News Release Explanation: I spoke to management.
The process under the terms of the contract on the Chiapas blocks has been as follows:
The contract on the Chiapas block states that Pemex pays ROE 60 days after each month end. So October oil gets paid for by Pemex in January. This is the contract term. Pemex has always paid on time and continues to do so.
The royalties are due and payable to the Government 10 days after the end of the month of production. So the Government royalty for the October oil production is due and payable on or before November 10.
The process that ROE has followed is to factor the invoice to Pemex for the production. This means the factor company pays to ROE the full amount of the invoice for the month of October oil less its factor fee, (which is not a large fee), basically after the invoice goes to Pemex. So then ROE has the money from the invoice the day after it is issued and the Factor company gets the money 60 days later. (This operates a bit like the payday loan) ROE as a result of the factoring can pay the royalty due.
Factoring invoices is a standard business practice and factoring of Pemex invoices in Mexico is standard business practice.
Everything has always worked smoothly for ROE.
Unfortunately, with the Pemex being behind in its payables with a lot of Companies and with the Department of Finance asking Pemex to delay payments, this has led to the collapse of the factoring system in Mexico with respect to Pemex invoices.
This means that ROE has a short term finance problem in that the Royalties are due before it has been paid the money to make the payment.
So ROE did not make the required payment of the royalties for October and won’t be doing so for November either. They are currently working to put a short term financing in place, like a credit line, but because these are Pemex payables that have to be financed and Pemex owes a $ 100 Billion or so, banks are not jumping in quickly to provide credit lines to cover this situation. So while ROE is working on obtaining a short term credit facility they are also looking at doing a financing that would cover the money needed to make up the 60 day shortfall.
There is an interest penalty for being late in royalty payments, and there is the potential of a risk to the contract so ROE is required to announce that this has happened. ROE does not feel the risk is that great, but they are technically in breach of the contract even though they were forced into this spot by the Government pushing Pemex to delay its payables which has led to the collapse of the factor system.
ROE has been told that this factoring problem is short term as well and the factor system should be back up and running in January of 2020.
ROE management were seeing this more as an inconvenience than anything else.