Mexico 2017 Budget Cuts to Push Pemex Output to 36-Year Low

(Bloomberg) -- Petroleos Mexicanos’s oil and natural gas production is poised to fall to its lowest level since 1980 after lawmakers approve an 86-billion-peso ($4.6 billion) budget cut proposed by the Finance Ministry.

The Mexican government has planned a 2017 budget of 392 billion pesos for Pemex, 18 percent less than last year, according to documents on the Finance Ministry website. The reduction would force Pemex to cut back on exploration and production activities, putting more pressure on its declining crude output.

Pemex and the Finance Ministry forecast the state-owned company’s production to fall to 1.925 million barrels a day in 2017, about a 13 percent decline from the current 2.2 million barrels.

Chief Executive Officer Jose Antonio Gonzalez Anaya remains "very optimistic" that Pemex can evolve into a more profitable company, he said Thursday at an event in Mexico City.

The company is "sitting on 24 billion barrels of oil," and can improve its financial standing by "being very proactive in joint ventures so that we can become more efficient and more productive," he said.

Smaller Cuts

The proposed 2017 budget cut is less severe than the 100-billion-pesos-reduction officials had signaled earlier this week, which would have been comparable to last year’s cuts.

Following Finance Minister Jose Antonio Meade’s presentation of the nation’s budget proposal to lawmakers Thursday, Luis Madrazo, the government’s chief economist, said the reductions for Pemex were consistent with his previous guidance. The cuts were adjusted for inflation, Madrazo said in a phone interview.

No more government cuts are expected. However, Pemex is struggling under a liquidity crunch and could tighten spending further on its own to free up cash to repay debt, according to a Pemex press officer who can’t be named due to the company’s policy.

Pemex’s cash flow shortfall, which means the company is spending more than it earns from operations, is expected to reach almost $22 billion this year from $13 billion in 2015, according to data compiled by Bloomberg. Pemex’s company losses reached $32 billion last year.

In its 2017 plan for Pemex, the government allotted 168 billion pesos ($8.9 billion) for oil exploration and production projects, while 21.4 billion pesos ($1.1 billion) is slated for refining investments.