Big-oil bailout already under way.
By Don Quijones, Spain & Mexico, editor at WOLF STREET.
These days, the trend is not Pemex’s friend. Mexico’s loss-leading, debt-swamped, state-owned oil giant company announced that in July it had imported 554,000 barrels of oil a day — its highest monthly volume of imports since public records began in 1990.
In total, two-thirds of all the oil Mexico consumed in July was imported — a staggering statistic for a country that until not so long ago was home to one of the largest oil fields in the world, the Cantarell. Pemex also acknowledged that its crude production fell a further 5% in July while its natural gas production shrunk 9%.
The export figures were just as ugly. In 2011, when the price of Brent crude averaged over $100, Pemex’s export revenues hit a historic peak of $49 billion, a monthly average of $4.11 billion. In the first quarter of 2016 the monthly average was just $893 million. That’s a plunge of 78%.
As Pemex’s exports dwindle, Mexico’s imports of oil and gas continue to grow. Petroleum accounted for two-thirds of last year’s $14.5 billion trade deficit, which was the widest since 2008. During the same year, Pemex managed to rack up $38.5 billion in losses, its biggest ever.
If anything, the company’s decline is accelerating. This could be bad news not only for Mexico’s fiscally challenged government, which has grown comfortably dependent on the once bountiful proceeds from the oil business, but also for many of Mexico’s biggest banks, which have lent vast sums to the oil major and its huge network of suppliers. As Moody’s warns, if Pemex’s financial health continues to deteriorate, it could be a major source of risk for the banking sector in the months and years ahead.
This is all happening at a time that Mexico’s economy is showing ominous signs of stagnation. In the second quarter, GDP fell 0.2%, on a drop in industrial output. At the beginning of the year its most important export sector, the automotive industry, began suffering the consequences of gradually softening demand, particularly in the U.S. On Tuesday, Standard & Poor downgraded the Mexican economy’s outlook from stable to negative as the country’s weak growth continues to disappoint.
Hours later Moody’s did the same. One of the biggest causes for concern is the recent explosion in public debt, which at close to 45% of GDP may seem tiny by comparison with other OECD economies. But it is more than double what it was in 2008.
Serious questions are once again being asked about how much support the government will have to, and be able to, provide Pemex in its hour of need. According to Moody’s sovereign debt analyst for Latin America, Jaime Reusche, over the next year and a half, Pemex will need to raise somewhere in the region of $20 billion from the markets just to roll over its maturing debt. But in light of current conditions, “it’s unlikely to raise more than $10 billion.”
In other words, a very large taxpayer-funded bailout of Mexico’s oil giant is in the cards, especially now that the financial sector is also at risk. The bailout is already underway. In early April, Pemex was given a $4.2 billion cash injection to help tide it over. But that’s a tiny fraction of what will ultimately be required, especially if losses continue to pile up at anywhere near the rate experienced in 2015, by the end of which Pemex owed its creditors a staggering $86 billion. If you include the company’s pension liabilities its debt already exceeds €100 billion.
The more the fiscal capacity of the government weakens, the greater the risk for Mexico’s banks, many of which are foreign owned. At Moody’s Annual Seminar banking analyst David Olivares warned that if the government does end up bailing out Pemex, its capacity to put out fires in the financial sector in the event of contagion will be significantly diminished.
Given the banks’ acute level of exposure to Pemex and its suppliers, this could be a very serious problem. That, added to the fact that the same banks have increased their lending to consumers and businesses at a time of sluggish economic growth, was the main reason behind Moody’s decision on Tuesday to downgrade its outlook for Mexico’s banking sector from stable to negative.
The agency also downgraded the credit ratings of seven Mexican banks — Bancomer, Santander, Banorte, Scotiabank, BanBajío, Banobras and Bancomext — as well as the Institute for the Protection of Bank Savings. Most at risk of exposure to a sudden deterioration in Pemex’s financial health are Mexico’s state-owned development banks, Banobras and Bancomext, which earlier this year were forced by the country’s Treasury Secretary to take on part of the debt Pemex owes to its suppliers.
It was yet another stealth bail out of Mexico’s now much diminished oil giant. There will no doubt be more to come, but their effects are likely to be little more than palliative. For Pemex the degeneration has already gone too far. Many argue that it was all by design. Successive governments in Mexico have sought to weaken Pemex, first by overtaxing it and then by starving it of investment, until the only option left is to completely privatize the company and sell off its most valuable assets.
The challenge will be doing so in something approaching an orderly manner, when the company owes more than $100 billion to national banks and international creditors! Somehow Mexico’s government must stop Pemex from crumbling completely under the weight of its compounding losses and massive debt burden while not increasing its own debt, at a time of slowing economic growth. An unenviable, or impossible, task. By Don Quijones, Raging Bull-Shit.
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