Prelude to a Bailout

But is Pemex too big to save for Mexico?

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

Mexico’s biggest company, state-owned oil giant Pemex, notched up 13 consecutive quarters of rising losses and now faces the toughest test of its 78-year existence: staying alive.

Pemex just published its annual results for 2015. Even with expectations already at the bottom of the barrel, so to speak, Pemex somehow managed to both shock and disappoint in equal measure with the sheer scale of its total annual loss: 522 billion pesos ($30 billion), almost double its loss in 2014.

Operating costs increased 19% to $81 billion, sales plunged by $25 billion, and daily oil production fell by 6.7%. The company also ended 2015 owing suppliers $8.2 billion.

Its total debt is expected to surpass $100 billion this year. Luckily, Pemex’s new director José Antonio González Anaya was on hand to calm investor nerves by reiterating that Pemex is not insolvent — it just has liquidity issues. The Financial Times begs to differ, arguing that if Pemex were privately owned, it would already be bankrupt.

The government’s decision last week to slash the company’s operating budget for 2016 by $5.6 billion is unlikely to help matters. According to González Anaya, most of the cuts will be felt in the firm’s loss-leading refining operations (35%) as well as its exploration and production activities (46%), its biggest source of profits. Assets will be sold off left, right, and center. Investments will be curtailed. And strategic partnerships will be sought. In other words, as the company’s debt grows, its output will continue to shrink.

Pemex’s autopsy has already begun. According to the FT, one of Pemex’s biggest problems is the size of its workforce, which is seven times as large as Norway’s state-owned Statoil and over a third larger than the world’s biggest oil majors, Shell, BP and Exxon Mobil. Certainly the firm’s 153,085 employees, together with the huge pension liabilities they entail, last estimated at over $90 billion, represent an unwieldy drain on resources.

Other major causes of Pemex’s existential crisis include decades of government mismanagement and corruption, in particular at the apex of the petrol workers’ union (which no government has dared to tackle), years of declining production, the recent oil price shock, the depreciation of the peso, estimated to have cost the company 154 billion pesos ($8.5 billion) in revenues in 2015 alone due to the sales it has in Mexico, and the horrid timing of the government’s energy reforms.

Since the government passed the historic oil reform in June 2014, oil prices have plummeted 70%. Yet President Peña Nieto has categorically stated that he has no intention of reversing course.

Last week, he was in Houston to attend the annual energy conference IHS CERAWeek. And he was the star. Not only did he open proceedings, he was also awarded the IHS CERAWeek Global Energy Lifetime Achievement Award in recognition of his vision and leadership in transforming Mexico’s energy industry.

The award is certainly well deserved. For the international energy industry, Peña Nieto has been the most faithful of servants, prying open one of the few remaining totally nationalized oil industries on the planet.

“No country has more profoundly modernized every aspect its energy sector — from oil and gas, to power and renewable energy, to the sale of refined products — in such a short time,” said conference chair, Daniel Yergin. “It took profound leadership to put Mexico on this course, change the constitution and make this transformation real. For this we honor President Enrique Peña Nieto.”

While Peña Nieto was the toast of the town in Houston, Pemex, the company his oil reforms were supposedly meant to help strengthen and modernize, teeters on the edge of the financial abyss. In January its export revenues shrank by a staggering 50% while its dependence on imports rose, and it recorded its lowest gas production in 40 months.

Against this backdrop, Peña Nieto chose to announce his decision to bring forward his government’s liberalization of Mexico’s energy imports. From April this year — instead of the beginning of 2017 — oil majors from around the world will be able to sell their wares directly to Mexican consumers for the first time in 78 years. The representatives of the oil majors gathered in Houston were no doubt delighted with the news.

For Pemex, it will mean even bigger losses, this time in its home retail market. As the losses stack up, rumours of a bail-out grow. In December the government stealthily set up a bailout fund to cover a small part of Pemex’s huge salary and pension liabilities. In a recent article the newspaper Reforma likened the fund’s creation to the creation of the Fobaproa fund used to bail out Mexico’s banks during the Tequila Crisis in 1995.

That debt — which 21 years later still hasn’t been paid off by Mexican taxpayers — was 552 billion pesos (in 1995 terms). By contrast, Pemex’s total debt is expected to surpass $100 billion this year. That’s 1.7 trillion pesos (in today’s terms). It is money that is owed to investors and banks the world over, which is why they’ve started calling Pemex “demasiado grande para quebrar” (too big to fail).

But here is the bitter irony: Where will the government get the money to bail out Pemex, the very entity that has bankrolled between a third and half of the government’s spending for the last 78 years?

My guess is that, as with the original Fobaproa, money will be lent from abroad — as luck will have it, the IMF recently renewed a $70 billion flexible credit line for Mexico — to be paid back over time by the Mexican taxpayers, while Pemex (like Mexico’s national banks) is split up into a thousand bits and pieces and sold (for centavos on the peso) to well-heeled, well-positioned foreign investors. By Don Quijones, Raging Bull-Shit.

On the bright side, it’s not bankrupt – according to the new CEO. Read… Desperate Oil Giant Pemex Makes a Deal with KKR

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  9 comments for “Prelude to a Bailout

  1. Thomas Malthus says:

    The deflationary death spiral that Bernanke so feared is here — and it will rip the global economy to shreds

  2. B.S. says:

    Recently Mexico moved to stabilize the peso by raising their interest rate.

    Perhaps they figure to sell interest bearing bonds to obtain capital to finance their promises.

  3. Yoshua says:

    I just read that it is the Shale Gas Revolution that will transform the future and not the Shale Oil.

    Shale Gas has an Energy Return on Energy Invested (EROEI) at 85:1 on average (which is almost as high as Saudi Oil was 50 years ago), while Shale Oil only has an EROEI at 5:1 on average (while the global average is 20:1 for crude production today).

    Shale Gas is today flooding the U.S market and causing a collapse in the gas price and there is perhaps enough Shale Gas for at least 50 years.

  4. MC says:

    One thing that has always struck me is the sheer number of PEMEX employees: over 150,000.
    By comparison Exxon Mobil has 77,000, Aramco 60,000, Shell 94,000… Even Total, which is not exactly known for its sleek workforce has about 100,000.
    One has to wonder over the years how many people PEMEX hired for purely political reasons or as the result of corruption and nepotism.

    Can any of these be realistically fired, especially considering how powerful the PEMEX union is? Perhaps Mexico will opt for the Italian way: send the excess personnel into early retirement with full benefits and simply kick the can down the road until it become an oil drum.
    I don’t think the PEMEX union would have any problem with that. Mexican taxpayers may, but when were they consulted last time about such issues?

    But, hey, Mexico has opened its borders to oil imports from abroad. I am sure Exxon and Marathon will be delighted to dump into the Mexican market all those refined products they cannot dump in Europe anymore because ARA storage facilities are threatening to explode.
    How this will help PEMEX is anybody’s guess. At these prices they barely turn a dime on crude sales so refined products are their main cash cow until oil prices increase above $50-60/bbl, something that may not happen for quite a few months despite the desperate forced rally we are seeing. Demand is way too soft, production freeze is a cruel joke (just look at Russia) and storage facilities will need emptying.
    In the meantime that debt is not going service itself (mmmh, perhaps that’s a new idea for Wall Street) and the Federal budget will go from bad to worse.

  5. chip Javert says:

    Honest question: who are the lucky owners of $100B of PEMEX debt (presumably bonds)?

  6. nick kelly says:

    I’m not sure who the author wants to blame for this situation- the new president for opening up this outfit to competition, the nasty folks wanting to buy distressed assets for centavos ( want top dollar- don’t let your assets
    become distressed)
    Or is just the same old brand of corporate socialism /Peronism that stalks the Latin world like a lingering disease?

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