Journalist Jude Webber, a correspondent for Mexico and Central America of the prestigious British newspaper Financial Times, made a devastating article showing the situation the company is going through.
MEXICO CITY (Times Media Mexico/INFOBAE) – According to specialists consulted by the British newspaper Financial Times PEMEX, the state-owned production company “is a disaster.” At the end of 2016, Pemex developed a new strategy: to focus exclusively on profitable activities, according to an article published by the Financial Times.
Journalist Jude Webber, a correspondent for Mexico and Central America of the prestigious British newspaper Financial Times, made a devastating article showing the situation that the production company of the state is going through and which the government of President Andres Manuel Lopez Obrador, has worked to rescue.
Webber’s article entitled “Pemex de Mexico: from the cash cow to the drainage of resources” recalls that at the end of 2016, during the six-year term of PRIista Enrique Peña Nieto, Petróleos Mexicanos devised a new strategy: it would focus exclusively on profitable activities. The plan, says Webber, was a first for Mexico’s state oil company.
These days, Andrés Manuel López Obrador, the president since 2018 who bet the country’s fortune on Pemex, is pushing the company in the opposite direction again, even in the face of the coronavirus crisis and the collapse of oil prices.
Pemex recently reported a quarterly loss of $23 billion, among the largest in corporate history, with neither its upstream nor downstream business making money at current prices. Annual losses already doubled last year to $18 billion, and the group accumulated $105 billion in debt along with unfunded pension liabilities of $77 billion. Last month, Moody’s followed Fitch in lowering its credit rating to junk.
In a statement to the U.S. Securities and Exchange Commission, Pemex acknowledged that its auditors, KPMG, had expressed “substantial doubts. . . as to our ability to continue as a going concern.
But while other oil groups are cutting back on production and investment to weather the storm, Lopez Obrador shows a little appetite to deviate from its promise to revive Pemex by reversing 15 years of production declines.
“Pemex writes the rule book of what not to do,” said Pablo Medina of Welligence, an energy consulting firm in Houston.
The president also promised to nearly double refining production to 1 million barrels per day in May, even though Pemex’s loss-making plants operated at an all-time low of only 28 percent capacity in February. In the first quarter, it cost Pemex an average of 12.51 USD to refine each barrel of oil.
“At 20 USD per barrel, there is not a single field in Pemex’s portfolio that is profitable when you consider costs and taxes. . . They lose in the upstream business simply by producing,” Medina said. “Now, they are forcing Pemex to lose more in its downstream business because of negative margins. All because of demand that may not exist.
The reason for Lopez Obrador’s stubbornness is that Pemex has always been more than just an oil company. The group was created as a symbol of national sovereignty, and Mexicans helped pay for the expropriation “to consolidate Mexico’s economic independence” by donating everything from chickens to jewelry and the contents of children’s piggy banks.
The discovery of the giant Cantarell field in 1976 made Pemex Mexico’s cash cow. Production increased to a peak of 3.4 mb/d in 2004, but was only 1.7 m last year, almost 8 percent in 2018.
According to the agreement with OPEC, Mexico will cut production to 1,681mb/d. Still, the government’s 2020 national production target, on which budget amounts are calculated, is 1.85mb/d, which means that Pemex will provide less revenue to federal coffers than expected.
The decline in production already meant that Pemex financed only 11% of the national budget last year, about a quarter of its contribution to government coffers in 2008. Still, with the government investing in boosting production, López Obrador sees the state giant as the engine of national development.
The 66-year-old president, born and raised in the southeastern oil state of Tabasco during Mexico’s boom years, has renamed the eagle and oil drop logo of Pemex with the phrase “rescuing sovereignty. That explains his drive to revive production growth in a company that has consistently made pre-tax profits but has been bled dry by high government taxes and affected by bureaucracy and corruption.
Achieving that will be costly.
“I think Pemex will need billions of dollars [a year] in the high teens,” said one bond analyst who asked not to be identified. “With oil prices where they are now, Pemex is not making any EBITDA. It’s simple math. The government will have to write some big checks.
The Treasury transferred $2.6 billion to Pemex last month through a tax cut, and the company has told investors it is reducing capital expenditures by $1.6 billion and will focus on projects with the “most exceptional economic foundation.
“Today, more than ever, Petróleos Mexicanos has the full support of the Mexican government,” he said.
Fitch, which cut the company’s credit rating to junk last summer and downgraded it twice last month, estimates a negative cash flow of up to $20 billion a year.
Pemex has $8 billion in credit lines, which analysts expect it to take full advantage of with $6.7 billion in debt payments due this year. After last month’s cut, Moody’s analyst Ariane Ortiz-Bollin said it would now need “recurrent and substantial” state aid of between 2% and 3% of gross domestic product this year”.
Lopez Obrador boasted of the March oil expropriation anniversary of production costs of $4 per barrel. Still, Medina said the average, including taxes and operating expenses, was $32 per barrel of oil equivalent and $47 if drilling costs were taken into account.
When it comes to refining, “nobody believes they can reach 1 million barrels in May,” a former Pemex member said. The refinery’s production was 580,400 b/d in February; Lopez Obrador says it has since increased to 800,000 b/d.
There’s an additional problem: the more Pemex plants refine, the more low-value fuel they produce, “so what comes out of the refineries is worth less than the oil that went in,” said Jorge Andrés Castañeda, an energy consultant. Fuel oil markets are drying up after its use in shipping was banned.
Also, according to analysts, Pemex has minimal storage capacity and risks running out of space in a few weeks.
Reducing refining “is something that I don’t think is compatible with its ideology,” said Ixchel Castro, an analyst with the energy consulting firm Wood Mackenzie.
A former senior Pemex official said the government should stop its controversial $8 billion Dos Bocas refinery project and “draw up a real business plan that allows investors to understand where it will profit at today’s oil price…
That’s easier said than done because, as one investor in the company put it, “Pemex is a disaster, it’s getting worse, and they have no plans to deal with things”.
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