Pemex Received First Payment From Its Hedge After Oil Plunges

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(Bloomberg) -- Petroleos Mexicanos received its first payment from its annual oil hedge, as prices fell the most in three decades amid a producer battle for market share, and the fast-spreading coronavirus.

Pemex protected its 2020 oil exports at an average of $49 a barrel, receiving the first payment for the month of February, it said in an emailed statement. The hedge was activated for February because of “the fall in oil prices in international markets due to the effect of the coronavirus,” it said.

Pemex hedged 234,000 barrels a day in 2020, a little over one-fifth of its crude oil exports, which averaged 1.1 million barrels a day in 2019, according to a recent filing to the Mexican stock exchange. That is a 24% reduction in volume they hedged compared with 2018. Pemex’s own hedge is much smaller than Mexico’s sovereign oil hedge, the world’s largest, which the finance ministry said has completely protected the country’s oil income this year.

Oil is set to have its worst week since 2008 as Saudi Arabia and Russia vowed to pump more in a battle for market share just as the coronavirus is expected to spur the first decline in demand since 2009. Some investors fear that even with the hedges, Moody’s Investor Service or S&P Global could downgrade Pemex’s bonds after Fitch cut them to junk last year.

“Pemex is still bleeding from other things,”said Luis Maizel, co-founder of LM Capital Group, which has Pemex bonds. “The corruption is still there, efficiency is low, there are a lot of elements impacting the results of Pemex beside the price, and none of this is helping solve that.”

Pemex is the biggest borrower of any oil company in the world, with about $100 billion in debt. Its losses almost doubled in 2019, its first year under a new leftist government that promised to revitalize output, which has fallen every year since a 2004 peak. Last year crude and condensate production fell 7.4% compared to the previous year, reaching 1.68 million barrels a day.

Reducing Exports

If prices remain low, the state oil producer would refine more of its oil domestically instead of selling it abroad, according to Mexico’s president Andres Manuel Lopez Obrador. “Now in a situation like this, instead of selling cheap crude oil, we will refine it here,” he said in his morning press conference on Thursday. Fuel prices, electricity costs and public debt will not increase, he added.

More than 80% of Mexico’s oil production has a break-even price higher than $35 a barrel, making it the Latin American producer that’s most exposed to the crude crash, according to energy consultancy Wood Mackenzie Ltd.

Mexico is proposing to build a new refinery for $8 billion in three years, calling into question the efficiency of a state-owned facility when the country’s six refineries are already losing more money the more fuels they produce.

Mexico’s refineries are in woeful shape after years of under-investment and only three of the six are equipped to process heavy crude, which represents the bulk of Pemex’s production. They are currently operating at just 34% of their capacity.

A government rescue package such as new tax breaks for Pemex could help reduce the financial risks the company faces amid lower demand, said Maizel. “As a matter of optics it would be great that they did something and showed they were concerned and moving in the right direction.”

©2020 Bloomberg L.P.

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