Get Pemex back on track

What are the objectives for Pemex’s liquidity and financial performance?
The financial situation of Pemex is stable and improving little by little. Our main aim is to gradually reduce our dependence on financing, so that in a few years we can have positive flows, which will enable us to relieve ourselves from the debt we currently have. That debt should eventually be aligned with the size of our income at any given moment. This is basically what we have been doing in the finance area.

What measures has Pemex’s treasury subdivision taken to improve the company’s financial performance?
We have focused on two main aspects. Firstly, we have improved our work capital and reduced our short-term current liabilities, especially regarding our payment obligations with suppliers and contractors. This has made it possible for the contractual dynamic to improve, regarding the different services we acquire from third parties. This has ultimately resulted in the improved overall operation of the company.
Regarding current assets, we have been able to improve the company’s liquidity. This has been done by promoting better financing sources in two aspects: the recurrence and maintenance we have given to our public debt, which is directly related to bond issuance in the markets where we are usually present – mainly dollars, euros and pesos, although we have not been as active as we once were in the latter – and improving our short-term and long-term bank credit lines.
By improving our assets and the company’s liquidity, we were able to recently issue USD 5 billion in the debt capital markets, aimed at addressing liabilities and preparing for next year’s bill due dates. All of this has made it possible to improve both our current liabilities and assets. As a result, we have also improved our working capital.

What is the strategic significance of developing an oil coverage programme?
In the risk subdivision, we have worked on contracts for 2017, and have developed an oil coverage programme. The aim of this programme is to cover the exposure of the financial balance. We call it financial balance, although it is a budget measure of a public account, which controls all the company’s money fluxes – income from oil exports, product sales and so on – all incurred expenses and investments, all royalties we have to pay the government and the financial cost of the debt we currently have.
When the oil barrel price decreases, we are impacted due to our budgetary sensibility, which does not necessarily mean an impact on all production. When the barrel price decreases, the value obtained from our exports decreases, but so does the value of our imports, which are basically different types of refined products. This means that the net sensitivity of our financial balance is what we are trying to protect with the oil coverage.
This approach is complemented by the coverage provided by the federal government, which covers its budget, including rights and royalties paid by Pemex. We cover our own balance and with this, we are covering Mexico’s exposure, which is why I affirm that the coverage actions of the federal government complement our own.
This programme was implemented in May 2017 and will be in place until the end of the year. We want to keep working on this effort in the years to come. The programme’s specific strategy will change according to market conditions and will not necessarily be the same as the strategy implemented by the federal government, as our exposure is different than the government’s.

What are the main advantages of trying to attain budgetary discipline?
In the budget subdivision, we have tried to have budgetary discipline, focusing resources on projects that have higher profitability, considering that under the law Pemex is now seen as a profitable state company.
We have focused our efforts on profitability, facility safety and maintenance. This has made it possible to improve the company’s profit margin, focusing resources in what produces higher profit. Together with the work of the procurement office, this has made it possible for Pemex to have better product and service acquirement conditions, given that we have inverted the ratio of the acquisition processes.
In 2015, around 70% of our acquisitions were made through direct allocation and in 2017, 70% of the purchases we make are done through competitive processes, resulting in lower costs for the company when acquiring services. Our aim is to further increase the percentage of purchases through competitive processes over direct allocation acquisitions, because the former offers better cost, payment and service conditions.

What have been the biggest accounting challenges that Pemex has faced following the Round 0 assignments, various open seasons and the liberalisation of fuel prices?
In the accounting subdivision, we have faced an important challenge with the transformation we have carried out, consisting of being able to go more in detail with each of our assets.
In Round 0, Pemex was granted around 490 assignments. The biggest challenge has been being able to handle the accounting for each of the assignments separately, allowing us to make better decisions. We have done the same thing with the refinery projects, which means we are now able to present our accounting by asset.
The same thing has happened with the pipeline segment. This last example was actually mandated by law, as we have been conducting open seasons, which consist of sharing Pemex’s pipeline capacities with third parties through competitive processes. By sharing I do not mean allowing the winning company to use the pipeline without paying, but rather paying an appropriate amount for the use of the network.
In March 2017, we performed the first open season in Baja California. The winner of this process was Tesoro [now called Andeavor]. This model will be replicated across the country throughout 2017, and it will enable us to have a higher income.
Another very important aspect has been the fuel price liberalisation. For Pemex, this has meant a special recognition of the company’s transportation prices. In Mexico, the fuel cost was the same in Chiapas and in Tijuana. However, the transport and access costs for each city is very different. This enables us to define the costs we actually incur, and therefore improve, on yet another front, Pemex’s finances without any subsidies.
The combination of these two aspects has made it possible for us to improve our financial balance, compared to last year, as a result of a better channelling of resources, a more strict financial discipline and increased income. The tools that have made it possible to increase our income are results of the energy reform.

What have been the main benefits of forging partnerships, such as the one between Pemex Transformación Industrial and Air Liquide?
We have done some partnerships, especially in the area of auxiliary services provided for the refinery process. A large part of the losses we incur in the refining business come from auxiliary services, and not from the refinery process per se. This means that vapour, electricity, hydrogen and water treatment play a determining role. We were able to establish our first partnership in a hydrogen plant with Air Liquide. We made that public in February 2017.
This type of partnership enables us to improve the costs associated with the service supply and makes it possible for our partner to invest in the modernisation of the plants we have, thus increasing the hydrogen supply. Last but not least, this partnership enables us to have a reliable hydrogen supply, so as to reduce the number of programmed strikes during the refinery process and start reverting the losses we have had so far with this business, which we have had for several years.

How has Pemex been able to reduce maintenance costs?
Regarding maintenance, we have worked in two areas: dedicating resources and having insurance coverage in line with the possible risks we might encounter. We want to work hand in hand with insurance companies, to be able to carry out very specific activities that might reduce the risk of possible accidents. In the past few months, we have hired an insurance company and we have reduced total insurance costs, as we are dedicating more resources to this aspect, so the probability of accidents has decreased.
From a financial point of view, we are stable and improving our finances gradually, helping ourselves through the changes made by the energy reform, and aiming to achieve financial equilibrium for the company.  

How can farm-outs and other E&P associations strengthen Pemex’s financial and operational standing?
We worked on two fronts in Round 1.4. Firstly, we were able to place one of the blocks that was assigned: Trion, a deepwater block. Pemex had never produced oil in deep waters before. This has given us the possibility of having shared risks, as well as having shared investments, which are very large for these types of fields. The expected investment over the lifetime of Trion is around USD 11 billion. We also have the possibility to create synergies through which we have been able to acquire knowledge on specific technology that Pemex did not have for these types of fields.
We partnered with Chevron and Inpex to participate in one of the fields tendered by the federal government. We also participated in Round 2.1, where we were granted another two fields: one with Ecopetrol and another partnering with German oil company DEA Deutsche. This clearly shows the confidence we have in participating with other parties in the Mexican energy sector. It has also been a way for investors, operators and financiers to show their trust in the Mexican energy sector and acknowledge Pemex’s knowledge of Mexican fields.
In all the proposals made by Pemex in these types of tenders, we have also been able to have very balanced positions: If we win, we do it with a small margin, and if we lose, we do so by a small margin. We have been backed up by the financial system in all of the proposals we have made, and we have had first-line actors in the world energy sector coming forward and expressing their willingness to participate with us in the tenders.
These actions increase Pemex’s reserves and maintain a balanced reserve level, which is calculated to be around 10 years.

What role does the issuance of debt instruments and the diversification of foreign currency deposits play in Pemex’s long-term financial health and stability?
We can guarantee that Pemex will fulfil its commercial and financial obligations. We want everyone to know that we have the necessary resources and liquidity, so that even in times of market volatility, we can face our obligations dutifully.
We also want to assure local and foreign investors that they can trust us. We have been able to do this through diversification. Diversification is done not only at a currency level, but also regarding the investors, who can show their willingness to participate with us and share Pemex’s debt.
We have had higher investment participation from different parts of the world. We see an increasing participation of Asian actors, who up until now did not participate in Pemex’s debt. With the issuance of dollar-denominated bonds, we have seen an entrance of new investors that had previously been unwilling to work with Pemex.
Between January and February 2016, Pemex’s differential compared to federal debt, expressed in dollars, has been reduced by about 50%. We were at around 320 base points, and today we are close to 120 or 130 base points. This means that the increase of the price of our bonds and the yield reduction has been significant for investors that have put their trust in the restructuring process we have been undergoing in this new administration phase.
The changes have led to significant profits for investors, and this has shown consistency and transparency in what we have been executing. Even though we have tried to improve our financing needs, the challenge is being able to keep it up in the years to come.

How does proper debt management improve Pemex’s current and future financial outlook?
In 2018, we will have elections and we need to be able to ensure the resources we need to work in the following years. This is where our efforts regarding liability management come into play: We need to be able to extend the half-life of our debt, which has increased by more than one and a half years since January 2017, and which expresses our risk, given a shift in the interest rates.
Our debt can be considered to be on a fixed rate, which gives certainty to our fluxes and enables us to have long-term plans for real financial cost. It also enables us to access different types of markets, so that when one of them is going through a volatile period, we can access the other on a regular basis.
We have done all this, and at the same time, we have been trying to expand our financing sources. We have been trying to do so by expanding our credit lines with banks that did not participate in the market in the past, and with which we have been able to create some credit line indications. These new credit lines have supported and complemented the bond issuance.
Today we are very confident about the liquidity of the company. We have already covered almost all the financial needs of the company for 2017, and a vast part of the needs for 2018. All of the above makes it possible for us to assure that we are able to pay our debts, and makes it more attractive for other parties to partner with Pemex in the operational phase of different projects that we want to work on.

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