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Analysis

Exchange Rate Risk

Tue, 01/22/2013 - 17:03

A significant amount of Pemex’s revenues is derived from exports of crude oil and petroleum products, which are priced and payable in US dollars. Pemex’s revenues from domestic sales of gasoline and diesel after the Special Production and Services Tax (IEPS), petrochemicals and natural gas and its by products are related to international US dollar-denominated prices, except for domestic sales of LPG, which are priced in pesos. At the same time, the hydrocarbon duties, most capital expenditures and investments and the cost of petroleum products and natural gas that Pemex imports for resale in Mexico or use iat its facilities are denominated in US dollars. By contrast, most of its operating expenses and a significant amount of capital expenditures and investments are payable in pesos and are not linked to the US dollar. As a result of this cash flow structure, the depreciation of the peso against the US dollar increases our income in peso terms. The appreciation of the peso relative to the US dollar has the opposite e†ect. Pemex perceives this risk as manageable, without the need for hedging instruments, because most of its investments and debt issuances are carried out in or converted into US dollars and therefore, the impact of the fluctuation in the exchange rate between the US dollar and the peso on Pemex’s revenues is o†set in whole or in part by its impact on its obligations.

CROSS-CURRENCY SWAPS

Most of Pemex’s debt is denominated in US dollars or pesos. Although the company attempts to issue debt in these two currencies, this is not always achievable. As a consequence of the cash flow structure, fluctuations in non-US dollar currencies other than pesos may increase its funding costs or expose the company to foreign exchange risk. For nonUS dollar or peso issuances, since 1991, Pemex has made the strategic decision to swap this debt into US dollars, except for debt denominated in UDIs (UDIs, or unidades Most of Pemex’s debt is denominated in US dollars or pesos. Although the company attempts to issue debt in these two currencies, this is not always achievable. As a consequence of the cash flow structure, fluctuations in non-US dollar currencies other than pesos may increase its funding costs or expose the company to foreign exchange risk. For nonUS dollar or peso issuances, since 1991, Pemex has made the strategic decision to swap this debt into US dollars, except for debt denominated in UDIs (UDIs, or unidades de inversion, are nonmonetary units that are adjusted for inflation every day by the Mexican Central Bank. Any obligation or debt denominated in UDIs can immediately and automatically be converted into pesos guaranteeing equal purchasing power), which is swapped into pesos. As a result of this strategy, Pemex holds a debt portfolio with negligible sensitivity to currencies other than pesos and US dollars.

Most of Pemex’s cross-currency swaps are straightforward, with no unusual terms, except for two swaps entered into in 2002 and 2004 to hedge exposure to Japanese yen and euros, with termination dates in 2023 and 2016, respectively. These swaps are referred to as “extinguishing swaps” and were obtained in order to be able to hedge long-term obligations. The main characteristic of extinguishing swaps is that the DFI terminates upon the occurrence of any of the credit default events specified in the DFI contract confirmation, without any payment obligation by either party. Pemex recorded a total net foreign exchange gain of MX$44,846 million in 2012, as compared to a total net foreign exchange loss of MX$60,143 million in 2011. Its foreign exchange gain in 2012 and the loss in 2011 were due to the e†ect of the significant appreciation of the peso on the value in pesos of Pemex’s US dollar-denominated debt. A significant portion of Pemex’s debt, 80.5% at December 31, 2012, is denominated in foreign currencies. The appreciation of the peso in 2012 therefore resulted in an increase in our net foreign exchange gain. The value of the peso in dollar terms appreciated by 7.5% in 2012, from MX$13.9904 = 1 US dollar on December 31, 2011 to MX$13.0101 = 1 US dollar on December 31, 2012. By the middle of May 2013, the exchange rate has reached MX$13.3564 =1 US dollar, and is expected to dip below MX$12 = 1 US dollar before returning to MX$12.30 = US dollar later in the year. This implies that further foreign exchange gains can be expected for 2013.