PEMEX Cliffhanger: The Good, the Bad and the Ugly in 2023
Despite the ongoing uncertainty still impacting global energy markets, oil prices have remained resilient at the beginning of 2023. The main drivers helping oil prices have been strong Asian demand and a still robust US economy. On the supply side, Russian oil continues to enter global markets despite the West’s price cap imposed on Dec. 5 and with a steep discount, particularly for its top buyers in Asia. Against this backdrop, Brent averaged US$82 per barrel in January (-5% YOY), while the WTI averaged US$78 per barrel during the same period (-6% YOY). The Mezcla was able to ride this oil tailwind, averaging US$68 per barrel (-12% YOY). Although oil prices are not at the peak of 1H22 after Russia’s full-scale invasion of Ukraine, the current trend indicates that oil prices will still be high in 2023, mainly driven by China’s economic reopening and tight inventories in H2.
This long intro is meant to set the stage for expectations for PEMEX. Mexico’s state-owned oil firm is likely to have a “Good, the Bad, and the Ugly” year, with the good coming from still resilient oil prices, the bad from lackluster output, and the ugly coming from its crippling debt, which will vex the next government’s budgets. Let’s start with the ugly.
The ugly for PEMEX, particularly its finances, continues to be its staggering debt. The state-owned firm remains the most indebted oil company in the world, with US$105 billion burden at the end of 2022, almost 10% of Mexico’s GDP. In an international context of high interest rates, it is unlikely that PEMEX will substantially curtail its ballooning debt in the short to medium-term without significant cost-cutting measures, such as dealing with its pension system and headcount. However, recent positive news for PEMEX was the successful issuance of a bond to refinance its stifling debt. In January, PEMEX raised US$2 billion with a new bond that has a 10-year maturity. The company will use this money to fulfill its immediate debt commitments, which range between US$5 billion and US$6 billion in 1Q23. Firms should interpret the successful bond issuance as a vote of confidence from capital markets in the López Obrador administration’s statement that it will continue to prop up the financially embattled company.
The good for PEMEX continues to stem from high oil prices and the amount of revenues obtained from its external sales. Indeed, PEMEX’s external sales ended on a high note in 2022, amounting to US$31 billion (27%YOY) thanks to high oil prices, with the Mezcla averaging US$90 per barrel. Yet, monthly, oil sales have been declining since September, ending in December at US$1.9 billion (-7%MOM, -16%YOY) as oil prices moderated and PEMEX’s production stalled. In 2023, we believe PEMEX’s sales will moderate vis-à-vis 2022, but will be higher than 2020-2021 levels, as the Mezcla is poised to average US$87 per barrel, 27% more than the US$68.45 per barrel that was estimated in the federal budget.
The bad for PEMEX will be that the choppy output expected in 2023 will not let it capitalize on another year with resilient oil prices. There has been an interesting debate recently about PEMEX’s output. Depending on the analysis, the numbers will vary. With partners and condensate, PEMEX’s output has increased, but the reality is that by itself, without partners and condensate, PEMEX’s output has stalled. That is a more effective benchmark to analyze the state-owned company’s performance, as it indicates how badly structural reforms and a pro-business approach are needed.
Hence, in 4Q22, PEMEX’s output (without partners) averaged 1.66 million barrels per day, plunging in December to 1.576 (-7% YOY) as operational and managerial problems continue. In 2022, output averaged 1.6 mbpd, representing flat growth vis-à-vis 2021. Without structural reforms on the horizon and allocation of more farmout contracts to private companies, it is all but certain that PEMEX will not reach its yearly goal of increasing output to 1.87 bpd.
Against this backdrop, output will slightly decline in 1Q23 vis-à-vis the roughly 1.66 mbpd on average in 4Q22. This trend is likely to barely improve throughout 2023, with better prospects in Q3 and Q4, thus curtailing revenue windfall stemming from higher oil prices.
Like everything in life, PEMEX’s outlook is not black and white, but gray in 2023. Firms and executives operating in the sector will continue to find opportunities in the upstream and refining segments, as the company’s spending priorities will be focused on those sectors. However, PEMEX’s “ugly” data, its crippling debt, will be a fiscal challenge for the next administration. Thus, with oil prices likely to be lower than current levels, the debate over how to run the company and the need to prop up the participation of the private sector in Mexico’s oil sector will have to be on the table to avoid the PEMEX cliffhanger ending in a financial disaster, dragging down the country’s macroeconomic stability with it.