PEMEX: The Case for an IPO

The issue of financing PEMEX investments has been a permanent concern since its inception on June 7, 1938. All large corporations have a portfolio of opportunities that require additional financial resources. These resources are generally provided by a combination of fresh capital and some healthy debt, in addition to the cash flow plowed back by ongoing operations. Unfortunately, such has not been the case for PEMEX. Historically, PEMEX has not received fresh capital from the federal government, but the government has mostly exacted not only the available cash, but also resources dearly needed to finance very profitable investments in exploration and production. There have been moments in which PEMEX has had to acquire additional debt just to transfer the proceeds to the government. 

Throughout most of its existence, PEMEX has financed investment with debt and some of the cash available from operations. The outcome of decades of this practice is a company that has had to increase its debt to a level that currently stands at US$105 billion, and since “there is no such thing as a free lunch,” PEMEX’s equity is negative to the amount of US$78.7 billion. 

It is a fact that the only administration in Mexico’s history that has provided fresh capital, thus reducing negative equity, is the López Obrador administration. It must be said, however, that it might be too little, too late. One thing is clear: The Mexican government is not going to let PEMEX down. However, the Mexican government does not have all the required resources needed to maintain a lifeline to PEMEX indefinitely for PEMEX to have all the resources needed to not only service its debt, but to tackle a very hefty portfolio of E&P opportunities.

It must be said that PEMEX is a very successful company when it comes to exploration and production. Only in the first half of 2022, PEMEX E&P generated a net income of nearly US$12 billion, and in 3T22, PEMEX Corporation produced an impressive EBITDA of US$8.6 billion. Between January and September 2022, PEMEX’s net Income was positive, at US$9.6 billion, the highest in the last 12 years. 

PEMEX is in the situation of many Mexican companies that have healthy and profitable operations, but have to deal with the heavy burden of gigantic debt. These are two faces of the same coin.

The question should be: How to finance an optimum level of investments, while continuing to service a debt that was the product of the bad policies of the past?

Acquiring additional debt does not seem to be a realistic alternative. Fitch rates PEMEX below investment grade at BB- with a stable perspective; Moody’s reduced even further its rating from Ba3 to B1, improving the perspective from negative to stable. For S&P, PEMEX is still investment grade at BBB with a stable perspective, based on the commitment of the federal government to continue its ongoing support. The conclusion is that PEMEX’s access to capital markets is limited because of its high credit risk and the fact that its financial costs have increased significantly.

A sensible alternative is to develop specific fields with the participation of private operators. Such is the case of the agreement recently signed between PEMEX and New Fortress Energy to continue the development of Lakach, a deepwater, dry gas field. The project was  abandoned by PEMEX six years ago after making an investment of US$1.4 billion. New Fortress will invest US$1.5 billion, including the development of LNG facilities to export the produced natural gas.

Notwithstanding the above, we must recognize that the financial problem is structural, and it requires a definitive long-term solution that will solve the issue once and for all. PEMEX is “too big to fail,” and is still a very important player in the Mexican economy. It must remain that way for many years to come.

From a financial theory perspective, the answer is very simple:stop increasing debt and inject fresh capital through the participation of PEMEX in international capital markets. The subject has a strong ideological load in Mexico for historical reasons. However, this alternative must be thoroughly discussed since it is, perhaps, the only way to provide PEMEX with the optimum level of investment that could allow it to find and develop prospective resources and discovered reserves.

There are many countries with national oil companies (NOC) that eventually took the decision to proceed with an IPO to clean the balance sheet and provide the optimum level of fresh capital required for the NOC to reach its maximum potential.

Two relevant examples are Spain and Brazil. The Spanish NOC, Repsol, made its debut in international capital markets in 1989, under the government of President Felipe Gonzalez, a historic figure of the Socialist Workers Party. Petrobras, the Brazilian NOC, launched its very successful IPO in September 2010, under President Luiz Inacio Lula da Silva, a founder of the Workers Party. Today, both corporations have healthy finances and are traded at a multiple of their values at the time of their IPOs.

One very recent case that should be highlighted is that of KazMunayGas (KMG), the NOC of Kazakhstan, that began trading its shares on the Astana International Exchange on Dec. 8, 2022. This IPO was presided by Kassim-Jomart Tokayev, President of Kazakhstan, and a former Soviet diplomat and Under-Secretary of the United Nations. Unlike the other two IPOs, the KMG IPO took place only on Kazakhstani exchanges, with applications of 48.5 percent for Kazakhstan citizens, 47.2 percent for Kazakhstani legal entities and only 4.3 percent for foreign individuals and legal entities.

Any debate on the Mexican case should begin by acknowledging that the NOC does not capture the economic rent of hydrocarbons, but is only an “operator,” as in the case of IOCs and other private oil companies. In a good fiscal regime, The “Oil Rent” is entirely transferred to the state (In the case of Mexico, El Fondo Mexicano del Petróleo) through the payment of royalties and other taxes, that average around 70 percent of the price of a barrel.