Thoughts about Pemex Financings impact for ROE I was going to post this when the news of the financing came out, but I have been unable to post anything on this site for the past couple of weeks.
https://oilprice.com/Latest-Energy-News/World-News/Mexico-Approves-Stimulus-Measure-To-Boost-Oil-Production-By-Up-To-400000-Bpd.html
Mexico Approves Stimulus Measure To Boost Oil Production By Up To 400,000 Bpd
By Irina Slav - May 14, 2019, 12:00 PM CDT
The Mexican government has approved a fiscal stimulus measure that could see Pemex raise oil production by as much as 400,000 bpd, S&P Global Platts reports, quoting the country’s Finance Minister, Carlos Urzua.
The legislation concerns a credit agreement with a group of lenders including HSBC, JP Morgan, and Mizuho Securities. Under the new terms, the maturity of a loan of US$5.5 billion will be extended by two years and some US$2.5 billion in existing debt will be refinanced, the official said.
The money will be used to boost oil production at ageing fields that are currently uneconomical to continue exploiting. To do this, the fields that the measure covers will be migrated from legacy assignment titles to production sharing agreements that were introduced by the previous Mexican government as part of a sweeping energy reform passed in 2014.
Mexico has been struggling to reverse a steady decline in its crude oil production resulting from insufficient investment and the consequent decline in much needed new discoveries. The previous government tried to solve the problem by removing Pemex’s monopoly position on the market and inviting foreign companies to explore for oil and gas on and offshore. The new government, however, has suspended all contracts signed by the previous administration and all new oil and gas auctions pending review.
At the same time, however, the new administration is just as eager as their predecessors to increase production: President Andres Manuel Lopez Obrador has promised that by the end of his term in office, Mexico will produce almost 2.5 million bpd of crude – a level close to the 2013 average of 2.522 million bpd.
The new government has also announced a lifeline for heavily
indebted Pemex of US$3.6 billion, combining debt refinancing and tax cuts.
Pemex figures show the company’s crude oil production averaged 1.813 million bpd in 2018. To compare, production averaged 2.522 million bpd in 2013, falling to 1.948 million bpd in 2017.
By Irina Slav for oilprice.com
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In my opinion that article contains lots of what I would call mis-stated or mixed up information and I don’t know if this is deliberate or just mistakes.
The fiscal stimulus will not see Pemex increase production by 400,000 barrels a day.
The fiscal stimulus is tax relief for the first 400,000 barrels of oil produced from the mature fields that have significant production declines. This was part of the deal on the refinancing. The government had to give tax relief as a condition of the lenders providing debt relief.
The debt relief was postponing the repayment requirements on $2.5 billion that was due this year, plus extending the revolving line of credit of $5.5 billion for a couple of years. This frees up the $2.5 that would have gone to pay off the loan, and the extension on the $5.5 billion of revolving credit means this is now available for financing development. The Tax relief will be up to $1.5 billion from the increased capital cost depreciation on the mature fields developments. This is a total of $9.5 billion available to Pemex for financing their part of any partnership deals. Now that this is in place and Pemex and Obrado have the money in hand, it appears that the money received and the tax relief are tied to the migration of mature fields from sole ownership by Pemex to joint ventures by Pemex with private companies.
My guess is that at least one of the reasons Pemex has not been entering into joint ventures with the private companies (ROE being one of them) has been the fact that Pemex had no money with which to enter into the joint ventures. Now these mature fields can be redeveloped and as they are redeveloped the first 400,000 barrels of increased production will have tax relief. Mexican President Andres Manuel Lopez Obrado's administration is aware of Pemex's upstream resource constraints. In response, Pemex said Monday this will allow it to deduct $1.5 billion in upstream expenses.
Pemex pays about 80 per cent of its revenue, in taxes to the government. So the taxes have been reduced as a condition of the refinancing.
This is significant for ROE. While ROE’s contract is not one of the mature fields, (unless the government some how stretches the Chincontepec formation as mature) it does provide funding for Pemex. In essence, if you don’t have to repay money, the money Pemex would have been used to pay off debt is now available for ongoing expenses.
So Pemex does not have to repay the money for a couple of years and this money can go straight to increasing production and increasing it with the tax relief. Going from being able to deduct 12.5 % of exploration and development costs each year to 40% each year for onshore fields is a big jump which means that for every billion dollars spent Pemex can deduct development expenses of $400 million instead of $125 million. Pemex then has more money for development and AMLO can then use some of the money to start his refinery project.
In my opinion this refinanciing and tax relief will also provide Pemex with the money needed to migrate the other contracts like Amititlan. Pemex will have to pay its 40% of all expenditures after this contract migrates or if it chooses not to, it will reduce to a 20% partnership and Pemex will still have to pay at least 20% of all costs. I would expect that Pemex will want the ability to keeps its position of retaining 40 % or dropping to 20% open, but in either situation, once the contract migrates Pemex is going to have to start putting up exploration money.
I would say this financing is real good news for ROE as Pemex should now have the financing to do its’ deal with ROE. Also the word “migration” has now been brought into the forefront of AMLO’s mind and that of the rest of Government and Pemex. I would think that the Pemex exploration and production manager can now move forward with his approval on the partnership contracts for both the mature fields and for fields like Amititlan. It would have been difficult for Pemex to approve of the Amititlan migration without the money in place for Pemex to actually perform Pemex part of the deal. While this may not be the only obstacle to the migration, it is one that has been removed.
The above is just my analysis, I have not spoken to management on this.