Some info - Management is still waiting I spoke to management this past week about the overall market and what is happening in Mexico.
The Maleki resignation was not discussed as at the time I spoke to management there had been no press release. Malaki was a Director, but I do not think he was directly involved in the day to day management. I will ask management when I call the next time.
Is the Mexican Government Changing Direction?
Management said there obviously has to be a change in direction for the Mexican Government and perhaps the oil price drop and the coronavirus economic slowdown will be the catalysts that break the balance between the Gov’t people pushing for private oil partnerships and investment like Romero and the ones who are holding against it like AMLO and Nahle.
Management is still waiting, like us shareholders, for the Government to release its new energy policy and direction. It appears that the Government is going to allow Pemex to partner with private industry as it will provide billions of dollars in investments which is a spending boost that neither the Gov’t nor Pemex can provide. The Mexican economy needs it, it was in a slow down before the oil price drop or the coronavirus problem.
If the oil price drop is prolonged it is going to devastate Pemex financially. It is obvious that Pemex, which lost $18.3 billion last year and $9.0 billion last quarter cannot withstand the financial hit from reduced oil prices for very long.
Apparently Pemex hedged about 1/5 of its expected exports for this year, or about 220,000 barrels of oil. Hedging is expensive and likely didn’t have the money to hedge more. Hedging that much would have cost about U.S.$600 million.
The Government says it hedged enough to protect its revenues. If the put options cost about U.S $2.70 per barrel, which is about the average of a put option, then if the Government spent $1.37 billion on its’ hedging program, it hedged about 500,000 barrels of its’ exports.
So if the Gov’t hedged, how does that protect Pemex revenues? It protects Pemex revenues if the Gov’t pays Pemex the hedged price, and then Pemex has the money and it can pay the huge taxes that the Government charges. I am not sure how they hand the money back and forth.
So if the Mexican Gov’t hedged 500,000 barrels and Pemex hedged 220,000 barrels, then about 330,000 barrels per day are going on the market at market price. The West Texas basket on Friday was about U.S.$ 31.43 per barrel and the Mexican basket was about U.S.$23.45 per barrel.
So my guess is Pemex will exercise its options, and hope and pray that the oil price comes back up before the end of September when the hedge protection runs out.
Pemex lost U.S. $18.3 billion last year with oil averaging $57.00 per barrel. So a hit of $11.00 x 770,000 barrels of export per day x 275 days will be a loss of another U.S $ 2.4 billion in the first 3/4 of the year.
If oil prices stay where they are, then Pemex will be down at least U.S.$ 26.00 per barrel and possible U.S.$34.00 per barrel for the last 90 days of exports BOPD of oil exports or the last quarter of the year. Pemex will lose another U.S.$ 2.5 to 3.4 Billion in its 4th quarter of 2020.
Can Pemex survive with potentially losing up to $5.8 billion when it lost $18.3 billion last year. This would mean the losses for Pemex for 2020 could be as high as $24 - $25.0 billion with no where but the Gov’t to bail it out and even the Gov’t does not have that kind of money. The Gov’t has no real options if they want to expand production next year or if Pemex wants to survive.
The only option is for Pemex to partner with the private sector. The Government is going to allow partnerships and will be announcing its new energy policy etc in the next few days. The new policy is supposed to cover oil, gas, electricity, renewables, and both upstream and downstream projects.
The Government always likes to make a big splashy announcement, so rather than approving projects on a daily basis and getting them working, the Government wants to review a lot of projects and give a bunch of them approval at once in a big announcement. The only challenge is that with 292 projects submitted for approval, it could take the gov’t a while to review them all. Even the finance minister has said they will go through the projects and create an immediate approval list, a further review list and a rejection list.
Since Pemex is in agreement with the ROE proposal and Pemex does not have to put up a dollar it should be near the top of the list, however, it is not a big project compared to some being put forward.
If ROE and Amititlan are in the first approved group, great, it not it is more lobbying and waiting. Once the new policy is announced and there are, in fact, Pemex partnerships happening the door will be open.
My concern is where is ROE and Lukoil and the Amititlan project on the list of priorities. Is shale oil going to be a priority? Management could give no information on this, I don’t think they know. Romero is pushing for it, and so is Pemex.