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Pemex: time for turnaround

Mexico’s state oil company is in terrible shape, but is far from a lost cause

HOW does a company lose $70bn over 14 consecutive quarters? Spend some time scouring through Pemex’s finances and you’ll find that declining oil production, rising debt-servicing costs and a crushing tax burden will do the trick.

Mexico’s state oil company hasn’t seen a profitable quarter since mid-2012 and the losing streak has plunged the company into crisis. Most importantly, it hasn’t had the cash it needs to maintain production. Since January 2014, oil output has fallen by 12%, from 2.85m barrels a day to just 2.51m b/d in March. It means Mexico has shed more than 300,000 b/d – not far off the entire output of Opec member Ecuador.

Combine that slumping output with a price rout and total sales fell to $12.9bn in the first three months of this year – when Mexico’s heavy crude slate brought in an average of $25.85/b – down from $31.1bn at the same time in 2014. That makes everything difficult; from keeping the oil flowing to paying down its $93.3bn debt load to meeting its huge pension obligations.

Successive governments haven’t helped. The state’s reliance on Pemex to fund the budget has drained the company of resources that could have at least slowed the output decline and reduced the company’s need for new debt. Last year, Pemex lost $30bn, but $23bn of that was taxes and duties paid into the treasury. The company’s tax bill typically exceeds its pre-tax income. Moody’s, the credit rating agency, reckons Pemex funds about 12% of the government’s budget.

How to right this ship? Bringing in a new chief executive was a good start. Pemex’s new boss José Antonio González isn’t an oilman, but that might not be what the company needs right now. González is an engineer with a strong financial background, having helped whip the sprawling Social Security Institute into better shape. He must do the same at Pemex.

Value stream

González is getting some help from the government, which at last seems to recognise that the national oil company is in dire shape. The one-way flow of cash from Pemex to the state has been reversed: the company received a $4.2bn cash injection from the government to help it pay long-overdue bills to suppliers and cover its pension obligations. More important, Pemex also got an important tax break on its operating costs. It reckons this will save it nearly $3bn this year. Another $8bn in relief could be on its way if oil prices don’t recover soon, the company’s chief financial officer, Juan Pablo Newman, said in April.

Naturally, the money comes with some strings attached. The bailout was contingent on González cutting capital spending by around $5.7bn this year, bringing investment down from nearly $23bn to $17bn. That will save some cash in the short run, but it will also make it difficult to keep production from sliding further. González will also be charged with laying off some of Pemex’s vast workforce and finding other savings in the company’s notoriously bloated cost structure. The new boss has also talked about slimming down the business by selling off some downstream and petrochemical assets – a real possibility, following the country’s energy reforms.

The most pressing thing González can do is get the company in good enough shape to move forward with new joint ventures and other agreements to bring in partners. Pemex deals with foreign and private domestic companies were supposed to be a fixture of the early stages of Mexico’s energy reforms. But while licensing rounds have raced ahead, mostly successfully, Pemex has struggled to get the farm-out process off the ground. The quickest way for Pemex to turn itself around is to work with private partners, which would bring fresh investment and technical skills into Mexico’s oil patch.

It won’t be easy. Given Pemex’s technical and financial woes, companies might balk at working with the state oil company. González met with a fair amount of scepticism on his road show to New York in April. And deals done at today’s weak oil price could raise domestic opposition and complaints that Pemex is selling the family jewels on the cheap. But opening the company to the outside world should be at the top of González’s to-do list.

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