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Debts threaten Latin America’s state oil companies

Petrobras, PdV and Pemex facing mounting financial pressures. Expect deep spending cuts

As the oil price boomed, Latin America’s biggest national oil companies (NOCs) spent big in pursuit of new reserves and binged on debt to finance it all. Now payments are coming due just as weak prices cripple cash flows. Government intervention, restructuring or even default are now likely. 

The region’s three largest NOCs – Brazil’s Petrobras, Venezuela’s PdV and Mexico’s Pemex – have a combined $45bn in debt repayments due over the next two years.

With international oil benchmarks trading in the mid-$30s – or much lower for some of Latin America’s heavy crude grades – the cash crunch will stretch the companies’ finances and divert funds needed for investment.

Ruing the ever-deepening oil crisis in Brazil, president Dilma Rousseff said in January that she couldn’t rule out a bailout for Petrobras if oil prices didn’t recover. The company considers this a “last resort”, but with close to $23bn in debt payments due over the next two years, the firm’s new management team has slashed capital spending and says it is prioritising the financial health over growth. Spending from 2015 to 2019 has been slashed from $130.3bn to $98.4bn, around $20bn a year. Upstream operations will receive the bulk of this investment, leaving the company’s other businesses running on bare-bones budgets. 

Spending cuts will help, but honouring the debt payments will depend on Petrobras’s ambitious $15.1bn divestment plan. The firesale got off to a slow start with just $0.7bn in assets sold in 2015. That leaves more than $14bn to go this year, at a time when sellers outnumber buyers. To pull in potential suitors Petrobras will probably have to cough up stakes in some of its highly coveted pre-salt oilfields.

Too big to fail

Mounting debt

If Petrobras’s asset sales fall short, it will have to go back to debt markets yet again. But it will pay a steep price for any new fundraising. In October, the company pulled a domestic bond sale worth around $0.79bn. The offering lacked interest, even with an eye-watering 16% interest rate attached to it.

Pemex may need help from the government as losses mount and the company faces close to $12bn in debt payments over the next two years. After a larger-than-expected third quarter loss of $10.2bn, Mexico’s finance minister Luis Videgaray said that the state oil company could get a capital injection – with the condition that it cut costs and bring in more foreign partners. The promise of a government backstop helped reassure jittery investors ahead of a successful $5bn bond sale on 28 January. The offering was oversubscribed, suggesting demand for the company’s debt remains robust – though the 10-year 6.9% interest rate was about twice what the company paid a year ago. Pemex plans to raise another $10bn or so this year, but that may come at an even steeper price given the company’s perilous financial position. Plunging oil output, down nearly 8% year on year through the first nine months of 2015, will only make recovery more difficult. 

Hardest hit and most vulnerable is Venezuela’s PdV. The company’s heavier crude slate means its oil price languished in the mid-$20s for all of January, at once point touching a low of around $21 a barrel. It’s an unsustainable price for PdV, on which the government relies for nearly all of its foreign earnings. BancTrust, a Latin America-focused investment bank, estimates the low crude price has cut cash flow for the first part of this year by close to 60% compared to last year, leaving PdV with a gaping cash hole. 

A default either by PdV or Venezuela itself is now possible in 2016, unless the oil price recovers or China steps in with its own bailout. PdV’s 2016 bond, which matures in October, is trading at just $0.057 cents on the dollar, a sure sign of widespread doubts about the company’s ability to pay. A default – corporate or at state level – would cut PdV off from international debt markets and hurt its plan to increase oil output.

All of these companies are central to their countries’ energy strategy, so failure is unthinkable, politically. But after years during which Latin America’s big oil companies funneled huge amounts of cash into national coffers, the price slump has quickly turned them into potential liabilities.

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