Pemex posts a loss
Sagging oil prices bruise the firm’s bottom line, despite a positive quarterly upstream performance
Mexican president Andres Lopez Obrador identified four key targets for Pemex, the state-owned oil and gas company, shortly after assuming office last December: boosting upstream crude production to 2.6mn bl/d by the end of 2024, reaching self-sufficiency in domestic refining, tackling rampant fuel theft and stabilising the company’s massive debt pile.
Simultaneously, Lopez Obrador set his government the onerous task of meeting these objectives while considerably scaling back on direct foreign investment in Mexico’s energy sector— planned licensing round auctions under his predecessor were cancelled at the start of the year.
Pemex’s third quarter results show the start of some progress towards meeting the government’s goals. Crude production stabilised in May and has since been steadily increasing. Output in the third-quarter improved by 1.2pc quarter-on-quarter to 1.69mn bl/d, the largest quarterly increase since 2015—the result of resolving technical problems in shallow water projects.
Over the third quarter, the Mexican firm drilled 71 wells, an almost 58pc increase year-on-year and averaged a daily rate of 68 operating drilling rigs. Pemex is now focused on the start-up of 22 new fields—for which it will complete a further 10 exploration and 11 development wells before the end of the year. Combined, these will aggregate additional oil production just shy of 100,000bl/d. Mexico’s national hydrocarbon commission. Of these 22, CNH has already approved 15 of their development plans and is in the process of reviewing a further two fields before the end of the year.
“We increased the monitoring of wells in our main fields in order to improve their continuity and operational efficiency,” said Francisco Flamenco, Pemex’s vice president of E&P, during an earnings conference call. “We project to incorporate additional reserves of around 2mn bl oe. This number is higher than the incorporated reserves of the last 15 year.”
In gas, the firm boosted output by 1.3pc over the previous quarter, reaching 3.69bn ft³/d—split 45pc onshore and 55pc offshore. Gas production remain down year-on-year across the first three quarters, though, due to operational failures at nitrogen removing units, forcing the company to flare higher volumes of gas.
But, while upstream performance was largely positive, lower international oil prices hurt the company’s bottom line. The average price of Mexican crude fell by $5.30/bl quarter-on-quarter, averaging $55/bl. “Lower crude oil and refining products prices were one external variable that negatively affected our results in the quarter,” says Pemex CFO Alberto Velasquez. “Lower prices were crucial in the decrease in our sales [revenues] as compared to the same quarter of last year.”
Total value of sales fell by $1.35bn quarter-on-quarter, helping to drive Premex to a net loss of almost $4.6bn. Another significant factor was a reduction in the country’s crude exports. In part due to higher processing levels in domestic refineries, crude exports fell by almost 130,000bl/d in the third quarter compared to the second. “From now on, our [export] figures will gradually improve as a result of our solid projection of increasing production for the upcoming months,” says Velasquez.
To help stabilise Pemex’s finances, its government owner identified three key strategies: address the company’s total debt pile, improve liquidity in its bonds and improve its amortisation profile.
“We project to incorporate additional reserves of around 2mn bl oe” Flamenco
Pemex used capital offered by the government to purchase notes due between 2020-23, helping to lower its outstanding debt by $5bn. The government also issued three new tranches of 7, 10 and 30-year Pemex bonds to refinance the firm’s short-term debt. This was the largest-ever issuance in Mexican history at $7.5bn and was more than five times over-subscribed.
To improve its amortisation profile, Pemex exchanged a total of $7.6bn in bonds with maturities due 2022-25 for those maturing 2041-46. Annual amortisation over the period 2020-30 has been lowered to an average of $6bn pa. Total debt refinanced since the start of the Lopez Obrador administration has reached almost $28bn. The company’s debt now sits at $99.6bn, split $13.25bn in Mexican pesos and $86.38bn in other currencies.
The administration is also committed to tackling endemic fuel theft. In February, the government closed a number of supply routes after the Tuxpan-Acapotzalco pipeline, supplying Mexico City, was damaged multiple times and a pipeline explosion in Hidalgo killed over 100 people. In the third quarter, measures to tackle the problem generated savings of MXN9.1bn ($500mn) year-on-year. Aggregate savings achieved from measures to tackle fuel theft throughout 2019 have reached $1.24bn.
Costs in Pemex’s distribution, transportation and end-user sales businesses were cut by 24pc and G&A expenses reduced by 11pc quarter-on-quarter.
On the rebound
Boosting refining throughput is another key government objective. Domestic refined product output has dropped by approximately 48pc since 2013, increasing Mexico’s import dependence. In the third quarter, crude oil processing grew by 10pc to 657,000bl/d—a 152,000bl/d increase over the last quarter of 2018, before Lopez Obrador rose to power.
“This improvement is mainly explained by increased crude processing, first in our Madero refinery with 79,000bl/d, through the startup of [new] processing plants including [its] Maya distillation unit in June 2019,” says Reinaldo Wences, Pemex’s acting deputy director of evaluation and regulatory compliance. “And then in the Minatitlan refinery, with 105,000bl/d, due to the fact that operations [there] were stabilised.”
Total refined products output grew by 63,000bl/d quarter-on-quarter, reaching 669,000bl/d. Diesel production is now up by 41,000bl/d compared with the pre-Lopez Obrador fourth quarter of 2018, while gasoline supply is up by 53,000bl/d from the same period. Across 2019 so far, average daily gasoline and diesel imports have decreased by 13.1pc and 29pc, respectively, in comparison to the final quarter of 2018. The administration plans to build a $2.6bn refinery in Tabasco which will add a further 170,000bl/d of gasoline and 120,000bl/d of ultra-low sulphur diesel capacity.
In petrochemicals, Pemex’s total Q3 output grew by 9.35pc compared to the second quarter, reaching 702,000t. Aromatics production upgrades at the Cangrejera petchems facility in Veracruz was a major driver—with aromatics and derivatives output at the facility up by 40,000t in Q3 compared to Q4 2018. The Caldereta refinery also saw improved petchems performance in the third quarter.