How did we get to these debt levels?
Analysts refer to a mixture of factors as the cause of the oil company holding that first place today: crude oil production that has been declining for more than 15 years – in 2004 it reached a maximum production milestone, followed by a continuous drop and a stabilization in recent years–; a high tax burden imposed on the company in previous administrations; the decision to prioritize secondary businesses with a low level of profitability and the 2015 price crisis – when the price plummeted from 100 to around 30 dollars per barrel – from which the company did not manage to emerge unscathed.
Specialists find a direct relationship between the drop in oil production and the increase in the company’s debt: Pemex has not been able to raise the numbers of its most profitable business – production and exploration – and has spent money on businesses that generate continuous losses such as the production of fuels and the fertilizer business.
Since in past years it did not obtain sufficient resources to continue its operations and maintain its investment levels, its need to find financing in the market increased. In 2015 Pemex already registered an increasing trend in its debt levels, but at that time it was less than the current one, of 86.792 million dollars.
The relationship between the Ministry of Finance and Pemex
Last Friday, the president made an announcement that was already expected by the markets: he said that the Ministry of Finance would continue to support the company and that there was already a plan to cover its debt amortizations, of which he did not give further specifications.
The relationship between the federal government and the company was already close from previous six-year terms: the oil company has been the main source of public finances for years. But in this administration that relationship was reinforced: the Obradorista government – which has placed the state company at the center of its objectives – has significantly reduced its tax burden, has granted it capital injections and during 2021 took over the payment of its debt repayments until last year it decided to partially withdraw its support and let the company take care of these payments, when the price of oil increased and then the state-owned company obtained more income than scheduled. But today Pemex faces a different reality, with a Mexican export mix trading around $70. “We expect an almost certain probability that the government will provide extraordinary, timely and sufficient support to Pemex in the event of difficulties,” said the rating agency Standard and Poor’s in a statement on Wednesday.
Bondholders and the market are calm: they are certain that the federal government supports the oil company and they are receiving large rewards for the capital they lend to the company. Last Tuesday, the state company announced that it raised debt in international markets at a rate of 10.375%, almost double the rate at which the federal government has placed bonds. But analysts wonder where the Ministry of Finance will get the resources: the expenditure budget does not contemplate any item to continue supporting the oil company.
And analysts don’t know what to expect: the federal government is running out of space to further support the state. “Pemex’s level of indebtedness becomes worrisome from a social point of view because it implies that both the company is going to have to generate profitability, as well as the government to obtain resources, through taxes or other sources, in order to sustain the payment of that debt” says Víctor Gómez Ayala, a financial analyst.
Raising capital amid high rate environment
The company’s strategy has been based on maintaining zero indebtedness in real terms and it has been fulfilled, analysts say. But debt refinancing is not being entirely cheap for the company: the state company has managed to place debt in the international market at much higher levels than those seen in previous years.
The rate at which it placed debt this week was 10.375%. In operations between 2018 and 2020, the state company placed bonds with yields between 5 and 7%, according to company records. The global economic environment, with high levels of inflation and the continuous increase in interest rates by central banks, has made the financing that the company can access more expensive.
The oil company also lost investment grade in April 2020, in the midst of the coronavirus pandemic crisis, when prices plummeted and touched negative levels for the first time in history. Several capital funds had to abandon the oil company’s bonds. The risk of lending money to Pemex increased and with it the premium that investors demand from the company.
At what point are we?
The company’s debt is not going through its worst moment. In 2020 it reached a record figure of just over 113,000 million dollars. Its latest financial report, from last September, says that the figure now stands at 105.035 million dollars, but analysts await the company’s annual report next February to assess the federal government’s strategy. The burden has been reduced – largely due to the appreciation of the peso against the dollar – and due to the series of supports from the Ministry of Finance.
To measure the weight of the debt on public finances: the reported debt as of September 2022 represented 7.3% of the Gross Domestic Product, according to calculations by the Mexican Institute of Competitiveness (IMCO).
Pemex has not turned to the markets to raise new debt to finance its activities or add more capital to its projects, but the reduction in debt levels has not been the result of good management of the company’s operations. “Pemex’s own operating numbers do not generate sufficient cash flow to indicate that the company’s profitability is improving and that is why the support of the federal process becomes essential,” explains Gómez Ayala.
Will it be possible to lower the debt?
Analysts are cautious about how successful the federal government’s strategy has been. They say that the numbers show a drop in the company’s debt, but they doubt that this can be sustainable in the long term: the current government is repeating some mistakes of the past, it has decided to continue with the commitment in the refining sector and opted to build a new refinery instead of cleaning up the finances of the oil company.
Analysts compare it with the large investments in the fertilizer plants of the past six-year term or the construction of the Tula refinery – during the administration of PAN member Felipe Calderón – which was not used in the end.
Pemex continues to lose money in the industrial transformation business – which includes refining – and has not been able to find new fields that will allow it to prop up its production and turn the downward trend of recent years in a forceful way. “In the long term none of this matters if you do not reformulate the company and this is something that is not happening, it is something that has not happened, they continue to bet on Pemex Industrial Transformation, on refining, Pemex’s priority fields have not yielded results . Operationally, the company continues where it was four years ago, although the debt has not grown, the reality of the company in the long term remains just as compromised”, says Óscar Ocampo, Imco analyst.