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Pemex's plan – we'll believe it when we see it

    Rafael Elias
    Rafael Elias

    Director, Latin America Credit

    Tellimer Research
    16 July 2019
    Published by

    We find nothing new in Pemex CEO’s new business plan, whether it is the government’s commitment to support the company for the next three years, increasing production by focusing on shallow waters and on-shore wells, the deferment or cancellations of deep waters farm-outs, a more relaxed fiscal regime for the company, or federal funds used to build the Dos Bocas refinery. These are all plans that the government has been talking about for months. 

    Pemex CEO Octavio Oropeza presented a summary of the company’s business plan this morning, during Mexico President Andres Manuel Lopez Obrador’s (AMLO) daily press conference. According to Oropeza, the plan was approved last night by the concerned authorities.

    In our view, there is nothing new in the latest business plan – it appears to be a repetition of what the current administration has been saying for months.

    What the ‘new’ plan calls for is a gradual increase in production by way of investing funds in a more relaxed fiscal regime, mainly in exploration and production. This repeats what we already know: exploration and production will be focused on shallow waters and onshore fields that are located close to the fields currently in production. It ignores (again) the possibility of exploring and producing via farm-outs in the deep waters of the Gulf of Mexico. Instead, it states that the participation of private capital in the company will be done through “production contracts” where the payment will be a function of elements such as production and the risk that each field entails.

    The plan also states an increase in investment towards refurbishing existing refineries and in the construction of the new Dos Bocas refinery in the state of Tabasco. However, the funds for these projects are expected to come directly from the federal government rather than from cash generated by Pemex itself (according to AMLO, the federal funds will come from better tax collection).

    Oropeza also said that the federal government has committed to support Pemex during the next three years through a combination of direct capital injections and (more importantly) via changes in the company’s fiscal regime, whereby the current contribution of c65% should be reduced gradually to c54% by 2021. After these three years, the plan states that Pemex will reach a budgetary equilibrium that will allow the company to start contributing to the federal coffers again, once production is clearly on the rise and the company is better capitalised through federal support.

    Pemex expects to produce 1.707mn barrels of oil per day (mmbpd) by the end of this year, from the current crude production levels of c1.6mmbpd. Furthermore, production is expected to rise gradually to 2.697mbpd by 2024 – the end of the AMLO administration’s current term. In theory, production should continue to climb beyond this and gradually reach 2.802mmbpd by 2030 – a level the government considers as optimal, as it would be close to the production levels that Pemex had at its peak some 10 years ago when it used to produce c3.0mmbpd.

    Oropeza said that the first spike in production this year will come from the operation of 12 new wells, the first one entering operations in August and the remaining wells entering into operation towards the end of the year.

    We remain sceptical about the reversal of Pemex’s fundamental problems and continue to believe that some of the objectives of the ‘new’ plan (such as the Dos Bocas refinery construction) are not right. Investors would be better-served by taking a ‘show, don’t tell’ stance on Pemex. 

    We maintain our Hold recommendation on Pemex purely for technical reasons, what we call the “Pemex paradox” where investors see the credit as a quasi-sovereign on the premise that, the weaker Pemex gets, the higher the likelihood that the federal government will intervene. This makes Pemex like a sovereign risk, and many holders still see it as “Mexico plus a spread”.