PEMEX’s Road to Financial Recovery

By Luis Vielma Lobo | Director General – Mon, 10/30/2023 – 09:00

The Mexican oil sector is at a historic crossroads. The industry, largely monopolized by PEMEX, has faced significant financial challenges in recent years. The vulnerability of oil prices, the decline in production over the last 10 years, the extraordinary investment in a new refinery and the investment needs in exploration, drilling and infrastructure, represent a critical economic situation for the national company.

It seems that the crucial moment has arrived to consider a different alternative, such as securities trading, using a trust scheme where future assets or cash flow are allocated with the aim of issuing securities. The purpose is to obtain financing by providing liquidity to non-liquids assets, and therefore, to realize a real turnaround in PEMEX’s projections, without renouncing state ownership or endangering national sovereignty.

To understand the urgency of addressing the situation of PEMEX, it is essential to recognize the importance of this state-owned company in the Mexican economy. PEMEX has been a fundamental pillar of revenue generation for the Mexican government for decades. In addition, the oil company provides employment to thousands of Mexicans and plays a crucial role in the country’s energy security. However, its ability to fulfill these responsibilities has declined due to financial and operational problems.

In recent years, PEMEX has faced a series of financial challenges that have compromised its ability to operate efficiently and sustainably. Some of these challenges include a significant debt load, exceeding US$100 billion, and servicing this debt absorbs a substantial portion of the company’s revenue, limiting its ability to invest in oil exploration and production, which has reached a plateau of 1.8 million BOPD and just over 4.0 billion SCFPD. The effort and results of this administration are recognized, but they have not been sufficient, since the need for greater investment in exploration and production, as well as access to cutting-edge technology, persists. Mexico’s oil infrastructure needs significant investments to remain competitive in the global market. With these resources, it could incorporate technologies that allow it to comply with its decarbonization and energy transition commitments, as well as incorporate alternative energy projects such as wind and solar. Without this investment, the national company will continue in this perverse cycle of continuously searching for financing at a high cost of capital that each year will be more difficult to obtain, meaning it will not be able to take advantage of the potential of prospective resources that exceed 130 billion barrels, which are available and internationally recognized.

Given this reality, there are not many options for the national oil company. On the one hand, it can do more of the same; that is, to receive an increasingly reduced budget (the budget for  2024 is approximately 50% of that of 2023), which could worsen its operating and financial trends. On the other hand, it can come up with a different scheme, such as securitization, which is a viable and pragmatic solution. PEMEX or the Mexican state have several options to implement such a scheme — rather than  just the «neoliberal» option, which implies the issuance of company shares in the national and international stock markets, allowing investment funds to acquire them and gain a stake in the company.

PEMEX has the option to negotiate with its creditors, funds and banks that have supported the NOC with loans and demand its payments on the agreed maturity dates. It can even agree with service companies to which PEMEX owes significant debts to convert them into stock market participation amounts, associated with trust-type mechanisms. This could be done by type of business, ranging from exploration, well drilling, construction of plants or facilities and pipelines to transport oil or gas.

Although these schemes may be seen as radical steps, it is important to emphasize that they do not imply the loss of state control or any impact on national sovereignty.  There are examples associated with the securitization of some national companies that have done so and have recovered financially, among them Petrobras and Ecopetrol.  These schemes would allow PEMEX to obtain fresh capital from private investors, alleviating or eliminating its debt burden and providing the necessary resources to invest in its portfolio of priority projects.

In addition, these types of schemes often incorporate additional accountability elements that require greater oversight and more efficient management. This could help PEMEX operate more competitively and reduce operating costs. Also, as mentioned, they do not imply the loss of state ownership or strategic control of the national company, since within the board of directors, the CEO and appointed members will represent a majority in decision-making. The incorporation of investors is relevant because it will allow PEMEX open and continuous access to state-of-the-art technologies and international experts, which would result in better access to practices and competencies to improve its technical and operational excellence.

It is understandable that there are legitimate concerns about a proposed securitization of the national productive enterprise, especially in a political environment in which the nationalist character of the two large national energy companies, PEMEX and CFE, has been reinforced, with the understanding that sovereignty is fundamental for Mexico. However, this particular scheme does not imply the sale of strategic assets or the loss of control over the country’s natural resources. Likewise, the search for greater efficiency does not represent a threat to the stability and labor rights of workers during this process; on the contrary, it represents an opportunity for growth and improvement in their quality of life. 

In the end, the future of PEMEX represents a risk or opportunity for the Mexican economy. A securitization scheme for the national company may offer a practical and feasible solution to address the financial and operational challenges facing the company, without sacrificing state ownership or national sovereignty. We suggest that government authorities seriously consider this option and that the national company, in conjunction with the Ministry of Finance, evaluate the mechanism that best suits the current financial realities, and thus create a proposal that can attract investment interest, funds, allied companies and national and international service companies. This will allow PEMEX to achieve the path that will ensure its financial stability and recovery. Securitization is a viable path that should be explored with seriousness and determination. The «what» is there. It is necessary to find the «how» to do it.

 MBS 2023


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