Mexican NOC's Journey Toward ProductivityWed, 01/18/2017 - 09:54
Q: What are the main factors that contributed to PEMEX’s progress toward financial stability during 2016 and the first quarter of 2017?
A: In 2016, we focused on two elements: financially stabilizing PEMEX and implementing the Energy Reform. The basis of PEMEX’s financial deficit considers our revenue flow from our product sales minus our expenditures: taxes, rights, royalties, operational costs and investments, to name a few. This calculation is our primary balance, to which debt interest has to be added to obtain our balance sheet. The Mexican Congress approved a financial deficit amounting to MX$150 billion in the same year. This budget was built under economic premises different from those observed empirically.
Two primary variables influenced this result: oil prices and the exchange rate. A budget adjustment of MX$100 billion had to be made since oil barrel prices reached US$20/b while our premise was US$50/b. We modified the macroeconomic conditions to account for a US$25/b price as a general average for the whole year. The objective of these adjustments was to leave short-term crude oil production untouched. Our main cutback involved our administrative services: consulting, travel expenses, stationery costs and so on. Also, we delayed some projects that were set to begin production in the long term, especially those in deepwaters. At the end of 2016, we achieved our MX$100 billion budget adjustment and the Mexican oil mix closed at a higher price than US$25/b.
Q: How did the Federal Government’s support measures effect PEMEX finances over the past year?
A: PEMEX had a MX$147 billion debt with its suppliers and contractors. The Ministry of Finance assisted us with half this amount through capitalization and fiscal incentives. On our end, we normalized our accounts payable.
At a later stage, we issued debt in the market together with new and increased credit lines, obtaining the required liquidity for PEMEX’s size and an improved financial debt profile. Debt maturity increased by one year and its duration to 0.8 years, mitigating our exposure to interest rates. Additionally, we underwent a liabilities management exercise of our US dollar-denominated debt, reducing the debt maturity of the following two years. Our portfolio became more robust through these measures, with a better price discovery.
All of the above measures supported the liquidity of our different instruments that gradually decreased the debt differential with the federal debt. We started the year with 300 differential basis points and reduced this gap to approximately 130 basis points.
Concerning E&P, the Federal Government assigned PEMEX certain fields during Round Zero. We went through our first migration process a few months ago with the Trion field, and recently we migrated the Ek and Balam fields from an allocation to a fiscal contract without a private partner. In our oil refinery segment, our unscheduled shutdowns are three times the international index. Conventional inputs and processing aids - hydrogen, steam, electricity, and water treatment- are responsible for these events in 80 percent of the cases. As a countermeasure, we established partnerships to inject modernization and operation investments for these auxiliary plants, limiting our participation to the purchase of the products we need. We achieved this already in our Tula refinery for the supply of hydrogen. In addition, we are analyzing potential partnerships to improve plant operation, increasing installed capacity, adding value to our refineries and decreasing supply imports.
Price liberalization also has an important part to play as a component of the reform, reflecting the international West Coast index and logistics cost and improving our refining revenue. Moreover, the reform stipulates that PEMEX should launch the Open Season, sharing its logistics infrastructure, pipelines and storage through the corresponding fee structure. The US Treasury was awarded 100 percent of the storage capacity in the northern part of the country. These auctions will continue through 2017 for the remainder of the logistic infrastructure.
As a whole, budgetary adjustments and the Energy Reform brought PEMEX favorable accounting results for 4Q16 and 1Q17. Our income statements reflected net profits of MX$77 billion and MX$81 billion, respectively.
Q: How important are your associations and partnerships to your financial stability going forward?
A: For our financial stability, associations and partnerships will not prove to be overly important but they will be significant in terms of our marginal growth. In our Business Plan, we differentiate our production from the improved scenario through our partnerships. One of the fields we cut as a result of the adjustments was Trion. We had a budgeted investment of MX$13 billion for that field to build the required infrastructure to reach operational phase in six to seven years. We put Trion on the table to attract a farm-out partner on Dec. 5 and the Australian company BHP Billiton won the bid. In that same farm-out round, we participated jointly with Chevron and INPEX and won a government-owned field. We also made a farm-out bid for two shallow water fields and two onshore fields. As a result of these developments, we are only missing partners in unconventional fields.
Q: What effect will oil hedge funds have in PEMEX’s financial situation?
A: The federal government covers its fiscal sensitivity against oil price drops to ensure its fiscal income. What PEMEX wants to cover its sensitivity against its balance sheet. Both parts complement each other. As PEMEX increases its number of private partners, we have joint investment obligations. It is imperative that against possible oil price drops, we are able to comply with these third party obligations, cement certainty in these ventures and assert our non-speculative position.
Q: PEMEX issued US$5.5 billion in bonds in December 2016. What will be the effects of this measure?
A: We not only issued US$5.5 billion in bonds in December, we also issued US$4.5 billion in February and March 2017. Most of PEMEX’s hard currency is in US dollars, as it is our debt. These US$9.9 billion bonds issued represent a prescheduled payment operation that ensure our minimum financing requirements. For 2017, we have an approved financial deficit of MX$94 billion, which is our target. The bonds pertain to gross exposure, as we had expirations close to US$5.5billion. As for the US$4.5billion issued, representing close to MX$90 billion, they cover our deficit target. This does not mean that we are opposed to using the markets, swapping market debt to banking debt.
Q: What is the short, mid and long term financial outlook for PEMEX?
A: We published a Business Plan in November in flow terms. We expect to mitigate losses in the auxiliary services of our refinery sector. Most of our losses are generated in our E&P segment. Sharing our fields in partnerships, we aim to increase production through greater efficiency and stabilizing it around 2 million profitable b/d. We anticipate that by either 2020 or 2021, depending on the reform’s implementation speed, we will bring our deficit to zero. In this surplus scenario, we will be working toward decreasing our total debt. By then, PEMEX will emulate private company behavior, without equity, and achieve a profitable state owned company status.