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PEMEX Suffers $18 Billion Loss

PEMEX Suffers $18 Billion Loss thumbnail

By Steve St. Angelo

The situation in Mexico’s oil industry continues to rapidly disintegrate as falling oil production and rising costs resulted in an $18 billion fourth-quarter loss for the state-run oil company, PEMEX.  Part of the reason for the huge financial loss at PEMEX was the fall in the value of the Mexican Peso.  While PEMEX’s costs are in Pesos, it sells crude oil and purchases petroleum products in Dollars.  Because the Mexican Peso declined 8% versus the Dollar, it put a huge strain on the company’s year-end financials.

Regardless, Mexico’s oil production continues to fall due to the natural decline from resource depletion.  However, as Mexico’s oil production falls, its net oil exports have dropped significantly as well.  Thus, falling net oil imports translates to less revenue for PEMEX.  According to BP’s 2017 Statistical Review, Mexico’s net oil exports hit a low of 587,000 barrels per day (bd) in 2016, down from 1,867,000 bd in 2004:

While Mexico’s oil production declined from a peak in 2004, its domestic consumption has remained basically flat.  Which means, Mexico’s net oil exports have fallen by more than two-thirds in just 12 years.  Unfortunately, it looks like Mexico’s oil production will be down another 10% in 2017.

The next chart from shows Mexico’s net oil exports since 1960:

Mexico’s total oil production is shown in the grey area, while consumption is displayed by the black line.  The green area reveals the country’s net oil exports.  As we can see, Mexico’s net oil exports peaked in 2004 at 1.86 million barrels per day (mbd) and are now likely below 0.5 mbd.  Falling net oil exports are a death-knell to the Mexican government because it receives a lot of its revenue from PEMEX.

Furthermore, the United States has received a lot of its oil from Mexico over the past three decades.  However, this has all changed in the past two years as Mexico has switched from being a net exporter to a net importer of crude oil and petroleum products from the United States:

Mexico’s net oil and petroleum product exports to the United States peaked in 2006 at 1.6 mbd and had turned into net imports of 603,000 bd in December 2017.  Again, this is terrible news for PEMEX and the Mexican economy.  While the United States can print Dollars to its heart’s desire, as it is still the world’s reserve currency, Mexico does not have the same luxury.

If we take a look at PEMEX’s financial statements, we can spot the unfolding trouble:

As mentioned at the beginning of the article, PEMEX suffered an $18 billion net income loss in the fourth-quarter of 2017.  Not only did PEMEX’s cost of sales increase significantly, but it also suffered a $7.6 billion Foreign Exchange loss due to the depreciation of the Peso.

Now, the next table shows PEMEX’s Cash Flow.  There are two important highlights in the table below:

PEMEX’s interest expense was $5.9 billion for 2017.  However, their total net interest expense was $5.4 billion.  That is one hell of a lot of money to pay those who hold your debt.  The second important figure is the cash flow from operations of $2.9 billion was less than the $4.3 billion in capital expenditures.  PEMEX spent $1.4 billion more money in producing their oil and gas than they received from operating cash.   Their negative free cash flow and other items pushed PEMEX’s long-term debt to a record $95 billion in 2017:

The more debt PEMEX adds to its balance sheet the higher will be its annual interest expense.  And, to make matters even worse, Mexico’s oil production will continue to decline right at the time its debt is exploding.  It will be impossible for PEMEX to pay back its debt, so it is logical to assume that the state-run oil company will likely go bankrupt in the future causing extreme difficulties for the Mexican Govt and economy.

Now, I am not singling out PEMEX or Mexico’s oil production as what’s going wrong in the global oil industry.  ALL public and state-run oil companies will go belly-up… it’s just a matter of time.

We must remember when Egypt switched from being a net exporter to net importer of oil; the Arab Spring occurred the very next year:

With the rising food costs during the 2008-2009 inflationary period in Egypt and on top of the country becoming a net importer of oil in 2010, the government was powerless to deal with the crisis.

Lastly, as Mexico’s oil production continues to decline, its state-run oil company, PEMEX, will likely default on its debt.  This will cause severe problems for the government and the domestic economy.  However, what happens in Mexico as it pertains to oil, will not stay in Mexico.  The U.S. and global oil industries are in serious trouble.  While these problems won’t impact the world this year or next, it will become a disaster over the next decade.

SRSrocco Report


9 Comments on "PEMEX Suffers $18 Billion Loss"

  1. Hello on Sat, 3rd Mar 2018 3:15 pm 

    >>>> Part of the reason for the huge financial loss at PEMEX was the fall in the value of the Mexican Peso. While PEMEX’s costs are in Pesos, it sells crude oil and purchases petroleum products in Dollars.

    How does this make any sense?
    If any, the fall of the peso HELPs, not hurts.

  2. Duncan Idaho on Sat, 3rd Mar 2018 3:35 pm 

    I lived in Mexico last year.
    Petro was easily available for any of the proletariat with cash (most people).
    I am amazed at the analysis of Mexico by those who have never lived there.
    I have driven to Costa Rica, and Central America is a mess .

  3. TommyWantsHisMommy on Sat, 3rd Mar 2018 7:30 pm 

    They can just go electric.

  4. MythBuster on Sun, 4th Mar 2018 1:04 am 

    “the fall of the peso HELPs, not hurts”

    Not if you have to use pesos to buy petroleum products (equipment, chemicals, etc.) in dollars.

    If you have to spend 15 pesos to get a dollar’s worth of something instead of spending just 10 pesos (for example), how does that help? Or make sense?

  5. MASTERMIND on Sun, 4th Mar 2018 3:19 am 

    When goods don’t cross borders. Soldiers will.

  6. MASTERMIND on Sun, 4th Mar 2018 3:30 am 

    Hey look its Clogg hanging with the fella’s!

  7. deadly on Sun, 4th Mar 2018 4:47 am 

    Too many trucks out there with a tank to haul oil from a pipeline in Mexico that mysteriously develops a hole in it and oil leaks into the tank the truck is hauling.

    You can experience heavy monetary losses that way.

  8. rockman on Sun, 4th Mar 2018 11:23 am 

    “ALL public and state-run oil companies will go belly-up…”. Back to the same problem: “belly-up”. If it goes bankrupt and is dissolved then so far not even close to truth with regards to US public hydrocarbon companies. The latest bust in oil prices proves that: perhaps I’ve missed a few but I’ve seen only one company file Chapter 7 and be dissolved. Of course, almost a hundred companies filed Chapter 11 and recovered in good to excellent financial shape.

    Of course, there was a slaughter: the folks that had loaned money to those companies. Their loans were taken off the books of those companies. Or for some lucky debt owners who had most if not all of a company’s assets transferred to them. If fact, with the increase in oil prices some of those assets may be worth more than the amount original debt. And there were also transactions relatively unseen by the pubic: acquisitions. Company A is deep in debt and looking at possible bankruptcy filing. But instead Company B offers those shareholders of Company A cash (typically much less then it had been trading for) but typically most of the value in Company B’s stock. And Company B also assumes Company A debt. A company, such as ExxonMobil, has used such deals for decades to increase its reserve base at a relatively low cost.

    Over time the number of petroleum companies will decline. Except during boom periods when new money will rush in. But as the boom/bust cycle continues many of those new companies will eventually be absorbed by the survivors. Theoretically the hundreds of existing petroleum companies today may decline to just a handful. Even true of the Big Oils: remember there used to be Seven Sisters. Not today. And probably even fewer in the future.

  9. bobinget on Mon, 5th Mar 2018 11:41 am 

    If we count reimportation of ‘product’, Mexico has been negative crude for more than a year.

    Mexico is one of America’s best customers for natural gas…. Still being flared in Mexico.

    Our Rockman explained why he still needs to flare.
    (cost of hook-up isn’t justified because of absurdly low NG prices) Which of course makes perfect sense for a private company.

    For nationalized PEMEX, not so much.

    As for currency; Mexico has an elaborate hedging
    system that takes weeks to formulate.
    World leaders need understand “oil is Money”.
    As Mexico’s reserves deplete so does its currency value. (due to higher debt service costs)

    As USD:

    IF USD Loses value against a basket of currency, (including yuan) US can no longer borrow at favorable interest rate to pay for crude imports.

    Our Dear Leader believes there are winners in trade wars! (“Trade wars are good and easy to win”)

    As DJT would say; “we will see”.

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