2023 so far has been a roller-coaster of statements by both the Ministry of Finance and PEMEX Corporation. The president of Mexico himself expressed at one point the idea that PEMEX’s debt should be converted to sovereign debt, highlighting the fact that its excessive debt is the most compelling problem the state oil and gas company has to face.
It must be said that the PEMEX debt problem was not created by this administration. During the Peña Nieto administration, PEMEX’s debt grew from US$50 billion to more than US$100 billion. In the second quarter of 2020, PEMEX had to face the perfect storm, with the pandemic and a historic collapse in the price of crude oil, resulting in PEMEX losing its investment grade. Fitch and Moody’s lowered PEMEX’s rating to “junk,” with only Standard and Poor’s maintaining the investment grade for PEMEX, based on the assumption that the support of the Mexican federal government would not be withdrawn.
According to PEMEX’s 1Q23 report, the company’s debt amortization schedule includes payments of US$4.6 billion in 2023, US$10.9 billion in 2024, US$4.9 billion in 2025, and US$8.8 billion in 2026. The Ministry of Finance recently announced that PEMEX will delay the payment of the DUC (Derecho de Utilidad Compartida, or Right of Shared Utility) royalty, which would free resources to partly amortize payments in 2023.
This measure should bring some comfort to the markets; however, it is likely that further measures will be required for PEMEX to take care of accounts payable to contractors.
PEMEX had been receiving significant direct transfers and other financial aid from the federal government in the last two years. However, assuming that the price of crude oil would remain at the high levels of 2022, the federal budget for 2023 did not consider any further financial assistance to PEMEX.
For fiscal year 2022, PEMEX was able to produce profits after a long period of losses. During the first quarter of 2023, PEMEX produced positive numbers in spite of lower prices for crude oil in international markets.
PEMEX has a very good exploration and production operation, but it has to deal with the debt problem and with an inefficient refining operation. In fact, during the first quarter of 2023, PEMEX ranked only third in the world in terms of EBITDA as a percentage of sales. This is no minor achievement. All other companies in the ranking are publicly traded companies, making PEMEX the only state-owned company to make the Top 10 in this category.
It must be clearly understood that PEMEX is too big to fail, and that aside from the debt issue, PEMEX does have a very promising future. It must be also understood that the structural problem requires a long-term structural solution.
The president hinted at the possibility of turning PEMEX’s debt into sovereign debt, but the impact of such a measure on the sovereign´s own investment grade would be very harmful. A structural solution would have to include a renegotiation of existing debt, based on a commitment on the part of the government to capitalize the entity in a way that would bring the balance sheet to a healthy state.
It is relevant to mention that the negative equity on PEMEX’s balance sheet went from an all-time negative of US$122.3 billion in 2020, to negative US$95.1 billion in 1Q23, which means that for the first time in the history of the company, PEMEX received an injection of fresh capital from the federal government of US$27.2 billion. This is definitely an important step in the right direction; however, the government cannot stop now. Further support in the form of fresh capital injections are required to improve the state of a balance sheet that was neglected for too long.
Throughout PEMEX’s history, government after government forced the company to acquire additional debt, mainly because of the very high dependence on oil revenues to finance public expenditure. Today is a good time to act, since the Mexican economy has grown and diversified in a way that oil revenues are not as critical for government finances as they were in the past.
I am a strong proponent of an IPO for PEMEX, but an IPO would require a profound restructuring, for which both the government and creditors must agree on the PEMEX that will emerge from such restructuring.
PEMEX must take advantage of its strength in exploration and production, and rethink its strategy regarding downstream operations, which are a burden to the entity. Most observers would point out that downsizing downstream at PEMEX would never take place under this administration, because self-sufficiency in fuel production is paramount to the López Obrador government. However, it must be said that even considering that from an energy security and balance of payments perspective, the government perspective might have some merits, it is definitely damaging for the future and long-term viability of PEMEX.
Refining is a complex business, with thin margins, high volatility and seasonal behavior. Mexico is ill-prepared to have a competitive refining sector, among other things because there is no storage capacity for all practical purposes.
Of course, there are success stories in refining throughout the history of the industry, such as Jurong Island in Singapore, but that would require a carefully designed strategy that would include the participation of the private sector.
In any circumstance, these subjects are so important for the Mexican oil and gas sector that they should be openly discussed without prejudice regarding what should be the optimal solution.