Juan Pablo Newman
View from the Top

Adjusting and Balancing to Solve PEMEX's Liquidity Challenge

Wed, 01/20/2016 - 14:23

Q: What are your main priorities as the CFO of PEMEX?

A: The most important thing is to move forward, and we are now a productive state company, which requires changes in all areas, the first of which is our corporate culture. Secondly, we have to find efficiencies and be more competitive with regards to the investment that new Energy Reform will foster. We must also be transparent and become an international reference for the future as an oil company.

Q: What are the main changes to be carried out in order to become a value-seeking company?

A: Since we have to become more efficient, we must conduct a comprehensive analysis in terms of the value that is created for the company. We will no longer be merely focusing on production, but this does not mean we will produce less. On the contrary, we have to analyze which of our investments are profitable in order to reach the new expectations set for us by the Energy Reform. This means forming associations and alliances with private partners, which will bring more value not just in terms of investment and costs but also in terms of efficiencies.

Q: How are the low oil price environment and resulting budget cut impacting your strategic priorities?

A: The adjustment that was implemented was not only a budget cut, but a redefinition of the company. We carried out a deep analysis with three objectives: cost reductions, finding new areas of focus, and adapting to the new low-price environment. When it comes to new areas of focus, there are two main components. The first one is the reconfiguration of refineries, for which PEMEX will look for partnerships and alliances, as we no longer plan to invest in that area. The second area we are looking at is deepwater, which is not yet in place, but for which we expect to begin production in eight to ten years. Here, we will look for operational partnerships given the high level of risk involved. Unlike the refining area, which we can operate, in deepwater we need technology and expertise, as well as investment. As I mentioned before, we are also trying to adapt to the new low oil price environment, which is poised to stay. We are carrying out an analysis throughout PEMEX to understand what is profitable at current prices and stopping anything that is not. Those investments will be delayed. This price environment gives us the opportunity to start incorporating the present and future profitable investments into the budget.

Q: What still needs to be done in order to overcome your liquidity challenge as fast as possible?

A: We have already carried out the adjustment, and now we have the support of the Federal Government. That comes in two parts. The first one is liquidity to pay our contractors and providers. We have an outstanding debt that is quite high for the company’s dynamics, and US$4.29 billion will be used to decrease that debt up to a functional balance. The second support mechanism gave us a floor for the cost cap. Following the Energy Reform, instead of being in nominal terms expressed in US dollars, it became relative to the price. When the reform was approved, the oil price was over US$80/b, so we were allocated 10.5% of the price, which increased to 11.075% this year. However, because the oil price is at US$20/b, we actually have less than we used to. One of the measures of support was putting a floor, which is US$6.10/b for shallow water fields and US$8.30/b for onshore fields. This fiscal relief of around US$2.92 billion, estimated at current price levels, will be used to decrease our financial needs and deficit with the end aim of improving the company’s financial health. We will not use it to increase our budget. Our primary focus is on improving our current and future health using the permanent support of the cost cap.

The Energy Reform instruments come next. We can migrate our fields, which might help us in fiscal terms. As the rounds have come up, the cost cap is approximately 60% of the price. Even though this currently stands at US$6 in a low price environment of around US$30/b, 60% is US$18, which means we can carry out three times more deductions. That does not come for free, however. In order to achieve that, we need to improve our efficiency and costs to reach an international benchmark. The government is able to give us that support because it would provide them with incremental production.

Q: What are the main financial benchmarks that you use to compare PEMEX to NOCs or IOCs?

A: We first benchmark against other state-owned companies because we do not have equity, after which we compare to the major private companies. We want to become one of the best Latin American oil companies. I think PEMEX has operated well for 70-80 years, and now we have to learn to operate as a state-owned company and not a monopoly.

Q: To which extent will these changes be driven by the financial and operational angles?

A: PEMEX is not a financial company or a bank. We are an oil company. We are going to focus on our business, which will improve our finances with solid management practices. We will look to become extremely efficient in the operational part and selective in the investments we make.

Q: Which areas will be the core business of PEMEX and will receive capital investment, and which areas can be operated in partnerships or be divested completely?

A: We will continue investment in the upstream sector as it is our main focus. PEMEX has done great work in shallow waters so far, and although we are used to exploiting very large fields, the small ones pose certain challenges that could be solved through partnerships. In onshore fields, we will do the same. In deepwater, we want operational partners. We do not just want them to bring investment, but also to operate so that we can learn and improve our capacities.

Q: What is your response to potential deepwater partners’ concerns about PEMEX’s liquidity challenge and its ability to make the agreed contributions to the development of the projects over time?

A: What we have done in the recent months has allowed us to regain some trust, which has been reflected in the spread reduction that we have experienced lately. It is very important for everyone to be confident in the fact that things are being taken care of. This year, our CEO made a commitment to outline and implement an analytical and reliable business plan. Investors are starting to see this new commitment that will give them the possibility to invest in PEMEX.

Q: What should suppliers expect from PEMEX in 2016, and what sort of payment behavior will the NOC adopt in the future?

A: This is an ongoing process, and PEMEX is paying off its 2015 debt to suppliers. The important thing is the net balance. Being a large company, we have payment processes that are naturally delayed. This creates a natural amount of debt with which we function. In a couple of months, all of the 2015 debt will be covered. Our more recent payment behavior has been much more typical for the new contractors we are hiring, and we expect to pay them in October-November. 180 days is the timeframe that is naturally implemented. As for 2016, we are going to start working with this process so that no one is affected. Lately, however, we have been delaying more than the natural process requires.