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Analysis

PEMEX's Financial Challenges

By Cas Biekmann | Tue, 01/21/2020 - 22:33

By making finances central to Mexico’s energy policy, President López Obrador is gifting PEMEX relief. Dropping production numbers have plagued PEMEX for the last 15 years, but the real shock only hit in the past half-decade as oil prices spiraled lower. The 2014 plunge in prices helped expose the many long-standing issues at the NOC. In 2017, the Peña Nieto administration oversaw the lowest annual income at PEMEX in memory. Its fiscal situation improved in 2018, although it remains far removed from the company’s most successful years. What is more, the cost to produce one barrel of oil equivalent has only risen over the years. While operation and maintenance costs have increased somewhat, the real burden is the NOC's taxation in the form of IAEEH and DEXTH. Since the introduction of these costs in 2015, they have proven to be a financial burden.

PEMEX says it is now on track for a higher profits in 2019, although in 3Q19 global issues still posed a threat. "This quarter, the company faced one additional challenge: the drop in international oil prices. The Mexican mix price was US$11.2 per barrel below the average price for the same period last year,” says PEMEX CFO Alberto Velázquez, proving the need for the company to set its own affairs in order so that it can survive the international volatility that defines the oil and gas industry. Even without examining where PEMEX’s profit stems from, one variable stands out: higher production is crucial. Exporting crude was, in fact, PEMEX’s second largest source of income in 2018, only narrowly beaten by gasoline sales totaling MX$511.32 billion (US$26.9 billion). Diesel follows in third place at MX$234.18 billion (US$12.3 billion). 

Considering sovereignty paramount, the government is emphasizing that Mexican oil should stay in the country until it is refined. The country should also reduce its reliance on imports, no matter how opportune this approach had seemed in previous years. This new notion of sovereignty changes the status quo somewhat. PEMEX’s income from exports translates directly into taxes; this has often proven to be both a stable and effortless source of income. After all, Mexico’s physical location is favorable and exporting crude directly means there are no further alterations and no further effort necessary. In the struggle to better make use of refining capacity, López Obrador has mandated that crude oil exports be decreased by 129Mb/d. To profit from exports once again, the president has argued for a further increase in production first. Velázquez expects that because this is being realized, exports should soon benefit as well. Furthermore, toward 2030, PEMEX is projecting a significant increase in production, especially after 2022 when its new fields are forecasted to start yielding their respective production peaks. 

Regarding the NOC’s earnings before interest, EBITDA, Velazquez asserts the company is on an average level of efficiency and profitability within the industry. Negative fiscal balances can mostly be blamed on the tax burden the company operates under. Although PEMEX has not recorded positive balances for over a decade, the post-2014 situation had a particularly strong impact on PEMEX. Debt had already been problematic, but in recent years it has become a major restricting force.: As of 2019, PEMEX's debt stands at US$99.6 billion and makes the NOC the most indebted oil company in the world. Credit rating agencies such as the above mentioned Fitch, Moody's and S&P see this as a major issue. Debt payments, furthermore, have pretty much doubled when comparing 2019 to 2014. With new government support and the promise to make PEMEX the backbone of the country’s energy policy once again, its numbers have already started to slide toward the positive. 

Renewed government support also will be essential for PEMEX’s fortunes in the coming years. The NOC’s Business Plan states that it will need to increase CAPEX significantly to reap greater rewards. For 2020 and 2021, more than half of its CAPEX will be dependent on a reduction of the tax burden coming from the federal government. A smaller, but nonetheless important contribution will also come from the private sector in the form of the CSIEE licensing contracts, in which private companies participate but do so under the umbrella of PEMEX. 

The NOC’s financial situation has been crippling its forward momentum for years. Now, with a shift in vision and valuable crutches to lean on, PEMEX may have the tools to stand up and deliver on its ambitious goals. Although there is no not just one particular reason for the struggles PEMEX experienced, the financial part did play a major role. 3P reserves kept decreasing due to a lack of available spending in exploration, while refineries were not equipped for the heavier crude that defined the post-Cantarell production roster. Although there might not be money available to counter this before, a shift in vision by the current López Obrador administration shows new potential on the horizon which might give PEMEX the tools to stand up and deliver on its ambitious goals.

Cas Biekmann Cas Biekmann Journalist and Industry Analyst