Reeling from crushing losses and hammered by the oil price plunge, state-owned Pemex, Mexico’s biggest company, will unveil its turnround strategy on March 29 together with its 2015 results. Both will be painful. 

Is Pemex bankrupt?

If Pemex were an ordinary company, not a pillar of the federal budget, the answer would be yes: at the end of the third quarter of 2015, Pemex reported total assets of $126bn, outstripped by $191bn in liabilities. It has long-term debt of $76bn and $90.5bn in pension liabilities and new chief executive José Antonio González Anaya says its debts are “unsustainable”. Amid price falls, total sales fell nearly 25 per cent in the third quarter and Pemex tumbled $10bn into the red.

Though production has fallen 33 per cent since its 2004 peak, Pemex still has to keep paying huge taxes — nearly $6bn in the third quarter. But the triple hit of lower production, lower prices and a weaker peso had wiped out profits even at a pre-tax level in the third quarter. “I don’t think the tax issue fully explains why things are so bad,” said Marco Oviedo at Barclays in Mexico City. 

So what does?

Pemex is bloated, with 153,085 staff at the end of 2014, nearly seven times the level at Norwegian state company Statoil, and well over a third more than ExxonMobil, Shell and BP.

Pemex trumpets costs that are as much as half those of oil majors, but efficiency lags.

Think-tank Cidac calculated in 2013 that Pemex needed 6.5 times Statoil's staff to produce twice its volume.

Cheap oil ought to mean cheap refining, but Adrián Lajous, a former Pemex chief executive, predicts losses in all divisions and a refining loss of 120m pesos ($6.6m) in 2015 “in a year of high margins in the rest of the world".

How big is the hole in Pemex? About $23bn this year, reckons Moody’s.

Why does Pemex matter so much to Mexico?

Although Mexico's dependence on oil revenue has dropped sharply, Pemex’s taxes still fund a fifth of state spending, according to Luis Madrazo, head of economic planning at the finance ministry. Created in 1938 when the industry was nationalised, president Enrique Peña Nieto calls Pemex the “pride” of Mexico. Though long blighted by corruption allegations, it is too big to fail.

So what’s the plan?

The government is betting on Mr González, a 48-year-old economist and engineer from Massachusetts Institute of Technology and Harvard. A cycling enthusiast, Pepe Toño to his friends has a ready smile, but it conceals steel. He is close to Luis Videgaray, finance minister, and a pensions expert — both will be critical. He also has a record: he slashed the state social security agency's deficit by a third in his tenure as boss.

He first task is to chop capital expenditure by $5.5bn. Mexico passed a historic energy reform in 2013 and its auction of onshore blocks suggests there could be appetite for fields that are marginal to Pemex, said Pablo Medina at consultancy Wood Mackenzie. 

Jose Antonio Gonzale Anaya, director of the Mexican Social Security Institute, (IMSS) speaks at the Mexico Autonomous Institute of Technology (ITAM) in Mexico City, Mexico
José Antonio González Anaya © Bloomberg

Should Pemex bite the bullet and go for the final taboo — privatisation — at least of some assets? Pedro Joaquín Coldwell, energy minister, once quipped "that makes economic, but not political, sense”. It is unlikely immediately — it could be a political gift to the opposition ahead of elections for 12 state governorships this year, notes John Padilla, head of consultancy IPD Latin America. But Pemex must accelerate private sector deals. It was already exploring selling stakes in three of its six refineries as well as sale-and-leaseback agreements before Mr González arrived. With $30 oil and crimped budgets, who might buy is unclear. A bigger question is how Pemex will afford to take part in Mexico's star auction — deepwater assets — on December 5.

With an unpayable pension bill equivalent to 9 per cent of GDP, Pemex has curbed perks. Mr González hails from an oil town and his grandfather was an early Pemex worker. But expect no misty eyes: “I wouldn’t be surprised to see him reopening negotiations on pensions,” said Mr Padilla.

Government aid is also promised. “It could be an equity infusion, a temporary decrease in taxes or royalties or a discussion of ‘if you reduce pensions liabilities we’ll provide more money’, said Joe Kogan at Scotiabank in New York.

Get alerts on Petroleos Mexicanos when a new story is published

Copyright The Financial Times Limited 2022. All rights reserved.
Reuse this content (opens in new window) CommentsJump to comments section

Follow the topics in this article