New Pemex chief is optimistic about turn-around prospects
MEXICO CITY—The Wall Street Journal reports that on his second day as the head of state-oil giant Petróleos Mexicanos this past February, José Antonio González Anaya got an early glimpse of what his new job would be like: He canceled an expensive contract to buy 40,000 computers.
“At large companies like Pemex, you don’t buy computers, you lease them,” said Mr. González Anaya in an interview on Tuesday at his office in Pemex’s headquarters. “By canceling the contract, we saved $171 million.”
The soft-spoken Mr. González Anaya, who is about to complete his first 100 days as Pemex CEO, has probably the toughest job in Mexico’s government: turning around an oil company that lost $30 billion last year, has seen oil output decline for 11 consecutive years, faces unfunded pension liabilities of $86 billion USD and is badly overstretched and overstaffed.
Pemex’s financial hole, worsened by low oil prices, prompted Mexico’s government to bail out the company in mid-April by announcing a capital injection of $4.2 billion USD to pay overdue debts with suppliers. The support also included lowering Pemex’s tax bill by $2.8 billion USD, savings that will reduce the company’s financing needs for the year.
The rescue package is conditional on Pemex cutting spending by $5.8 billion USD this year, around 19% of last year’s total spending. Mr. Gonzalez Anaya said he was confident the company would hit the target, slashing everything from the cost of renting oil platforms to putting off investment in exploration.
When oil prices started to fall in mid-2014, Pemex failed to react as quickly as oil majors in cutting spending, leading to a liquidity crisis. At one point this past January, Pemex’s coffers were down to just $8 million USD in cash, according to a Pemex official. The company issued debt later that month to keep operating.
Former CEO Emilio Lozoya was fired and Mr. González Anaya, a close friend of Finance Minister Luis Videgaray, was brought in. Mr. González Anaya had gained a reputation as an effective cost-cutter in his previous position at the head of Mexico’s government health-care institute.
“The ‘bailout’ will enforce fiscal discipline and rigor at the company that has never existed,” said Jeremy Martin, an energy expert at the University of California at San Diego’s Institute of the Americas. “That discipline and rigor will pay dividends in the medium and long term, particularly if the price of oil recovers.”
Mr. González Anaya said the announced government support may be enough for this year. “It gives us a solid financial position to keep going in the short-term,” he said.
Pemex is expecting to get an additional $7.7 billion USD from the government later this year to cover long-term unfunded pension-liabilities, Mr. González Anaya said, part of a deal last November that limited pension benefits and raised the retirement age for many of Pemex’s 135,000 workers.
Moody’s recently lowered Pemex by two notches to Baa3, its lowest investment grade, and kept a negative outlook on the company, saying the goals of Pemex’s new administration “will be challenged by the company’s large size and complex operating and labor structures as well as the weak industry fundamentals.”
Pemex’s output fell to 2.2 million barrels a day in March, down about 4.5% versus the year-ago period. The Pemex chief said output would end the year at 2.13 million barrels a day—well below the peak of 3.4 million it reached in 2004.
Longer term, the key to getting Pemex on sounder footing is to rely far more than ever on the private sector, Mr. Gonzalez Anaya said. Thanks to Mexico’s 2013 Constitutional change that opened the oil industry for the first time in seven decades, Pemex can partner with private oil firms in everything from exploration to refining.
“Three years ago, it was illegal to invest with Pemex. A year and a half ago, it wasn’t, but high oil prices meant Pemex didn’t need to use private investment. Now, it’s both legal and the low price…forces us to do it,” he said.
Pemex’s declining fortunes could mean a major silver lining for international private oil firms. In the early months after the energy overhaul passed, Pemex claimed the lion’s share of Mexico’s existing oil fields for itself.
But as prices have dropped, the company has come under greater pressure to “farm out” many of those fields to private hands in joint ventures.
So far, Mexico has auctioned off oil-producing fields to private companies totaling some 500 million barrels of oil. But Pemex oversees a total of 25 billion barrels of oil in producing fields, meaning the potential for access for private firms is far greater, Mr. Gonzalez Anaya said.
He said that in coming months, Pemex will develop a multiyear strategy to bring in partners for a portion of those fields. He declined to put a specific figure on just how much.
Already, Pemex plans to save some $800 million this year by putting off investment in a large offshore field in the Gulf of Mexico until it can find a partner. It expects to get similar savings from paying less to rent oil platforms and other cost cuts. In some cases, exploration would be put off one year in the hopes of partnering with private firms in other fields.
Mr. Gonzalez Anaya said Pemex may not have the first “farm outs” done by year end, but that the process would be well underway.
Some observers are skeptical Pemex can easily get partners, particularly in refining, where some of Pemex’s refineries employ more than 3,000 workers while a U.S. refinery employ on average about 700 people. The Pemex chief said two oil majors have said they aren’t interested in refining in Mexico, but that others are taking a closer look, especially refining companies.
“At least once a week, we hear from someone who is interested,” he said.
The company is studying selling some nonstrategic assets, such as fertilizing assets and petrochemical plants.
The challenges are so overwhelming that Mr. González Anaya took a deep breath when asked if he will manage to straighten out Pemex. “No doubt we have a gigantic task ahead,” he said.