close to 3.4 million in 2004.

 “The company will have much larger borrowing needs to fund negative free cash flow now that oil prices have fallen more than 60% compared to a year ago,” Moody’s said. “Unless the government provides substantial injections of equity capital or reduces taxes and duties in a material way, Moody’s expects Pemex to have much greater borrowing needs in 2016 and 2017.”

The review will consider to what extent Pemex can improve its cost structure and adjust spending without significantly affecting production and reserves, and any downgrade would likely be limited to a single notch, the ratings firm added. 

Moody’s corporate analyst Nymia Almeida said the review is expected to take no longer than three months to complete. “It could be shorter. It depends on the details and how fast we get answers from the issuers.”

Pemex said in a statement that it is already taking various measures to cut costs and improve its capital structure.

The company said it is one of eight major oil companies in the world whose outlooks or ratings have been downgraded in the past year as a result of the drop in oil prices.

Mexico’s crude oil price on Monday fell to $33.71 per barrel, its lowest since February 2008.

Pemex reported net debt of $79.7 billion at the end of June. Its sales in the first half of this year were $37.8 billion, and were down 28% in peso terms from the first half of 2014.

In response to the increased investment needs in Mexico’s oil sector and the decline in production, the Mexican Congress passed laws allowing private and foreign firms to participate in oil exploration and production for the first time in nearly eight decades. The energy overhaul generated high expectations for private investment in the industry, although the drop in oil prices in the past year has lowered the prospects.

The government awarded only two out of 14 exploration blocks in a first auction held in July. Further auctions are planned for offshore reserves, onshore reserves, deep-water blocks and nonconventional reserves such as those found in shale rock.

Following the changes in the energy laws, Pemex hopes to reduce its financing needs through joint ventures with private companies, and has already sold stakes this year in several natural-gas pipeline ventures.

Pemex said Tuesday it has cut 62 billion pesos ($3.6 billion) from this year’s budget, and is lowering costs through reductions in expenses and renegotiating contracts with suppliers, while seeking to minimize the impact on output and reserves.

The company also expects to lower its pension liabilities in negotiations with the oil workers union, within the next three months.

But the problem at present is cash generation, as Moody’s expects oil prices to remain depressed for years, Ms. Almeida said.

Source: - WSJ -