Mexico’s State Oil Company Expects $311 Million From Its Hedge

(Bloomberg) -- Mexico’s Petroleos Mexicanos expects to receive some relief from its oil hedge this year as producers grapple with a record slump in demand.

“The Finance Ministry has full coverage, and in the case of Pemex it is a part of our production,” said Pemex Chief Executive Officer Octavio Romero at a press conference in Mexico City, attended by President Andres Manuel Lopez Obrador.

“It is a monthly payment that we receive when the price falls below that agreed by the insurance. We are calculating this year we’ll receive around 7.5 billion pesos ($311 million) for insurance coverage,” said Romero.

Pemex hedged its crude exports at an average of $49 a barrel using Asian put-spread options with monthly maturities for the period between Dec. 16 last year and Dec. 15 this year. The so-called put-spread strategy, whereby put options are exchanged, provides protection when prices decline, down to a set level.

Even so, the hedge covers just a fraction of Pemex’s production. According to a stock exchange filing Pemex hedged 243,000 barrels a day in 2020 -- roughly 13% of its oil production goal for the year, according to its five-year business plan.

Pemex’s hedge differs from the renowned oil hedge of the Finance Ministry, the largest of its kind, which typically involves purchasing put options rather than buying and selling different ones to profit from the spread. The country banks all gains from higher prices but enjoys the security of a minimum floor, which provided a powerful defense in Mexico’s refusal to make deeper output cuts in a deal with OPEC+ on Sunday.

The so-called Hacienda hedge, however, does not alleviate the myriad challenges facing Pemex. Its debt has grown to the highest of any oil major, at more than $100 billion, and it must reverse 15 years of output declines. It also faces a mounting storage problem should prices remain low, as the country has capacity to store only 11 million barrels of Maya crude, Romero said.

With demand collapsing even after the largest coordinated production cut in history by the OPEC+ nations, and little confidence in Pemex’s ability to turn things around, the company could face a fresh downgrade of its bonds after several cuts already this year from Fitch Ratings Inc. and S&P Global.

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