Mexico Plans More Pemex Tax Relief, Won't Tap Rainy Day Fund

(Bloomberg) -- Mexico’s state oil company is set to receive added tax breaks to help reverse long-term production declines and avoid tapping the nation’s rainy day fund, according to its chief executive officer.

The country’s Finance Ministry is opting for a new tax strategy for Petroleos Mexicanos starting next year that will provide an “important reduction” in the company’s contributions, Octavio Romero said in an interview, declining to give an estimate for the savings. The gradual cuts, to be spread over five years, would complement incremental tax breaks announced in February that were worth 90 billion pesos ($4.72 billion) over six years. He said the new tax regime will be announced in “the coming days” and it will be used instead of using about $7 billion from the Oil Revenue Stabilization Fund, known as FEIP, which had been previously proposed by the Ministry.

The tax breaks are the latest in a string of measures aimed at shoring up the finances of the beleaguered driller, known as Pemex, whose $106.5 billion debt is the highest of any oil company. The funds could help Pemex stave off another credit downgrade after Fitch Ratings Inc. reduced its rating to one notch above junk in late January, and provide a much-needed liquidity boost.

“The idea is to allow Pemex to meet its planned investment and not create a burdensome situation for public finances,” Romero, 60, said in an interview in Tabasco, the location of Mexico President Andres Manuel Lopez Obrador’s flagship energy project, a 300,000 barrel-a-day refinery that Pemex has been charged with constructing and operating. “It’s aiming to strike a balance."

The tax cuts would follow the signing of an $8 billion syndicated loan, of which $2.5 billion will pay off existing debt and $5.5 billion will replace some credit lines. The company is seeking to issue no new debt this year or next year, said Romero.

Lopez Obrador has saddled Pemex with managing the construction of a seventh refinery after none of the companies invited to bid on the project met the government’s ambitious three-year construction timeline and $8 billion budget.

The government has designated 50 billion pesos to the Dos Bocas refinery project this year, and the remainder of the funds “are guaranteed” in the budget, said Romero. Pemex will manage the project jointly with the energy ministry, and contract private companies to build the refinery units, he said.

Pemex also aims to reconfigure its six existing refineries to run at about 90% of capacity in two years, up from about 35% today, said Romero.

Also see: Mexico to cut fuel oil from crude hedge formula: Pemex Ceo

Romero, an agronomist by trade and longtime political ally of Lopez Obrador, was nominated by the president in July, and took over in December. The transition phase was “fundamental” to learn the ropes, said Romero, who just landed in Villahermosa and was preparing for a week of back-to-back meetings there. The schedule is tough, with Romero working for weeks on end without a break.

“Sometimes I forget what day it is,” he said over the course of a two-hour interview, looking haggard.

It’s been a steep learning curve. In the first weeks of his leadership at Pemex, a fuel pipeline exploded due to an illegal tap, killing more than a hundred people in Hidalgo state. "It was brutal, a very difficult experience."

The tragedy led Pemex and the government to double down on its strategy to end fuel theft, measures that he says have born fruit. Piracy fell more than 90% between November and April, he said. Pemex expects to receive about 32 billion pesos in additional revenue in 2019 as a result of combating theft.

Both Romero and Lopez Obrador were born in Tabasco, an oil state in southeastern Mexico that has fallen into decline in recent years as profits have dried up. Romero echoes his boss’s sentiments on the need to revive oil ghost towns by expanding drilling and weeding out corruption at Pemex.

This will be achieved by installing new management, while a company wide restructuring has resulted in several hundred job cuts, he said. Pemex’s former exploration and production chief Miguel Angel Lozada has also stepped aside while he is being investigated for corruption, Romero said.

Pemex bonds extended gains for a fourth-straight day since the latest rescue package was announced on Monday. Yields on the bonds maturing in 2027 fell 5.8 basis points to 6.4% on the day.

Pemex will sign contracts for 20 fields in May that will help increase production this year, said Romero. The company is focusing drilling onshore and shallow-water fields that are easier and less costly to develop than deep-water areas.

The 20 fields, he said, will eventually help compensate for declines at Mexico’s most productive oil field, Ku Maloob Zaap. The company, whose oil output has declined every year since 2004, aims to pump 2.48 million barrels a day in 2024, compared with 1.66 million in the first quarter of this year.

“This investment will result in more production and generate more income for the budget and eventually higher production will compensate” for Pemex’s lower taxes, Romero said. “The first thing we have to do is stop the drop in production.”

--With assistance from Justin Villamil and Eric Martin.

To contact the reporter on this story: Amy Stillman in Mexico City at astillman7@bloomberg.net

To contact the editors responsible for this story: David Marino at dmarino4@bloomberg.net, Reg Gale

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