Boom times for oil & gas firms?

The profitability of Latin American oil and gas companies will pick up next year after a relatively slow 2019, with the sector's Ebitda going up by roughly 9%.

This is the prediction made in a report by rating agency Moody’s. Relatively stable oil and gas prices and continued improvements in operating efficiency will help to offset weak cash flow this for most of the sector’s companies, according to the report.

“For the industry as a whole, we expect a certain stability”, Nymia Almeida, senior vice president at Moody’s and the analyst in charge of the region's outlook, told BNamericas. While growth in demand for oil is expected to peak at some point in 2030-40, with petrochemicals peaking shortly after, there is a window of opportunity for producers before that point,” she said.

“While there are normal ups and downs in the markets, political conflicts here and there, there is nothing major going on in the industry that is not a temporary issue. We’re estimating Brent prices will stay between US$55/b and US$75/b in the medium term,” said Almeida.

In the report, Almeida and her team predict that companies’ heavy debt burdens will keep capital spending subdued in 2019-20. Meanwhile, they give a positive outlook for the sector in Brazil, a stable view for Argentina and Colombia, and a negative outlook for Mexico.

MEXICO

Almeida is pessimistic about the current situation of Mexican state-controlled oil giant Pemex. “In the latest speech by the President [Andrés Manuel López Obrador], to celebrate the one-year anniversary of his election, he made it very clear there won’t be any change” in policy, she said.

There is little hope that the government will revive oil tenders in 2021 and the broad strategy for Pemex will stay focused on building the US$8bn Dos Bocas refinery and making the country self-sufficient in terms of oil, Almeida said.

There is a major concern because Mexico “faces a brutal gas deficit" with 65% of gas being imported and this situation is beginning to affect power production in certain areas, said Almeida, who does not see any plans in place to solve the problem.

“AMLO would like for Pemex to play a role of the past, as the only agent in the industry’s development.” she noted.

ARGENTINA

Argentine producers, in contrast with the rest of the region, have managed to keep their debt levels relatively low, said Martina Gallardo, the analyst in charge of the outlook for Argentina and another author of the report.

“Companies are not currently reducing their debt levels [in Argentina]. Rather, they’re financing capex with cash flow and, while lowering their debt somewhat, they’re basically rolling it forward,” Gallardo said.

The rich Vaca Muerta formation is largely supporting the stable outlook for oil and gas in Argentina. However, the production of gas is being held back by a lack of transport infrastructure, both in terms of exports and the supply of the internal market, said Gallardo.

Meanwhile, as BNamericas reported previously, investments are moving heavily towards Vaca Muerta shale oil. “Last year, YPF had a single area in massive development, Loma Campana. This year it’s adding two more, La Amarga Chica and Bandurria Sur,” Gallardo said.

There also other companies concentrating on Vaca Muerta’s oil window of opportunity, such as Vista Oil and Madalena Energy.

In terms of politics, the potential effects that the upcoming elections could have on the sector are hard to predict, according to Moody's.

As Argentines head to the polls on October 27, they face two polarized options in the presidential race.

The main rival of center-right and market-friendly incumbent Mauricio Macri is Alberto Fernández, chief of staff during 2003-2007 under former center-left president Néstor Kirchner. His running mate is ex-president Cristina Fernández, who ran the country in populist fashion for two consecutive terms after her late husband.

A Fernández-Fernández administration could become very different from Macri's government but it is very difficult to predict at the present moment, said Gallardo.

"We have some idea when looking at the past, but the reality is that the energy sector is so important in Argentina today, for the country’s development, to generate future revenue, to reduce the energy deficit, that we think Vaca Muerta will be developed no matter the name of the administration.”