Rise of the slashers
Latin America’s oil majors are turning to bankers to cut fat and mend desperate finances
When oil prices were booming, Latin America’s oil giants spent big chasing world-beating reserves, from Brazil and Mexico’s deep waters to Argentina’s shale deposits. Today, they are spending less time hunting for new discoveries and more time trying to repair balance sheets wrecked by oil’s downward turn and swamped by huge debts.
Mending those finances demands a different skill set at the top. Petrobras, Pemex, Ecopetrol and YPF have all seen turnover in the chief executive’s office in the past 15 months. The new faces show that industrial engineering skills are out and financial engineering expertise is in. New leaders from the financial world have moved in to the top roles. They bring a thirst to slash debt and axe spending commitments.
The latest to lose his job amid the market turmoil is Miguel Galuccio, head of Argentina’s national oil company YPF. Galuccio, a petroleum engineer who rose through the ranks of Schlumberger, took over the chief-executive position in May 2012 when Cristina Kirchner’s leftist administration nationalised YPF. Galuccio has won praise at home and throughout the industry for his steady hand steering YPF through a turbulent time and helping to launch the company’s shale business.
But Mauricio Macri’s presidential election victory in November (he took office in December) and the company’s deteriorating finances strained Galuccio’s position. The new energy minister, Juan Jose Aranguren, previously the head of Shell Argentina, has been particularly critical of Galuccio’s management of YPF’s finances during the downturn. The company managed to reverse production declines under Galuccio, but it came at a cost. YPF lost $110m last year, despite heavily subsidised crude and natural gas prices, and debt has risen from $2bn in 2012 to $7bn this year.
Difficult at the top
Macri has put forward Miguel Gutierrez, who had a long career at JP Morgan and is a partner at the Rohatyn Group, a hedge fund, to replace Galuccio. The appointment of an oil-industry neophyte with decades of experience in financial markets points to a change in strategic direction at YPF.
Deeper spending cuts are on the way as debt reduction and profitability replace production and reserves growth as priorities, at least until the oil price shows some signs of recovery.
It is a strategic shift echoed elsewhere. The Carwash scandal and Petrobras’s debt – the highest of any listed oil company in the world – took the scalp of Maria das Graças Foster, the state-controlled firm’s boss, early last year. Banco do Brasil’s then-chief executive Aldemir Bendine replaced her.
Since taking over the job, Bendine has repeatedly cut spending, reined in the company’s deep-water ambitions and promised to restore the Petrobras to profitability.
Around the same time, Colombia’s government replaced the long-time head of Ecopetrol, Javier Gutierrez, an engineer who oversaw an aggressive expansion strategy that didn’t pay off for shareholders once the oil price turned. The government looked within, and appointed Juan Carlos Echeverry. He had been finance minister, and enjoyed a fairly successful tenure.
In February, it was Mexico’s turn. Pemex’s chief executive Emilio Lozoya was replaced by José Antonio González, who was credited with imposing financial discipline during his time at the Mexican Social Security Institute, which is a vital establishment in the country’s government.
Under Lozoya, reform at Pemex had stalled and the company’s debt had ballooned. Pemex is in dire need of an urgent cash bailout from the federal government if its to turn things around.
The strategy may be more than changing deck chairs, but it still brings risks. The oil industry is a very much an insular one, with its own vocabulary and traditions, so the opportunities for culture clash between the new outsider executives and the rank and file are rife.
Bendine at Petrobras, for instance, has reportedly earned the enmity of some in the lower ranks of the company for appearing to be not fully engaged with the company.
Naturally if communication breaks down from the top, the risk of mistakes, project delays and cost overruns rises across the board.
But it’s also a necessary and well-constructed strategy, at least in principle. Latin America’s state oil companies spent like the era of $100 oil would never come to an end, and have come crashing down to earth along with the oil price. Weak oil prices mean priorities need in the headquarters of the regions oil majors need to change quickly. Expect some earth-scorching.