It seems like only yesterday, but more than seven years have elapsed since we last saw barrels of oil at US$100. IOCs and NOCs alike have been forced to reinvent themselves since the price of oil began a journey that had its darkest moment in April 2020, when quotes turned negative in Cushing, Oklahoma.
Oil field service companies all over the world were increasingly forced to take the heat, which was particularly true in the case of Mexico. PEMEX’s capital investment reached an all-time high in 2014 of US$27 billion, only to begin a steep decline to US$10 billion in 2017.
Historically, Mexican and international oil field service companies working in Mexico have dealt with the fact that the Mexican oil and gas industry is a monopsony, which means there is no other client aside from PEMEX, granting the NOC exceptional negotiating power regarding contractual terms and conditions. This is in addition to the fact that PEMEX is a state-owned company, and for many years, it acted as its own regulator.
This has changed slightly since the constitutional reform of 2013, which allowed for the participation of private operators; however, the largest demand for the sector’s services still comes from PEMEX.
Some service companies have been active in Mexico since even before the nationalization of 1938. Many have been in business for more than 50 years and have been able to adapt to the times and circumstances. Unfortunately, some of them were bankrupted and some have been short-lived.
Surprisingly, in spite of the fact that the oil sector has been historically of great importance to the Mexican economy, there has been a lack of fresh capital to finance oil field service operations. The Mexican and international financial sectors have been able to leverage PEMEX-related projects using the PEMEX contract itself as collateral.
This is painfully obvious if we take a look at the Mexican Stock Exchange, where there is perhaps only one stock that could be considered within the oil field services vertical.
The lack of capital formation might be explained by the monopsony and the uncertainty that it brings, and definitely by the lack of an industrial policy to strengthen the sector.
But the lack of fresh capital is not exclusive to oil field services. PEMEX itself had not received an infusion of fresh capital since its inception, until 2021, when the current administration capitalized the company for the first time in its history, with more than US$4.5 billion. This might seem a small contribution compared with the negative equity of US$100 billion reflected in PEMEX financials; however it is a clear demonstration that the government is fully committed to rescuing PEMEX, which lost its investment grade in March 2020. The issue of a series of bonds in early 2022 is also of significance, since it required an additional capitalization of US$1.5 billion. This recent move by the Ministry of Finance and the PEMEX financial department will definitely have a positive impact on the ability of service providers to continue supporting PEMEX’s operations.
Undoubtedly 2020 is a year to forget. The low price of oil, as well as PEMEX’s cash flow difficulties, resulted in a significant increase in overdue invoices for the first time in PEMEX’s history. This, in turn, resulted in an increasing reluctance of the financial sector to finance oil field service companies.
Even before the end of 2020, PEMEX had taken this challenge very seriously. It began consultations with AMESPAC (Asociación Mexicana de Empresas de Servicios Petroleros), which resulted in the signing of an agreement between the CEO of PEMEX and the Executive Committee of the association on March 18, 2021.
In parallel, PEMEX launched a transparency effort, through the publication on its webpage of all amounts overdue to contractors and service providers.
In a few months, PEMEX was able to turn the page regarding invoices overdue in 2020, and began updating the amounts due in 2021 through various financial instruments, particularly through the use of funds coming from its own treasury.
Today, the prospect for oil field service companies has changed dramatically. The price of the Mexican oil mix is at around US$80 and contractors are already reflecting the benefits of payments and an investment that in 2021 reached US$16 billion, with an approved investment of close to US$19 billion for 2022.
It would be of great value to take advantage of the recent exchanges between PEMEX and the oil field services industry to further enhance the channels of communication and collaboration between the two, which could benefit the Mexican oil and gas industry as a whole.
Of significant importance is the participation of the financial sector, whose risk departments still need some time to acknowledge the recent changes in the environment, and most importantly, must clearly outline what are the features that make a specific contract or project truly bankable.
Additionally, an effort must be made by PEMEX to make oil field services more attractive for investors, through a better understanding of the right mix of risk and return in the sector.