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Analysis

A Closer Look at PEMEX's 2015 Financial Performance

Wed, 01/20/2016 - 14:28

Mexico was not exempt from the crisis resulting from the precipitated drop in the oil price, and in 2016 the average price of the Mexican crude basket stood at US$25.92/b, almost half the price budgeted by the government for that same year, and 43% less than a year previously. Gasoline prices evidenced the impact of the oil price soon after, as these tumbled down 30% in the northern coast of the US Gulf of Mexico during the first quarter of 2016. The average price of gas based on the Henry Hub also suffered a decrease, as it was down by 32% compared to the same period in the previous year. However, this is attributed to different causes, such as an increase in inventory buildups and warmer than average temperatures in Japan, Europe, and the US. In addition to dropping commodity prices, the industry was also hit by a depreciation of the Mexican peso against the US dollar, which went from MX$15/US$1 by the end of the first quarter of 2015 to MX$17.40/US$1 in April 2016.

PEMEX was forced to lower its expectations in terms of revenues and revise the forecast to a more realistic figure of US$25/b, which was chosen because it was thought to suit a conservative scenario in terms of current expectations in the industry. This revision led to a cut in revenue of approximately US$5.6 billion.

MEASURES TO ADJUST TO A NEW ENVIRONMENT

On February 26, 2016, the Board of Directors of PEMEX decided that in order to comply with the maximum deficit of US$8.3 billion established by the Federal Revenue Law and meet the financial balance goal set for the year, the company would have to enforce a Budget Adjustment Plan that would cut over US$5.6 billion to its allocated expenditures. The NOC understands that there is no other way to adapt to the new unfavorable price environment and is following the footsteps of its competitors with the budget cut and its redefinition as a company that prioritizes profitability, stability, and sustainability. In line with these new objectives, the Adjustment Plan also requires the deferral or cancellation of projects that do not add value at current prices and the implementation of efficiencies in several expenditure items. In addition to the aforementioned internal changes, PEMEX is seeking to use the figures and mechanisms offered by the Energy Reform. “We will strive to strategically collaborate with third parties to diversify sources of working capital and share risks, monetize assets to increase our financial flexibility, and migrate assignment contracts to the new exploration and extraction contracts that offer more attractive fiscal conditions. The new business model will maximize value creation by focusing on profitable projects to stabilize production,” Juan Pablo Newman, CFO of PEMEX, expounds.

The Federal Government announced two support measures aimed at strengthening PEMEX. The first involves a capital increase of US$4.1 billion, comprised of an exchange of US$2.6 billion in non-negotiable government certificates received in December 2015 for negotiable ones, and US$1.47 billion in an equity injection through certificates of participation. In addition to this, the government put forth a decree on raising the tax-deductibility ceiling applicable to the profit-sharing duty, setting minimums of US$6.10/b and US$8.30/b respectively for shallow waters and onshore fields that could generate up to US$2.8 billion in savings, subject to the prices of hydrocarbons. It is hoped that these measures will help reduce PEMEX’s liquidity constraints, therefore reducing accounts payable to suppliers and the financial debt, and eventually guaranteeing the sustainability of the company. Moreover, the revision of PEMEX’s pension scheme is also having a positive impact on the company’s financial results.

SALES

During the first quarter of 2016, total sales amounted to US$12.5 billion dollars. Broken down, this equates to US$3.8 billion in exports, US$8.5 billion in domestic sales, and US$0.2 billion in revenues from services. The 19% or US$3 billion decrease compared to the same period in 2015 can be explained by a decline in the average sale price of oil and its derivatives.

Looking into the individual causes, exports dropped 35% or US$2.1 billion due to a US$1.4 billion decrease in crude oil exports as well as US$600 million reduction in petroleum products exports. These lower prices accounted for 72% of the decrease in total export sales, while the rest was attributed to a reduction in export volumes. Domestic sales, on the other hand, decreased by US$900 million or 10% mainly as a result of a decline in the international reference price of gasoline and diesel, and to a lesser extent by a decrease in the sales volume of LPG.

COST OF SALES

The cost of sales decreased by 21% in majority because of a reduction in the “other” item, which englobes depreciation, amortization, impairment, net cost for the period of employee benefits, preservation and maintenance, exploration expenses, non-successful wells, inventory variation, and subsidiary entities consolidation net effect. The ones that impacted the cost of sales most during the first quarter of 2016 were inventory variation, which suffered a US$800 million decrease due to the lower value of products in different periods, as well as depreciation and amortization, down US$600 million because of a lower calculation base that followed from declining prices, fixed asset impairment, which represented a US$300 million drop as a result of no-asset re-evaluation during the quarter and compared to certain assets’ reevaluation during the first quarter of 2015, and the net cost of employee benefits that amounted to a decrease of US$200 million for the period due to the modifications in the pension scheme. The gross income, calculated by deducting cost of sales from total sales, totaled US$3.5 billion, a US$600 million or 15% decrease compared to the first quarter of 2015. The reduction in cost of sales was the main reason in reverting the gross loss experienced at the end of 2015.

GENERAL EXPENSES

General expenses are broken down into distribution, transportation and sales expenses, administrative expenses, and other expenses. In the first quarter of 2016, general expenses stood at US$1.7 billion, down US$300 million or 15% from 2015. The drop is mainly attributed to a 33% decrease in the distribution of expenses and a 6% decrease in administrative expenses, mainly related to the variation in personal services from the reduction in personnel that occurred throughout 2015. Consequently, operating income fell to US$1.7 billion, 16% less than in 2015. Newman reminds that the operating loss observed at the end of 2015 was able to be reverted thanks to improvements in the gross income and a reduction in general expenses. Interest expenses went up by US$2 million following an increase in financing activities and the depreciation if the Mexican peso against the US dollar. Interest income grew by US$1 million mainly due to the investment in securities.

Income from financial derivatives experienced a positive variation of US$1.4 billion, which represents an increase of 155% compared to the same period in 2015, largely thanks to the appreciation of the US dollar against other currencies in which PEMEX has entered into through cross currency swaps. Nonetheless, the NOC also recorded a foreign exchange loss of US$1.1 billion, US$100 million more than in 2015 due to the depreciation of the Mexican peso against the US dollar. As a result, the difference between operating income and net financial cost provides an income before taxes and duties of US$170 million, or 134% more than the amount recorded during the first quarter of 2015.

Taxes and duties during the first quarter of 2016 added up to US$3.6 billion, which is US$1.5 billion or 29% less than in the first quarter of 2015, a drop that can be attributed to a combination of drop in the crude oil price and lower production, which lowers the tax base. Despite the new fiscal regime to which PEMEX was subject as of 2015, the company is still unable to deduct all of its operating costs and expenses from its calculations of taxes and duties. In order to reduce this impact, on April 18, 2016, the Federal Government published a decree that grants certain tax reliefs to assignment operators, which are expected to reduce the payment on the profit-sharing duty and to improve the financial condition of the company. In consequence, PEMEX recorded a net loss of US$3.4 billion, 38% less than the one recorded last year, in majority due to the effect of prices and exchange rates discussed previously. The comprehensive loss, however, amounts to US$3.5 billion, 34% less than last year's as a result of the conversion between the different currencies and PEMEX’s functional currency, the Mexican peso.

LIABILITIES

PEMEX’s financial debt went up by US$7.2 billion while the reserve for employee benefits increased by US$900 billion. Moreover, the NOC recorded a US$2.3 billion or 26% decrease in supplier liabilities during the quarter, and an increment in the remaining liabilities of US$600 million. As a result, total liabilities as of March 31, 2016 stood at US$177 billion.

PEMEX and PMI’s total financial activities during the first quarter of 2016 added up to US$11.7 billion, with total debt payments made during that period amounting to US$5.3 billion. The impact generated on the company’s debt from exchange variation added up to US$900 million. The evolution of equity was subject to a decrease of US$3.5 billion during the first quarter of 2016 as a result of a net loss of US$3.4 billion during the period.

According to the 2016 Federal Revenue Law that was approved by the Board, PEMEX has an internal net indebtedness ceiling of US$6.1 billion and an external net indebtedness ceiling of US$7.2 billion, amounting to a total of US$13.3 billion that could be raised through the communicating vessels mechanism.

To date, PEMEX has tapped both the local and international markets, raising approximately 54% of total allocated financing for the year. In January 2016, it accessed the local debt markets and entered into a bank loan for US$400 billion, and in March, the company issued Stock Certificates amounting to US$300 million and obtained US$800 million through three credit lines with Mexican development banks. The company already tapped international debt markets in January 2016 and issued securities for an aggregate amount of US$5 billion in three tranches, maturing in 2019, 2021, and 2026. In February it accessed the market for US$2.25 billion. In March, it raised US$2.6 billion in two tranches, maturing in 2019 and 2023, and in April, PEMEX entered into a bilateral loan for US$571.6 million due in seven years.

Thanks to the support measures granted to PEMEX by the Federal Government, financing needs are expected to decrease, primarily benefitting the domestic market and giving the company more flexibility regarding operating execution. The company expects to receive approximately US$2.8 billion from this scheme, which it will use to pay off US$200 million out of the US$1.7 billion it has to allocate for the year. These US$2.8 billion that PEMEX received were part of a pension reduction agreement drafted in 2015 that amounted to US$10.4 billion, the rest of which is still under revision by the Ministry of Finance. The company might receive this latter amount in liquid form or under the form of securities that will help it reduce its pension liability. Moreover, PEMEX hopes to access international markets again in the next quarter to raise dollars, Swiss francs, or Japanese yen in order to diversify the sources of funding. In the time period from February to April 27 2016, the spread between PEMEX’s financing costs in dollars and the Mexican government bonds in dollars narrowed by 59 basis points, while the spread with the US Treasury bills decreased by 116 basis points.