EconomyFinancialOil above 100 dollars: what's next for Pemex?

Oil above 100 dollars: what's next for Pemex?

The international price of oil has entered an upward streak that did not seem to stop until last Tuesday. Yesterday, the WTI and the Brent had a setback and the Mexican mix followed the trend closing at 105.97 dollars per barrel after having touched the 120 dollars per barrel, its highest price since mid-July 2008, when the international prices of the Crude oil reached the highest levels on record so far.

Analysts are divided between those who assure that prices will remain above 100 dollars for the remainder of the year and those who say that it is only a temporary bubble that will end when Iran enters the crude export market again, American shell producers increase their production or when the Organization of the Petroleum Exporting Countries (OPEC) decides to launch a measure to calm the nervousness of the markets that fear a cessation of Russian exports.

And when asked what an export mix above 100 dollars per barrel will mean for Pemex, the answer from analysts is basically the same: it depends.

Naturally, a higher oil price would imply an increase in export revenues for the Mexican state company. But the presidential discourse turns to the opposite side and until recently it was based on the decision to cut exports to prioritize the domestic market, although this premise has been loosening in recent days and the federal government has given signs of a change in the dynamic.

Export crude above 100 dollars

Last January, the state company exported 832,000 barrels per day, the lowest amount on record. Continuing with a similar dynamic would imply a lesser possibility of taking advantage of this conjunctural increase in prices.

But even if the rudder were turned around, the state-owned company does not have the possibility of increasing its crude production in the short term to take advantage of the benefits of prices even more and grow its cash flow. “Pemex does not have the capacity to increase its production so fast as to take advantage of the price escalation”, says Raymundo Sánchez, a partner at Ernst & Young. Despite the efforts, the state-owned company has not managed to overcome the barrier of 1.7 million barrels of crude oil per day and thus has fallen short of each of its goals.

The latter does not imply that the company’s foreign exchange will not increase while oil registers these high prices. The Ministry of Finance budgeted crude oil at 55 dollars per barrel in its fiscal year for this year, any price above that will result in higher than expected revenues and higher cash flow for the company.

The smartest move within the company would be to go against the presidential plan or relax a bit and prioritize exports. “The best decision would be to increase or maintain your exports, get extra income and use it to maintain fuel prices, which could, although little, help you contain inflation,” says an analyst who has asked not to be quoted.

The refinement: hole in the pocket

The margins of the largest refiners have increased in recent weeks due to the rise in international fuel prices. But the case of Pemex is different, the company drags refineries with high costs, low levels of processing and little use of crude oil: its complexes produce more fuel oil than gasoline. And that limits the profitability of the activity. Pemex Industrial Transformation, which groups the refining business, reported a net loss of 172,391 million pesos in 2021. The extra income could fall short in the face of these negative results.

Continuing with a strategy in which refining is prioritized in the midst of rising prices could increase these losses even more and end up “eating” all the extra income that will come from crude oil exports. “Everything will depend on the balance with the other businesses. If Pemex insists on refining more, surely the refining loss will be higher and that will affect the cash flow in the end. Everything will depend on the policy that Pemex decides to follow”, says the analyst.

The industry calculates that, if the mix remains above 100 dollars during the year, the company could receive an extra income of 7,000 million dollars. But while the amount is significant, it would not be enough to cover the company’s financial shortfall, analysts say. Last year, despite government capital injections, it ran a cash shortfall of $12.5 billion.

In an optimistic assumption, a price above 100 dollars during the year could lead the oil company to reduce its accounting losses, but it would still carry a financial deficit. “That will depend on how long prices last up. We would need this to last many months for it to really be significant in Pemex’s numbers. The extra income for a company the size of Pemex is not so much money”, says the Ernst & Young partner.

The last time Pemex reported a positive financial result was in 2012, with the price of the Mexican blend at $102 per barrel.

The good news could come for public finances. The reason: an increase in income at Pemex could mean less spending to help you financially. The federal government has opted to provide it with capital injections and more recently by taking charge of its debt repayments. If Pemex increases its cash flow, it is possible that it will make it a little less dependent on federal resources, at least for this year.

In 2021, the financial support from the federal government to Pemex was valued at around 15,000 million dollars. If the company has higher revenues, this figure could drop to a figure similar to that seen in 2020, when transfers were close to $2.3 billion.

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On the other hand, the Ministry of Finance is facing a different scenario, with an increase in income from the Mexican Petroleum Fund, but a lower collection by IEPS, now that it has decided to take the stimulus to the limit and announce extra measures to comply with the presidential promise not to increase gasoline prices and contain, at least for a short time, inflation.

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