Pemex’s E&P strategy puts it at disadvantage

A difference in the strategic priorities of Latin America’s largest state oil companies, Brazil’s Petrobras and Mexico’s Pemex, will be exaggerated by muted demand growth and record-high inventories. 

And Pemex's inflexibility will exacerbate the effects on the company while conditions in the global oil market are set to persist through much of 2020.

“The current fuel glut in the global markets and the ongoing decline in fuel demand both influence fuel prices, making it probable that large downstream investments cannot be fully recovered - especially if Pemex struggles to increase the operating efficiency of its existing refining business," Moody’s said in a note. 

“By contrast,” Moody’s continued, “Petrobras is gravitating toward E&P, which offers higher margins than refined products.”

O&G IN 2020

US energy regulator EIA estimates that Brent crude will average US$64/b and WTI US$58.5/b in 2020, with a lull in prices expected in 1H20 because of rising global inventories. 

The potential for lower prices comes amid an expansion of investment opportunities for private energy firms eyeing the region. 

“Along the Atlantic Coast, Mexico has countries that are strong competitors,” Isabelle Rousseau, a geopolitics energy researcher at Colegio de México, told hydrocarbons regulator CNH last month. 

She cited Argentina as a competitor for investments in unconventional extraction based around Vaca Muerta, Brazil competing for deep offshore investments, and Guyana, whose offshore reserves have recently been the subject of major private sector interest from ExxonMobil and others.  

Rising private sector interest in those countries, combined with a three-year halt to farmouts in Mexico, could redound to Pemex’s disadvantage in the years ahead, forcing the company to increase output in the short-term without promising explorations to continue harvesting hydrocarbons in the future. 

MATURE ONSHORE AND SHALLOW WATER E&P

In its note, Moody’s mentions Petrobras’ management enjoying greater flexibility from the government to deploy capital as a corporate strength, while “Pemex can count on stronger support from the government.”

The Brazilian government owns 60% of Petrobras. Pemex is entirely state-owned and, according to Moody’s, the Mexican government “plays a greater role in the company’s policy and direction.” 

Hence, Pemex cannot set its own agenda. And while President Andrés Manuel López Obrador (AMLO) consistently promised government support for Pemex, he also has yoked construction of the Dos Bocas oil refinery on Pemex. 

But even with government support, Pemex’s finances remain a constraint. As Mexico’s largest taxpayer, Pemex accounts for roughly 18% of the national budget, a burden that Moody’s says has “limited capital investments in E&P.” 

Earlier this year, Moody’s forecast that Pemex would run a cash flow deficit of more than US$10bn from 2019-2020, even after the government injects cash into the company. 

In light of these realities, Pemex has opted for a strategy that cobbles last-barrel investments in mature onshore fields together with shallow water E&P. 

“Pemex has chosen to expand both upstream and downstream,” Moody’s said. “Pemex’s strategy entails more risk for credit quality given its high debt levels and limited capital investment capacity.”

Already the world’s most highly indebted oil company, corporate credit watchers expect that Moody’s will cut Pemex’s credit to junk in the coming months. 

The company's strategy, moreover, looks unlikely to achieve AMLO’s goal of energy self-sufficiency by the end of his term in 2024. 

“I really doubt that shallow water [E&P] is sufficient to meet actual demand,” Rousseau said. 

In recent weeks, Pemex has been forced to admit that production growth will reach 1.75Mb/d by year-end, instead of the 1.85Mb/d it aimed for. 

RETURN TO NORMAL

Recent hiccups in energy markets have helped Pemex financially. 

The US-China trade war, for instance, enabled Mexico to sell its most common crude blend, Mexican Maya, for a US$5/b premium to West Texas Intermediate. Normally, the heavy-sour crude sells at a discount to the major US oil benchmark.  

But a return to normal trade conditions could restore established crude prices and erode Mexican Maya’s premium. 

Between the political goals weighing on operations, the inability to tap into the deepwater reserves, and oil prices heading downward, Pemex faces challenges in 2020.  

Rousseau told CNH, “Mexico has big areas of fragility.”