Pemex will take its first steps alone. The presidential promise that the oil company would become a source of income for the federation after three continuous years of support from the public treasury was fulfilled. Although it was not due to any government strategy, the company has increased its liquidity above expectations.
The war between Russia and Ukraine and the fear of a shortage of Russian crude has filled the markets with nervousness and raised the international price of oil to levels not seen for more than a decade. The Mexican mix has remained close to 100 dollars per barrel, with a previous boost given by the restriction of supply after the height of the pandemic.
How does Pemex generate income?
The state-owned company has reported profits of 122,493 million pesos in the first quarter, the highest net income for the period since 2011. Along with this good result, its management has made another announcement: the company will take care of its debt repayments , at least in the short term. The government, which had said it would not make these payments until 2024, will remain as backup. The biggest test for his strategy could come in the coming months.
The good result has not been a victory for the measures undertaken. High crude prices gave a boost to all oil companies. Pemex continued with exports, despite the presidential plan to cut them to send more crude to refineries, and has seen the favorable consequences of the decision. The news is positive, the company will have more resources than expected, but the government’s strategy is not yet understood in the markets, says Aaron Gifford, emerging markets analyst at HSBC.
“The confidence [of the market in Pemex] is what is most needed. We don’t understand Pemex’s business plan,” says Gifford from New York.
Analysts say the company has sold presidential goals as its own, such as achieving total fuel production in the country or raising production to levels not seen in more than a decade, without a clear strategy, and that has undermined its credibility. “We understand that the politics and management of the company are not going to be completely separated, but the market needs much more clarity about what it wants to do, the origin of the resources, the true viability, and we have seen none of that so far,” says a JP Morgan analyst who asked not to be quoted.
The specialists and the market have already ruled out a radical change of direction. But the federal administration still has little more than two years to show that its plan has worked.
The company has turned a deaf ear to the recommendations of the rating agencies and financial institutions and has decided to continue prioritizing the refining business – which between 2018 and 2021 has added losses of 20,000 million dollars – above other more profitable ones, such as production. crude or investment in petrochemicals.
And right here, in his most profitable business, is where analysts expect a change. They know that the goal of 2.6 million barrels promised at the beginning of the six-year term will not be met, but a greater commitment to deepwater fields or restitution of reserves that guarantee long-term production would be a good sign to restore confidence.
Until now, the strategy has been based on the exploitation of mature and terrestrial fields where the state company was already active. But there is still no asset that guarantees production in the long term.
The management of the oil company and President Andrés Manuel López Obrador assure that crude oil production has grown. Analysts and rating agencies see it differently: they recognize that the decline has been stopped, but we are far from talking about an increase.
The latest number from Pemex is 1,755 million barrels during the quarter, a figure similar to that of 2018. “Although the growth of oil and gas production has been below management objectives, we recognize that, at least between In 2019 and 2021, Pemex has been successful in reversing declines in production and reserves and we believe this trend will continue in 2022,” says Moody’s in its latest analysis.
The solutions
And then the solution could be directed on two fronts: return to one of the main approaches of the 2013 reform, which tried to include private capital in exploration and production, and turn towards the exploration of new fields and even resume the strategy of active in deep water. “The main point of your business plan should be to focus on maintaining production for the long term,” says Gifford. Pemex does not have any plans involving a large field. And Ku Maloob Zaap, his most important asset, doesn’t have much time left.
Gifford explains that the main failure of the reform was based on a factor impossible for the Mexican government to control: oil prices. When the constitutional change was approved, they hovered above 100 dollars per barrel, but years later, when the investments had to be executed, prices fell between 30 and 50 dollars. And this has resulted in a private production below what was projected and which has been used as the main argument to describe the legal change as a failure. “We know that most of the changes that we would be expecting will not come because they are incompatible with the government’s vision, but definitely using capital from private companies to grow production, while the company’s cash flow is used to clean up finances, would be a turnaround. interesting”, says the JP Morgan analyst.
In an article, Columbia University proposes that alliances could be created between the state company and pension funds: “A special investment vehicle, with strong corporate governance and transparent accounting standards, could allow Afores to participate in projects that increase the production of oil in blocks owned by Pemex that have demonstrated their potential”, says the document. Hydraulic fracturing or fracking could also be positioned as a solution. The country has the fourth largest shale gas reserve in the world and until now there is no other technique to exploit this hydrocarbon.
The state company has already increased its investment. Last year it added a Capex of 161,492 million pesos, the highest figure since 2018. But the capital may have been placed in places that have not been the most profitable. The company has prioritized investment in already mature fields and in the refining business, although in the discourse the resources for the latter have come from public finances.
Most analysts say the best option would be to continue importing from the southern United States, where production costs are much lower. But Fernando Valle, an analyst at Bloomberg Intelligence, believes that the strategy could not be so wrong and as the process increases in the refineries, the financial losses could decrease. “The losses are due, in part, to refineries that need a lot of upgrading and are running at very low utilization rates. If they worked at higher rates, you could make money. Refining margins are at 30-year highs and the Deer Park acquisition has been positive so far,” he says.
But the result of increasing production in the refineries is still uncertain and the goals have not been met either. Although Pemex closed processing 711.00 barrels per day, the highest figure since 2017.
And here the analysts have another recommendation: use the resources allocated to the refining business to reduce the debt. The Treasury has continuously injected capital into the company, but the achievements have still been short. In 2019 -the first year of the six-year term-, Pemex closed with a total debt of 105,000 million dollars. At the end of the quarter, it reported a liability of 108,000 million dollars, a decrease of 3% compared to the end of last year, after continuous increases.
And within the debt there is a segment that weighs significantly: labor liabilities, which at the end of last quarter totaled 1,398 million pesos, an increase of 29% since the six-year term began. Pemex adds more than 125,000 employees. Other state oil companies have reduced their workforce and that has helped to clean up their finances, says Mauricio Cárdenas, a consultant who has worked closely with the Colombian Ecopetrol, which has also trained its employees in new tasks aimed at the energy transition, which allow them to influence the new business areas of the company that has opted for diversification.
And there is the other step that could work for Pemex: start looking beyond oil, as other state-owned companies have done, such as Argentina’s YPF, Norway’s Equinor and Saudi Aramco. Morena’s bench prepared an initiative a couple of years ago so that Pemex could enter these new businesses, but it remained in the inkwell.
Prioritizing oil has already brought some bad reputational blows to Pemex. The company is ranked as the second oil company in the world with the highest ESG risks (environmental, social and corporate governance or ESG, for its acronym in English), only surpassed by the Venezuelan PDVSA. “Pemex’s ESG credit impact score is very negative. In addition to having very high exposure to environmental risk and high risk exposure, it has very high governance risk, including weak financial strategy and risk management, weak board structure, policies and procedures,” says Moody’s in A report from a few weeks ago.
Until now, the federal government has not given any sign of a change in strategy, while the rest of the oil companies change, little by little, their course towards one aligned with the energy transition. Shell, which sold the Deer Park refinery to Pemex, has explained its decision as part of a strategy to move to other technologies. Pemex already announced, at the end of last year, a review of its business plan, but there is no other clue that suggests a change in strategy.
