Pemex’s first move: cutting muscles instead of fat
Mexico’s new president, Claudia Sheinbaum, is starting her fourth week in office, but it feels like it has been much longer. The nation is experiencing a peculiar and unprecedented crisis between its powers, a legacy of former president Andrés Manuel López Obrador to his protégé. With the spotlight in the battle between Congress and the Judiciary, it is no surprise that the energy sector has, for the most part, stayed backstage.
Besides the approval of the energy reform, another relevant story in the sector was Pemex’s plan to cut its budget by around $1bn in the fourth quarter. Generally speaking, any savings should be taken as good news when you are the world’s most indebted oil company. However, the new head of Pemex E&P, Néstor Martínez, will direct the bulk of the cuts to drilling activities, especially maintenance. Experienced people already warn that such a reduction could hamper Pemex’s oil production in the near term, even though the company itself projects a minor loss of just a few thousand barrels per day.
Cuts to E&P would add further pressure to declining trends
Analysts warn Pemex is risking trimming its muscles instead of cutting fat by harming its only profitable business instead of going after the real money-losers, like its refining business. The explanation could be that at this point of the year, most of Pemex spending usually goes to maintenance work, and E&P consumes most of it. But what the industry really wants to know is whether this budget reduction is a one-time cut or if the Sheinbaum administration plans to shrink Pemex operations further. The new government might be weighing the convenience of losing a few more oil barrels, hurting its oil royalty revenues but also sending less money to Pemex. AMLO’s administration supported the company with over $45bn between direct transfers and different tax breaks and other schemes, and oil production is going down again, while Pemex’s oil refining business loses even more money than six years ago.
At this point, in the absence of more information, it is tough to fully understand what Pemex’s plans are. For instance, hydrocarbon regulator CNH approved modifications to the exploration plan for the Cinturón Plegado Perdido-09 area. Pemex will conduct four exploratory studies before drilling the Kuajtla-1SON well, which will be near other wells like Nobils, Maximino, and Trion, a partnership between Pemex and Woodside Mexico. During the session, commissioners highlighted that this well, if successful, could boost oil reserves by 100 million barrels, something that rarely happened over the last six years.
At the same time, the regulator cleared another plan to revive the exploration campaign in the Tampico-Mistantli basin. This region, in east central Mexico, includes the Chicontepec shale play, one of Mexico’s largest oil and gas reserves. The company spent billions in the area a decade ago with limited success. However, experts contend that the region has plenty of potential, but that it will remain mostly trapped because it requires more funds, and hydraulic fracturing techniques. Pemex has neither the funds nor the technology, and Mexico’s government has banned using fracking in the country. Pemex will try to squeeze the region exploring new areas where fracking won’t be necessary.
Deep waters and shale plays contain around half of Mexico’s prospective resources so it’s hard to make sense between the state-owned company presenting those plans, at the time it is planning budget reductions in its E&P arm.
Pemex 3Q24 report
— Pemex reported a third-quarter loss of 161.3 billion pesos ($8.1 billion) on Tuesday, nearly doubling its loss of 79.1 billion pesos from the same period last year. It was the worst results since the Covid-19 pandemic. The company’s crude and condensate production dropped by almost 5% compared to a year ago and has been declining steadily over the year, reaching its lowest level in the last 13 years. Pemex reported a net debt of $97.3 billion, and the total liabilities to assets ratio reached 1.75x.
— Following release of the report, Pemex new management had its first conference call with analysts and investors to present the company’s weak 3Q24 earnings results. Its new CEO, Víctor Rodríguez Padilla, pledged that the company will continue to timely honor its debt maturities, and is seeking ways to pay its suppliers. No details were shared, despite some questions from the analysts; however, he promised the company will soon present its business plan. He also stated that the government is working on the rules for the private sector to invest in projects like deep waters, oil enhanced recovery in mature fields, and natural gas fields.
— Rodríguez Padilla delivered multiple interesting bullet points about his plans, including talks with the government to introduce a new oil royalty regimen. However, his term with the company started with a massive net loss of around USD 8.1bn, partly due to FX losses. However, even without that impact, operating income sank 98%.
— Pemex’s liabilities with suppliers ended the López Obrador era at around USD 20bn, three times more than in the last quarter of 2018. The oil services sector in Mexico is desperate to know what this administration will do to tackle this issue.
— Also, it was interesting that Rodríguez Padilla repeatedly said during the call that the company is working with both the Finance and Energy ministries. In the past administration, the relationship between Pemex and the Energy Ministry was complicated and tense, so this new coordination could be positive, as far as both ministries can work together.
Other Pemex & Energy News
— A news article by Reuters suggests that Pemex may be exploring new opportunities, with plans to analyze new business models to intensify deep-water exploration. In the past, Pemex’s deep-water exploration efforts faced significant criticism from AMLO’s administration, which viewed them as wasteful. A fresh management team at Pemex, however, might find ways to revive these efforts and shift the current approach.
— Despite this renewed interest, it remains unclear how Pemex plans to attract investment in deep-water projects. Success rates in these ventures are below 30%, and even successful projects could take over a decade to come online. Pemex is familiar with one approach, known as farmouts, such as its project with Trion. Yet, even if Sheinbaum’s team presents a similar plan, any joint venture would need to navigate an uncertain legal framework after recent energy and judicial reforms and contend with new regulators who are no longer independent of the federal government.
— Meanwhile, some of Pemex’s top vendors, reportedly including Protexa, Marinsa, Naviera Integral, and Solar Turbines, are considering partial or complete work stoppages by early November if payment issues are not resolved.
— Pemex will no longer pursue the acquisition of KKR’s Monterra Energy in the Mexican port of Tuxpan. The company got the approval from the energy regulator, CRE, and antitrust watchdog, Cofece, a few months ago. However, former CEO Octavio Romero Oropeza didn’t proceed with the purchase, and the new administration headed by Víctor Rodríguez Padilla is similarly unwilling to proceed with the transaction now.
— The company might be also halting funds to reconfigure the refineries in Tula and Salina Cruz. Pemex will be seeking other ways to finance those projects, meant to allow both refineries to further process fuel oil into more valuable by-products.
— Pemex is analyzing contract suspensions of four jackups: Peforadora Mexico 300-ft unit Zacatecas, CP Latina 400-ft unit La Covadonga, Perforadora Central 375-ft unit Coatzacoalcos, and Operadora Cicsa 400-ft unit Independencia 1.
— Drilling company Opex recently announced a “temporary adjustment” in its services because of payment delays. The company manages the CME-owned 300-ft jackups CME I and CME II and the Borr Drilling-owned 400-ft jackups Galar, Gersemi, Grid, Njord, and the 350-ft Odin. All have been working for Pemex with contracts that were expected to continue through 2025.
— Pemex crude output fell for a fourth consecutive month, dropping to 1.45mn b/d in September, down by 7% from a year earlier and off by 1.1% from the prior month, setting a new 40-year record-low. Mexico’s crude output from non-state companies rose by 7% in September from a year earlier, driven by increased production at Italy’s Eni.
— The federal government gave Pemex its sixth tax break this year, while the company conducts budget cuts as the new administration takes over the heavily indebted company. Pemex is exempted from paying its main royalty, the DUC, and a hydrocarbon production tax owed for September, according to data from the Mexican petroleum trust (FMP).
— CNH approved Pemex’s plan to develop the Pokche field, even as it reached peak production last year during its transition phase. Pokche, discovered in 2016, produced about 30,000 b/d of crude in 2023, the highest output recorded. Although this period is typically used for planning, Pemex began early production. The company now expects output to decline gradually, falling below 10,000 b/d from 2025- 2034. Energy experts warned about Pemex’s poor capacities to explore high temperature/high pressure fields like Pokche, and how rushing them into production could have caused a rapid decline.
— Pemex vendors trade group, Asociación Mexicana de Empresas de Servicios Petroleros (Amespac) appointed as its new head former Pemex board member Rafael Espino, also member of official party Morena. Espino has stated that Amespac wants to collaborate, but that it needs reciprocity and payment for services rendered, a growing debt that needs immediate attention to support the government’s energy objectives.
— Ricardo Aldana was re-elected as secretary general of the oil workers’ union (STPRM); it was the first time workers cast free and secret ballots to elect their leader. Mr. Aldana previously served as union treasurer, member of the Chamber of Deputies and Senator.
— Mexico’s antitrust watchdog Cofece fined retail fuel stations, executives and a trade group Ps437.91mn (about US$22.6mn) for fixing regular and premium gasoline prices from 2014 to 2021.
CFE News
— CFE appointed a new chief executive for its fuels trading arm, CFEnergía, following the departure of Miguel Reyes, who led the subsidiary under the previous administration. Reyes, now part of the finance department in Veracruz, governed by former energy minister Rocio Nahle, served as chief executive of CFEnergía from December 2018 to September 2024. Erendira Corral Zavala, previously general manager of the treasury for Mexico City’s police, took his place.
— CFE reported results for 3Q24, with headlines centering on the company’s losses in the quarter, as well as a sharp increase in its short-term debt, up 37%. This is interesting because the company seems to be borrowing more from numerous revolving credit lines to finance its current infrastructure projects, specially five combined-cycle power plants. That was former CEO Manuel Bartlett’s flagship project during his six-year term at the company. In late 2020, CFE declared the tenders deserted as no company complied with the company’s terms.
— To avoid relaunching the tenders and face a second failure, the company used its trading arm, CFEnergía, to directly assign the contracts. Now, those five power plants are almost finished, but the utility had used short-term financing to fund their construction. The problem now is that it has to repay the funds, and the projects, while nearly completed, are still far from reaching operational status, as they lack the natural gas supply to run. For example, two of these power plants are located in the Yucatan Peninsula, in Mexico’s Southeast. Their supply will come from Texas, as most of Mexico’s gas, but to get it the power plants need to wait for the expansion of the marine pipeline currently being developed by Canadian TC Energy. The pipeline is expected to be finished in mid-2025, and even then it will further need some other small interconnections like the pipeline expansion of French Engie, which could be finished by 2026.
— CFE’s revenues jumped by 4.1% YoY in 3Q24, while its operating income rose by 37.7%, mainly due to a decline in fuel costs. CFE posted a loss of Ps 85.8bn in the quarter, driven by FX losses. CFE’s EBITDA jumped by 31.2%.
— CFE’s short-term debt related to its trusts jumped 68.8% YoY.
Read as PDF: MI-EnergyChatterOct302024