Big-Oil Bailout Begins as Pemex’s Debt Spirals Down

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Proud sugar daddy becomes giant financial sinkhole.

By Don Quijones, Spain & Mexico, editor at WOLF STREET.

Pemex, Mexico’s state-owned oil giant, cannot seem to get a break these days. It notched up 13 straight quarters of rising losses. It now owes over $80 billion to international investors and banks. It needs to raise $23 billion this year to stay afloat. The cost of servicing that gargantuan debt mountain continues to rise. So it tries desperately to rein in its spending, without tackling — or even discussing — its endemic culture of corruption.

In recent days, Pemex received a 15 billion peso ($840 million) lifeline from three of Mexico’s homegrown development banks, Banobras, Bancomext and Nafinsa, to help the firm pay back some of its smallest providers, consisting mainly of domestic SMEs.

The loan was part of an arrangement cobbled together between the banks and the Mexican government. By today’s standards the amount involved is pretty meager, but the operation was about more than just raising funds: it was meant to restore confidence among both investors and suppliers in the firm’s ability to repay its debts.

“This sends a sign of stability and confidence to the sector, which has been very nervous” payments would not be made, explained Erik Legorreta, President of the Mexican Oil Industry Association, which represents around 3,000 service providers. “Members of the industry now have the confidence and certainty that the payments will be honored.”

Not everyone agrees. Last week the U.S. credit rating agency Moody’s flagged concerns that the loan will significantly increase the three banks’ combined exposure to Pemex’s debt, calculated to grow from 44% to 62%. “The three lenders now have high concentration risks with their 20 biggest creditors,” cautioned Moody’s, which already downgraded Pemex’s debt in November to Baa1, with a negative outlook. In its report last week, the agency piled on the pressure by warning that there’s “a high likelihood” that it will downgrade Pemex’s rating another notch in the coming weeks.

What this all means is that rather than restoring investor confidence in Pemex, the loan operation has merely served to reinforce investors’ fears that lending to the debt-laden oil giant is fast becoming a very dangerous risk. It has also raised serious concerns about the ability of Pemex to honor its new managing director’s pledge to promptly pay back the over 100 billion pesos ($5.6 billion) of outstanding debt to its larger suppliers.

Besides receiving loans from development banks, Pemex is also awaiting a support plan from Mexico’s Finance Ministry to help the firm make the outstanding payments. The plan could include financing options such as a “capital transfer” (a.k.a. bailout) or a reduction of the company’s tax burden, chief economist Luis Madrazo said. The bank could also receive support from Mexico’s central bank, Bloomberg reports:

Mexico’s central bank will soon send the Finance Ministry as much as 300 billion pesos that it made from exchange rate gains on international reserves last year, a person familiar with the situation said last week. The surplus from the central bank could be used to help Pemex reduce its debt, Finance Minister Luis Videgaray said last month.

The stakes could not be higher. According to Juan Pablo Castañón, president of the Business Coordinating Council, one of Mexico’s most powerful business lobby groups, the consequences of failing to meet the challenge would be both serious and far-reaching.

“Pemex not only finances close to 30% of the public budget, it is the central provider of basic provisions for the population,” he said. “There are some states whose dependence on its operations is irreplaceable.”

Those states include the Gulf states Veracruz, Campeche and Tabasco, where the fallout from Pemex’s trials and tribulations is already being sharply felt. Since February last year over 40,000 oil sector jobs have been lost across the three states, with most job losses concentrated among Pemex’s suppliers. In Cameche and Tobasco, GDP fell by 6.8% (in Q3 2015) and 2.8% (in 2015) respectively while formal employment shrank by 6.8% and 6.5%.

That’s a lot of pain, and it’s only just beginning. Like many other oil giants, including Brazil’s Petrobras, the world’s most indebted oil company, Pemex is drowning in debt — debt that it accumulated with abandon during the good times, when oil prices were over $100 per barrel, and which it will struggle to pay back in the current lean times. Assuming that oil prices remain low for the foreseeable future and the cost of debt continues to rise, one of the world’s biggest — and least efficient — oil companies could soon have little choice but to request a massive taxpayer-funded bailout to keep servicing its bloated debt pile.

As such, a company that was once the proud sugar daddy of Latin America’s second biggest economy, providing the lion’s share of public funds for generations, could soon become a gargantuan financial liability. The fact that this is all happening at a time when state finances are already stretched to breaking point while Mexico’s gross external debt is over $400 billion, the fourth highest of 17 of the world’s biggest emerging economies, is hardly helpful.

It’s no secret that the Peña Nieto government has long sought to privatize and asset strip large chunks of Pemex; despite the government’s feeble denials, it’s what its 2014 energy reforms were all about. Now it’s got the perfect excuse to execute its grand scheme. But first it must somehow bail it out. Then it will sell it. Already, there are concerns, given how things went in the past in Mexico, that during the entire process of bailing out Pemex and then selling it, vast sums of supposedly public money will be disappearing into very deep, hidden, private pockets.

After all, what lies in the balance is not only the future of a huge, emblematic company that can no longer function in its current form, but the health of the entire Mexican economy. As Castañon says, providing for Pemex is no longer just an energy or fiscal challenge, it’s a matter of national security. By Don Quijones, Raging Bull-Shit.

On the bright side, Pemex is not bankrupt yet, it just has a “liquidity” problem, according to its CEO. Read…  Desperate Oil Giant Pemex Makes a Deal with KKR

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  11 comments for “Big-Oil Bailout Begins as Pemex’s Debt Spirals Down

  1. Stavros h
    March 16, 2016 at 2:47 pm

    It seems that the ramifications of waging an all-out economic war on Russia has severe global consequences. It would be useful to know who Pemex’s creditors are. The same applies to the creditors of the Mexican economy in general.

    • nick kelly
      March 18, 2016 at 11:57 am

      The desire of aspiring novelists to use just another oil price war as a plot reveals more about their imagination than reality. There have been an least a dozen such crashes in the price of oil – it was 10 dollars a barrel in the early eighties.
      Venezuela thinks the crash is directed against it. The US frackers think they are the target.
      That is the only scenario that comes close and has nothing to do with politics- the Saudis COULD cut production to make room for high cost
      US oil but why should they?
      Where else does a low- cost producer make market share for a high- cost one?
      The cure for high prices is high prices. The producers got used to 100 a barrel oil and launched a bunch of new projects, including in Alberta’s oil sands. Iran is coming back on stream. There is too much oil.

      Supply and demand- so boring.

  2. Yoshua
    March 16, 2016 at 3:01 pm

    Pemex did a $32 billion loss in 2015. The oil production in Mexico is in decline from 3.5 million barrels per day a decade ago to 2.3 million today and without investments the decline will be even worse in the future.

  3. Chicken
    March 16, 2016 at 3:07 pm

    It appears Mexico has a liquidity problem, why not adjust corporate income tax lower to attract investment growth as opposed to bailing out the oil industry?

    • walter map
      March 16, 2016 at 4:30 pm

      “why not adjust corporate income tax lower”

      Since they’ve been losing money for over three years (‘thirteen quarters of rising losses’) one could reasonably surmise that their tax liability is presently zero.

      What am I missing here?

      • Chicken
        March 16, 2016 at 11:35 pm

        You’re missing a conclusion? I wasn’t suggesting giving PEMEX a tax break, for crying out loud.

    March 16, 2016 at 4:43 pm

    This solution is not very pleasant, but neither is the World.

    The Mexican government can turn a blind eye to the Drug dealers. They can flood the US with drugs IF the dealers agree to bring most of the dollars back and place it in Mexican Banks.

    Second, “take” care of Donald Trump. If he wins, then he might really stop the drug trade and deport the illegals. There are BILLIONS of dollars being shipped back from the illegal work force. Mexico, and the Mexican Banks, need those Billions as well.

    Next, start de-populating Mexico by sending mobs north to the stupid Yankees. Before Trump can build a wall, or before Cruz fakes it, they need to send millions north and get them off the roles in Mexico.

    Mexico has a sealed Southern Borders and is extremely strict on who can enter. They need to arm and stop 100% of those passing through. These “immigrants” take the place of Mexicans leaving North. A solid wall of soldiers with machine guns will seal their Southern border. Meanwhile, the rulers of Mexico need to scream “RACISM” against the stupid Yankee if Donald should do the same.

    IF Mexico does not do this, then the ruling class (always a lighter shade of skin tone, notice that?) are in real trouble.

  5. March 16, 2016 at 5:57 pm

    Wow, interesting article. These national oil companies are disasters! They end being a huge percentage of gov’t funds for long periods, but now they are bleeding. Also, they are some of the few sources of employment in these dysfunctional countries — bloated you might say. Now the chickens have come home to roost. Pemex=Petrobras. To think that this same thing is happening all over the world—-in a world dominated by national oil companies.

  6. John Doyle
    March 16, 2016 at 6:04 pm

    Since the situation is grim for the economy the central government can pay off PEMEX’s debt, or a lot of it, simply by buying it with fiat money. It is monetary sovereign so all its money comes from thin air. It doesn’t come from taxpayers, not even 1 cent. Depending on how much fiscal space the economy has even the resulting inflation will be modest and better by far than a company collapse fallout. Either way it has to pay.

  7. March 16, 2016 at 8:54 pm

    Not at all clear why PeMex and other GSE/GSO companies should not be allowed to go BX, and be rendered out. Why throw good money after bad? BX would get rid of the people [the management] that caused the problems without political impact. BX/forced reorganization should also force many things to the surface when the books are opened, and the assets reviewed. A retelling of the tale of the goose that laid the golden eggs on a larger scale in a modern venue.

  8. Agnes
    March 17, 2016 at 6:21 am

    Mexico’s hedging program generally ends in November(contracts made in the late summer). The price estimated from the options premium for 2015/2016 was 49$/barrel. This is much less than the 80$/barrel of 2014/2015(Mexico recently has exported roughly half of its annual production). If Mexico persisted in a plain vanilla hedges then the writers of the contracts cannot be happy and will be trying to get a better deal this summer. But the cash money that those hedges earned…who got it?

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