Economics: Pemex Profits Belie Capex Effects

MEXICO - Report 06 Nov 2017 by Mauricio González and Esteban Manteca

When releasing its preliminary results for the third quarter of 2017 last week, Petróleos Mexicanos once again decided to emphasize the results of its efforts to strengthen the company’s financial health while trying to avoid as much as possible the extent to which oil and gas production has continued to plummet. Management’s focus on improving the company’s financials began to clearly pay off early in the quarter as both S&P and Fitch raised their outlook on Pemex from negative to stable, citing improved debt portfolio management and an austere conduct of business that has included deep personnel cuts.

However, the company’s positive earnings results for the first nine months of the year were essentially the result of substantial foreign exchange gains, without which Pemex would have recorded the sort of loss it posted for the first nine months of 2016. Despite the recovery in crude prices in the last six months, between June and September Pemex daily production of barrels of oil equivalent was 6.4% less than what was reported for the previous quarter, and 12% below levels of the third quarter of 2016. The erosion of Pemex production is a direct consequence of the cuts made to the company’s capital investment budget over a number of years. The future viability of Pemex is at stake if such investment budgets are not strengthened; otherwise the company will be in no position to compete in a market in which many companies, including some of the world’s largest producers, are starting up their own investment projects in Mexico.

One could conclude that the ongoing weakening of the main actor in the sector makes the prospect of participating in an increasingly competitive Mexican market all the more attractive to local and foreign investors, who participated in Round 2.1, the second most successful to date. But while Mexico may be consolidating its position as an attractive hydrocarbon investment destination, in order to exploit to the maximum the country’s full potential, Petróleos Mexicanos must be substantially strengthened, and that will only happen with a reversal of the downtrend in its capital investment budget.

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