The warning came from the first months of the six-year term: betting on the refining business would aggravate Pemex’s losses and diminish the possibility of returning the company to a path of profitability. But the strategy did not change. Four years later, the state-owned company has two more refining complexes and investment in the old refineries continues to be a constant.
Last Monday the rating agency Moody’s and the commitment to the refining business was just one of the main arguments for the action. Moody’s expectations of continued negative free cash flow and the need for large amounts of external financing given persistent losses in the company’s refining business.
Most refiners are experiencing a good moment, with high profit margins that they have not seen in years, which are improving their financial situation affected during the pandemic. But this is not the case for Pemex, the low utilization of its refineries and the poor condition in which they operate is only allowing the company to reduce losses that have already become commonplace, but the business is still far from profitability and There is not a great probability that it will be achieved in the short term, explains Nymia Almeida, senior vice president of Moody’s, in an interview.
Moody’s has downgraded Pemex’s rating to B1 from Ba3 because cash flow continues to be insufficient for Pemex to meet its debt commitments, pay taxes and continue with its investment. Although the state oil company is still within the bonds without investment grade.
Pemex will announce its financial results for the second quarter of the year at the end of this month, but the latest data indicates that during the first three months of the year Pemex Transformación Industrial (TRI), the subsidiary that groups the refining business, recorded a loss net of 18,729 million pesos, a figure below the almost 40,000 million a year earlier.
Since its creation in 2015, Pemex TRI has never managed to report profits, according to the company’s financial statements. And Pemex Refining, a subsidiary now non-existent and that previously grouped the activity of the six refineries, also failed to register positive results, according to the oil company’s records.
“What happens with Pemex is that due to the state of its refineries, the more it produces, the more it loses,” says Almeyda. What the analyst says makes sense: in the refining business, those who manage to maximize the use of their complexes win. Pemex has set itself the goal of increasing the use of refineries, but so far the objective has been halfway. So far this year, the state-owned company has averaged use of its refineries at 50% of their capacity – at the end of the last administration they operated at 30% – although fuel production has reached its highest level in the same period since 2017, with a volume of 949,000 barrels per day.
But the latter is not helping much. Pemex’s losses in the refining business are somewhat undermining the increase in revenue that the company is reporting in its exploration and production segment, in which the rating agencies have recommended that it focus its efforts and that is now seeing a boost derived from high international oil prices. In the first quarter of this year, Pemex Exploration and Production (PEP) recorded profits of 131,612 million pesos, a result contrary to the continuous losses reported in the last three years. “The refining part is erasing PEP’s profits,” says Almeyda.
The dynamics of the refining business are taking away from Pemex the opportunity to take advantage of the high prices of the Mexican mixture, a streak that could not last long as the energy transition progresses.
One more risk could be added if Pemex and the federal administration decide to cut exports to prioritize the refining business. Despite the speech, shipments of crude oil abroad have been maintained and the company has managed to add more resources by taking advantage of the international environment. But a change in this and a drop in exports would reduce the company’s income in dollars and reduce its ability to pay its debt holders, increasing its credit risk.
The rating agencies do not make the decision to downgrade the grade based on the closest movements, but instead evaluate the long-term impact of the companies’ plans, analysts explain. The agencies had already explained that the construction of the Dos Bocas refinery could further pressure the state company’s finances and make it more dependent on government support.
“In refining, any cost overruns or delays in the execution of the [Dos Bocas] refinery project would have an impact on Pemex’s cash flow, and would most likely modify its comprehensive investment plan. This is important because under such a scenario, it is not clear whether the company would reallocate resources from other divisions to complete the project, whether the government would provide additional support, or whether the company would explore other sources of funding,” Standard & Poor’s says in a note. of 2019.
The refinery has already been inaugurated in its first construction stage, with a gap in the time promised for its construction and a cost overrun that could increase.
For now, explains the Moody’s analyst, the costs of the refinery have fallen on the Ministry of Energy and the Ministry of Finance, but once the operation of the complex begins, the expenses of its operation will be added to the financial needs of Pemex and that could lead to growing pressures on the oil company’s cash flow. Having a refinery operating at high capacity is good news for Pemex, but no one is certain how long it will take for the complex to operate efficiently, says Almeyda. Most forecasts contemplate that the Olmeca refinery will operate commercially until the end of the six-year term.
The case of the Deer Park refinery is different. Although it will not reverse Pemex’s losses in the segment, the high levels at which the complex operates guarantee better margins in production, says the analyst. In its latest financial report and the first to include the purchase, Pemex said the refinery was one of the elements that helped the company report returns and come out of losses.
