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Costly Pemex: former cash cow burned through US $15 billion in 2020

Cost will be similar this year but it's only enough to keep the company muddling along

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Propping up the state oil company Pemex is costing the cash-strapped government at least 1.4 points of GDP a year, according to Moody’s Investors Service and a senior former public official.

Pemex is a priority of populist President López Obrador, who sees the former monopoly as a lever of national development. He is investing heavily in a new refinery despite the company’s downstream activities losing money hand over fist and the firm suffering negative cash flow overall.

“Supporting Pemex in 2021, for the company to cover its financing needs, could impose a financial burden of up to US $14.7 billion or 1.4% of GDP on the sovereign, in addition to the already budgeted transfer of $2.3 billion to build the Dos Bocas refinery,” Moody’s said in a report.

That, however, is just to keep things muddling along for Pemex, rather than allowing it to boost production significantly.

“If the government was to provide additional [capital expenditure funds] of $10 billion, which we estimate is the amount required on an annual basis to lift production on a sustained basis, the cost would rise to around $25 billion or 2.3% of GDP each year,” Moody’s said.

That chimes with the estimates of a senior public official, who told the Financial Times that Pemex had “burned through 300 billion pesos” (US $15.2 billion) in 2020 — some 1.5 points of GDP. “It’s an incredible amount,” added the former official, who expected the company to need state support “very soon in 2021.”

The government has resorted to increasingly creative ways to help the nation’s former cash cow, as the nationalist López Obrador continues to prohibit Pemex from sharing risk by partnering with private companies in exploration and production.

Nymia Almeida, Moody’s senior vice president and a Pemex analyst, said that last year Pemex had been given about half the aid it received in 2019. That it had managed to keep production about stable when its main fields were mature and declining at 25% a year was no mean feat, she said.

“The challenges are still the same: high tax and debt,” Almeida said. Pemex is already the world’s most indebted oil company, with net debt of $110.3 billion at the end of the third quarter of 2020 and $6 billion due this year.

Pemex’s debt has already been downgraded to junk but could be at risk of further pressure if Mexico’s sovereign debt rating is cut — something that is no longer most analysts’ base case for this year unless economic recovery is badly delayed.

“The main trigger [to downgrade] Pemex is the sovereign,” said Almeida. “In other years, it’s been the other way round.”

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