Pemex - Commentary Report Number three.
See report from Pemex.
https://www.pemex.com/en/investors/financial-information/Reporte%20de%20Resultados%20no%20Dictaminados%20%20Archivos/Reporte%201Q19.pdf
Some highlights.
The report says:
“PEMEX will develop 20 new fields in 2019
To incentivize hydrocarbon production platform,
Pemex Exploration and Production began the
development of 20 new fields. Out of the total, 16
are located in shallow waters of the Gulf of
Mexico, and four are located onshore, in the states
of Veracruz and Tabasco.
For their development, the company considers
drilling at least 30 wells during 2019, for a total of
116 wells (72 offshore and 44 onshore) during the
fields’ producing lifespan. Some of these fields will
begin production by year-end 2019.”
As noted before, no wells have been drilled as of June 6, 2019.
Drilling completions through out Mexico. This year in the first quarter there were 42 wells drilled and completed, and this compares to last year in the first quarter when 40 wells were drilled and completed. These wells are wells drilled by everybody, not just Pemex.So no increase in activity or success here.
Out of Production
The total number of producing gas and oil wells dropped by 5.5% as 439 wells were taken out of production, with only 42 new wells being completed is not really a good indicator of success. Less than ten per cent of wells taken out of production have been replaced.
Financially
Pemex had a Net Income (loss) during 1Q19 a net loss of MXN 35.7 billion was recorded about U.S.$1.86 Billion. This is a substantial loss. Expenses and cost of business going up ( see the wage settlement just reached), oil production and revenue is decreasing. This projects to a loss on an annualized basis of US $ 7.44 billion in 2019. How is Pemex going to cover this? They have a credit line of about US $2.5 billion.
In my opinion it is only a matter of time before they give the go ahead to develop the shale oil.
At March 31, 2019, PEMEX’s negative working capital amounted to MXN 121.9 billion,(US$ 6.4 Billion) as compared to a negative working capital of MXN 54.7 billion (US$ 2.8 Billion) at the end of 2018. This result was mainly caused by:
• an 18.8% decrease in cash and cash equivalents, mainly due to the net effect between receivables and funds from financing activities, and was partially offset by taxes and amortizations related to financing transactions, as well as capital and operational expenditures; and
- a 45.9% increase in short-term debt, mainly resulting from a reclassification of maturities due in the next 12 months.
The real important number here is the negative working capital at US$ 6.4 billion for the Ist quarter. This means among other things, that about $6.4 billion worth of bills didn’t get paid!!!
Typically negative working capital describes a situation when current short term debts exceed your current assets, where there is more short-term debt than there are short-term assets. It is not clear whether this is a situation of where Pemex can't cover its bills and it will need more money from the Government or if it is done by design. By design I mean using other oil companies money to expand the Pemex business. For example, if Pemex only puts up front 20% of the money for all parts of the development of the new fields, the drilling, the platforms, the pipelines, then this is possibly a smart use of other Companies money. This is typically done in short term situations such as a store buying a lot of inventory that it will turn over quickly with a big sale, and it can pay back the suppliers before the bill comes due. I am not sure what Pemex is doing here, because as I explained earlier, if Pemex uses supplier money to bring these 20 fields into production they could run into a disaster if the supplier companies decide to demand payment part way through, or even at the end when Pemex will owe them US$ 8 or 9 billion. Right now Pemex can’t pay as you go on any of the development projects it has undertaken, including the refinery.
Exploration and Production budget for 2019 is US$ 10.91 Billion, of which 2.92 Billion was spent in quarter 1 or about 26% of the yearly budget. The total of 42 wells have been drilled, in all of Mexico by somebody and since they are all on service contracts or joint ventures, Pemex can claim to have drilled them. It will be interesting to see how Pemex can pay to drill the other 464 oil wells (Out of the 506) AMLO said Pemex will drill in 2019 when it has used 1/4 of its budgeted money and drilled and completed only 42 wells and we have only 5 months left to drill the other 464 wells. (Of the 150 or so wells drilled last year, ROE drilled 18 of them)
Exchange rate.
The Mexico Peso, since December 4, 2018 has dropped by 7.07% against the U.S.Dollar. When you consider that virtually all of the debt is repayable in U.S. dollars, it means that Pemex’s debt repayment obligations have gone up by 7.07 % or roughly 7.0 Billion dollars since December 4, 2018. This and the current short fall in short term working capital of US$ 6.4 billion should be troublesome for Pemex bondholders and for Pemex management and for AMLO.
There is not much encouraging information from or about Pemex in this report. Simply a bankrupt company being kept afloat by the Government.