Fixed Income Analysis /

Pemex: Q1 results show continued vulnerability; reiterate Hold on valuation

    Rafael Elias
    Rafael Elias

    Director, Latin America Credit

    Tellimer Research
    1 May 2019
    Published by

    Pemex reported its Q1 19 financial and operational results on 30 April, showing a marginal sequential improvement that paled in comparison with the yoy decline. The results did support the company’s optimistic statement that “the first quarter of 2019 welcomed the beginning of a new era for Pemex due to the new management”.

    Total sales in Q1 19 were cUS$18.554bn, 10.4% lower than the US$20.697bn in Q1 18, and also lower than the cUS$21.27bn in Q4 18. EBITDA showed a slight sequential improvement from the US$5.32bn in Q4 18, at cUS$6.03bn, but c17% lower than the US$7.22bn in Q1 18.

    Operating income in Q1 19 was US$3.16bn, lower than both Q4 18 (US$4.48bn) and Q1 18 (US$5.59bn). The net loss in Q1 19 came in at US$1.86bn, lower than the US$8.19bn of Q4 18, but still negative compared with net income of US$5.90bn.

    In terms of production, Pemex produced 1.661mn barrels per day (mmbpd), lower than the 1.711mmbpd in Q4 18 and 1.883mmbpd in Q1 18. Crude oil processing increased to 559,000 barrels of oil equivalent per day (boed) in Q1 19, slightly higher than the 505,000boed in Q4 18, but still lower than 598,000boed in Q1 18.

    Although the company argues that crude oil production is stabilising, its statement that it cut fuel theft by 79% in Q1 and by 95% by 24 April seems dubious and is not reflected in volumes produced or in sales.

    Q1 debt was US$106.502bn, cUS$1.35bn higher than at end-18, although Pemex argued that its net indebtedness in the period was zero. Further, cash and equivalents were cUS$3.46bn, lower than the cUS$5.08bn at end-18, despite capital infusions received from the federal government.

    In sum, we reiterate our Hold recommendation on Pemex bonds on valuation, as well as our belief that the company’s strategy of prioritising exploration and production in mature shallow waters and onshore wells is flawed. Also, the start of the construction of a new refinery, a low-margin business that will require Pemex to feed it with domestic crude that will not then be exported, will create an imbalance between revenues in pesos and debt in stronger currencies.

    We maintain our view that Pemex requires a deep reform to return to profitability, and that management (and the government) would be wise to restart the exploration and production auctions for the deposits located in the deep waters of the Gulf of Mexico, where major volumes of new oil are located. The company would also be better off shelving construction of the Dos Bocas refinery in the state of Tabasco, which is very likely to cost much more than the US$8.0bn the government has said the facility will cost. The construction is also likely to take more than the estimated three years.