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Pemex Woes Snowball as Cash Crunch Deepens
Production Plunge
By : Jose Enrique Arrioja
Petroleos Mexicanos’ deteriorating finances are poised to get much worse, signaling no end in sight to
years of declining oil production.
The company’s output may dwindle to about 1.6 million barrels a day by 2020, less than half its 2004 peak, because it
lacks the technology and funds to revamp aging fields, Morgan Stanley analysts led by Martijn Rats said in a July 24
report obtained by Bloomberg. Pemex has had cash flow shortfalls for the past three years, and this year the gap will
almost double to a record $22 billion, from $13 billion in 2015, according to data and estimates compiled by
Bloomberg. Once a bigger supplier to the U.S. than Saudi Arabia, Mexico’s weight has waned as the shale boom
reduced American imports and the oil crash dealt a blow to hopes of luring billions in foreign investment. The country
is now stuck in a vicious cycle where declining revenues from its traditional cash cow have led the government to slash
Pemex’s budget, reducing further its ability to reverse the fall-off. Given insufficient liquidity and investment, Pemex
will continue to shrink as it fails to restore output in areas where it lacks technical expertise, the Morgan Stanley
analysts said.“We expect some mind-the-gap issues, the private sector being hesitant in terms of long-term
commitment in Mexico,” the analysts said. “Lower oil prices have exposed important shortfalls that will need to be
addressed over the coming years.”The Morgan Stanley output estimate for 2020 would represent a decrease of about
700,000 barrels a day from current levels. The continued output declines have exposed flaws in the fiscal framework of
the country’s 2014 regulatory overhaul that ended decades of state monopoly to seek much-needed foreign
investment, according to the report. Those flaws are likely to require modification or an "energy reform 2.0," the
analysts said. The investment bank expects “a revised energy reform to be on the agenda for the next administration
beyond 2018," requiring provisional measures such as additional capital injections from the finance ministry. On May
15, the Finance Ministry assumed 184.2 billion pesos ($10 billion) of Pemex pension liabilities and transferred 47 billion
pesos in bonds known as Bondes D to the company in an effort to boost its liquidity. The government also gave Pemex
a capital injection of 73.5 billion pesos to pay off outstanding debts to oil service providers and absorb some of the
company’s pension liabilities in April.The cash flow shortfalls, which mean the company is spending more than it earns
from operations, will further complicate efforts by Chief Executive Officer Jose Antonio Gonzalez to seek joint ventures,
stabilize production and improve ailing refineries. The company’s total debt has ballooned to almost $100 billion, and it
may lose its investment-grade rating from Moody’s Investors Service, which has put it on a negative watch for a
possible downgrade. Pemex has also had to weather cuts of 162 billion pesos from its budget in the past two years
amid the oil market rout. It’s output is set to decline for a 12th straight year. “The sharp decline in oil prices that
began in late 2014 has had a negative impact on our ability to generate positive cash flows,” the company said in a
May filing. A “heavy tax burden” limits Pemex’s ability to fund capital expenditures and the company “will need to raise
significant amounts of financing from a broad range of funding sources,” according to the filing.Pemex forecasts
production to fall to about 2.1 million barrels a day this year, which the company aims to stabilize and slowly increase
in the following years, according to an e-mailed response to questions.Pemex’s cash gap contrasts with positive
projections for Russia’s Rosneft PJSC and Colombia’s Ecopetrol SA and far exceeds an estimated $1.4 billion cash flow
shortfall expected for Petroleo Brasileiro SA and the $1 billion dollar deficit for Argentina’s YPF SA, according to
analysts’ estimates compiled by Bloomberg."There is little chance that Pemex will be able to slow the decline of
production in the short term," George Baker, an analyst and publisher of Mexico Energy Intelligence, said in a phone
interview. "There are opportunities to increase production, but there isn’t the money to do it." Source: Bloomberg
Production Plunge
By : Jose Enrique Arrioja
Petroleos Mexicanos’ deteriorating finances are poised to get much worse, signaling no end in sight to
years of declining oil production.
The company’s output may dwindle to about 1.6 million barrels a day by 2020, less than half its 2004 peak, because it
lacks the technology and funds to revamp aging fields, Morgan Stanley analysts led by Martijn Rats said in a July 24
report obtained by Bloomberg. Pemex has had cash flow shortfalls for the past three years, and this year the gap will
almost double to a record $22 billion, from $13 billion in 2015, according to data and estimates compiled by
Bloomberg. Once a bigger supplier to the U.S. than Saudi Arabia, Mexico’s weight has waned as the shale boom
reduced American imports and the oil crash dealt a blow to hopes of luring billions in foreign investment. The country
is now stuck in a vicious cycle where declining revenues from its traditional cash cow have led the government to slash
Pemex’s budget, reducing further its ability to reverse the fall-off. Given insufficient liquidity and investment, Pemex
will continue to shrink as it fails to restore output in areas where it lacks technical expertise, the Morgan Stanley
analysts said.“We expect some mind-the-gap issues, the private sector being hesitant in terms of long-term
commitment in Mexico,” the analysts said. “Lower oil prices have exposed important shortfalls that will need to be
addressed over the coming years.”The Morgan Stanley output estimate for 2020 would represent a decrease of about
700,000 barrels a day from current levels. The continued output declines have exposed flaws in the fiscal framework of
the country’s 2014 regulatory overhaul that ended decades of state monopoly to seek much-needed foreign
investment, according to the report. Those flaws are likely to require modification or an "energy reform 2.0," the
analysts said. The investment bank expects “a revised energy reform to be on the agenda for the next administration
beyond 2018," requiring provisional measures such as additional capital injections from the finance ministry. On May
15, the Finance Ministry assumed 184.2 billion pesos ($10 billion) of Pemex pension liabilities and transferred 47 billion
pesos in bonds known as Bondes D to the company in an effort to boost its liquidity. The government also gave Pemex
a capital injection of 73.5 billion pesos to pay off outstanding debts to oil service providers and absorb some of the
company’s pension liabilities in April.The cash flow shortfalls, which mean the company is spending more than it earns
from operations, will further complicate efforts by Chief Executive Officer Jose Antonio Gonzalez to seek joint ventures,
stabilize production and improve ailing refineries. The company’s total debt has ballooned to almost $100 billion, and it
may lose its investment-grade rating from Moody’s Investors Service, which has put it on a negative watch for a
possible downgrade. Pemex has also had to weather cuts of 162 billion pesos from its budget in the past two years
amid the oil market rout. It’s output is set to decline for a 12th straight year. “The sharp decline in oil prices that
began in late 2014 has had a negative impact on our ability to generate positive cash flows,” the company said in a
May filing. A “heavy tax burden” limits Pemex’s ability to fund capital expenditures and the company “will need to raise
significant amounts of financing from a broad range of funding sources,” according to the filing.Pemex forecasts
production to fall to about 2.1 million barrels a day this year, which the company aims to stabilize and slowly increase
in the following years, according to an e-mailed response to questions.Pemex’s cash gap contrasts with positive
projections for Russia’s Rosneft PJSC and Colombia’s Ecopetrol SA and far exceeds an estimated $1.4 billion cash flow
shortfall expected for Petroleo Brasileiro SA and the $1 billion dollar deficit for Argentina’s YPF SA, according to
analysts’ estimates compiled by Bloomberg."There is little chance that Pemex will be able to slow the decline of
production in the short term," George Baker, an analyst and publisher of Mexico Energy Intelligence, said in a phone
interview. "There are opportunities to increase production, but there isn’t the money to do it." Source: Bloomberg