Mexico’s state oil company Pemex suffered a near-US $2-billion net loss in a second quarter blighted by its downgrade to junk status as its former boss, Emilio Lozoya, went on trial in a high-profile corruption case.
Lozoya’s hearing — his first time before a judge since he arrived back in Mexico on July 17 after being extradited from Spain — distracted from the tough road Pemex faces to achieve leftist nationalist President López Obrador’s grand plans to make it Mexico’s growth engine.
The debt-laden company’s net loss — 44.3 million pesos — was 16% worse than the same quarter last year but an improvement on its first-quarter performance, when Pemex racked up a $23-billion loss after being hammered by low oil prices and currency fluctuations.
However, including actuarial losses relating to staff benefits, Pemex’s total second-quarter loss increased 17% to 239 billion pesos ($10.4 billion) and sales, at about 182 billion pesos, were half those of the second quarter last year.
It also slumped to a 30-billion-peso operating loss in the quarter and the ratio of earnings before interest, tax, depreciation and amortization to total revenues fell to 23% against 29% a year earlier.
“The company is bleeding cash like crazy,” said Jorge Andrés Castañeda, an energy consultant. “They had a cash shortfall of $4.15 billion in the first six months.”
The company, which has $106 billion in total debt and about $70 billion in unfunded pension liabilities, nevertheless insisted it was making progress.
“Pemex continues generating value and contributing to national development,” Alberto Velázquez, finance director, told analysts. “Little by little, Pemex is achieving solid results.”
Production, including from private sector partners, dipped to 1.69 million barrels per day, versus 1.74 billion in the first quarter, after the Easter supply cut deal with Opec-led oil-producing nations. But Pemex said upgrades to its six refineries were bearing fruit: refinery output rose to 635,000 barrels a day compared with 542,000 in the first quarter.
López Obrador has promised to reap the proceeds from Pemex to “sow” development in Latin America’s second-biggest economy. But the company is trapped in a Catch-22: it needs cash to boost output, but with GDP set to crash 10% this year because of Covid-19, the government has none to spare and has cut Pemex’s taxes already this year. The president has ruled out new debt and after Moody’s in April delivered Pemex’s second downgrade to junk, the cost could anyway be prohibitive.
Analysts say Pemex also owes billions of dollars to suppliers and has been raiding a corporate pension fund. “I think at the rate they’re depleting the pension fund, it could effectively be at zero by the end of this year,” said Rudy Sarmiento, analyst at Empra, a consultancy.
“No one is optimistic on Pemex’s finances but there’s the sense that they’ll be OK in the very near term and when they’re not OK, the government will step in,” said Aaron Gifford at asset manager T Rowe Price. He saw a new government bailout, after support last year, as “inevitable”.
But that could weigh on Mexico’s sovereign investment rating. Analysts said Lozoya’s trial was a convenient distraction. The former Pemex boss, who has accepted state protection in exchange for naming politicians who accepted bribes, appeared on Tuesday by video link in the first hearing over charges of money laundering related to Pemex’s 2013 purchase of a fertilizer plant.
On Wednesday he faces another hearing over alleged $10 billion kickbacks from disgraced Brazilian construction group Odebrecht. Lozoya, who was whisked to hospital, not prison, on arrival in Mexico, is alleged to have 16 hours of videos of bribes to politicians to buy their support for a historic 2013 energy reform that ended Pemex’s nearly eight-decades monopoly and allow private investment in the energy sector, according to local media reports. Some reportedly collected their cash in Louis Vuitton carrier bags.
López Obrador opposes the reform and wants to stamp out graft. But Carlos Ramírez at Integralia, a consultancy, noted: “It’s a very politicized case that he will use … to go against the energy reform and to try to win the midterm elections [in 2021]”.
According to court authorities, Lozoya said in his hearing on Tuesday morning: “I gave up my extradition fight to clear my legal situation and … I will demonstrate that I am not responsible or guilty of the crimes I am charged with.” He added that he had been “systematically intimidated, pressured and used,” without giving further details.
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