For Mexico’s troubled Pemex, deeper debt seems the only option

Amid falling output, continuing losses and mounting debt, Pemex, Mexico’s state-owned oil company, has once again had to borrow money to remain operating. On Friday, it announced it had raised 80 billion yen ($771 million) on a 10-year loan from the Japanese capital market, pushing the company’s long-term debt to $65 billion, equivalent to almost half its total liabilities.

Since Mexican President Enrique Peña Nieto took office in December 2012, promising to break the state monopoly in oil and gas exploration and production in a bid to accelerate Mexico’s economic growth, Pemex’s problems have worsened, exacerbated by falling oil prices, swelling its losses in 2015 to $40 billion.

Pemex is the seventh-largest petroleum company in the world, but since 2004 its profits have dropped by 30%. But there has been no room for modernization in the state-owned oil firm, mainly because almost two-thirds of its revenue goes directly into the national treasury.

Pemex is fast running out of places to borrow money, while reducing its outgoings through mass redundancies would be political suicide for the government

Because of the current state of affairs in Pemex, the country’s major political parties agree that intervention in Pemex is not only necessary but urgently needed. The problem centers on how to go about it.

Tenders to open the energy sector that had been expected to draw billions of dollars in investment coincided with the global oil price crash. The drop in oil revenue has hit state coffers hard, falling from around 50% of state income to 20% in recent months.

In response, the government has sacked the company’s director general, replacing him with a financier experienced in reviving ailing businesses. At the same time, some $5.5 billion worth of cuts have been imposed on Pemex.

Pemex’s new strategy has focused on attracting private investment, which have bid for concessions at hundreds of oil fields across the nation.

Mexico’s strong dependence on crude has also made officials careless in they way they invested money for new energy exploration projects. More than 90% of Pemex’s investment is spent on maintaining current oil fields, with little money spent on exploring new wells.

Pemex’s woes are matched by the Mexican economy, which this year is once again likely to fall, registering growth for 2016 of around 2%.

“Pemex’s debt has doubled under Peña Nieto. Production is falling, revenue is falling, and there are no solutions in sight. The time for accounting games is over and what is needed now is real progress,” says David Shields, a US academic and expert on Mexico’s oil industry.

Unable to generate revenue, Pemex has decided to deepen its debt, a decision that has troubled the international markets and rating agencies. Borrowing provides short-term relief, they warn, but it also increases fiscal pressure. Falling output and lower oil prices reduce expectations of generating cash, which in turn reduces the company’s ability to invest in exploration and production: a vicious circle that is hard to break.

Pemex has few options. It is fast running out of places to borrow money, while reducing its outgoings through mass redundancies would be political suicide for the government: the company employs some 150,000 people, with a further 100,000 former employees on its payroll.

Pemex faces one of the most difficult situations in its history, but there is no question of it being allowed to go bankrupt, despite the increasing burden it represents to the state. That said, if the government cannot turn its fortunes round, Pemex could end up dragging the Mexican economy down with it.

English version by Nick Lyne.