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Pemex’s balance sheet calls out for investors in oil, gas and power sectors

Pemex, Mexico’s state oil company, is hoping that an infusion of capital from private equity firms and other foreign investors will help it stave off a pressing liquidity crunch.

Pemex, which is going through a number of key reforms, is suffering from not only lower oil and natural gas prices, but also has had to increase its debt to fund outflows for taxes, duties and capital spending, all while seeing a roughly 6.7% year-over-year oil production decline.

The company, which has a new director general and is responsible for providing close to 25% of the Mexican government’s annual budget from its operating cash flow, posted a $10 billion loss in the third quarter 2015, making it the 12th consecutive quarter in which losses were reported. In the first nine months of 2015 the company reported a loss of approximately $19.4 billion.

In a late 2015 ratings action, Moody’s Investors Service said Pemex’s liquidity was “tight.” It said that in 2014 Pemex’s $9.1 billion of cash flow from operating activities “fell well short of covering $15.1 billion in capital spending outlays.”

After noting that Pemex has or will have $11.8 billion of debt come due from the latter part of 2015 into and throughout 2016, while having an estimated $4.5 billion of cash at the end of 2015, Moody’s on Dec. 16 cut Pemex’s global scale senior unsecured rating one notch from A3 to Baa1.

Said Moody’s, “The actions were prompted by Moody's view that the company's current weak credit metrics will deteriorate further in the near to medium term.”

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Down, but not out

In early January, the Mexico City-based Pemex announced the layoff of as many as 10,000 oil service workers from its total work force of approximately 142,000, a rare thing in heavily unionized Mexico. The move was a cost-cutting measure, and more layoffs could follow.

On Feb. 17, the Mexican Finance Ministry said the government would reduce spending this year by approximately $7.2 billion, or 0.7% of gross domestic product.

Pemex, whose new Director General José Antonio González Anaya holds a Ph.D. in economics from Harvard and served until Feb. 8 as director general of the Mexican Institute of Social Security, is committed to cutting spending by $5.5 billion.

The Pemex investment budget for 2016 is expected to be $17 billion, down from $22.5 billion in 2015 and $26 billion in 2014. For its 2016 budget, Pemex has reportedly used an average Brent crude price of $50/b. For the month of February, Brent has been trading in the $33/b range, while Mexico’s Mayan crude has been trading in the low-$20/b range.

Pemex, which saw its average production fall to 2.266 million b/d in in the third quarter of 2015 compared to 2.429 million b/d in Q3 2014, will thus be more reliant than ever on partnerships with and investments by the foreign private sector as it tries to keep its opening of its oil, natural gas and power sectors on track.

On Monday, President of Mexico Enrique Peña Nieto opened the IHS CERAWeek conference in Houston by assuring the energy-heavy audience that Mexico “will maintain the rhythm of contracts for hydrocarbon extraction" that it started two years ago.

Peña Nieto said he came to Houston to announce that “the fourth call for bids of Round 1 will be issued in the first days of December, which corresponds to deep-water deposits."

On Tuesday, the Pemex chief González Anaya said at the same meeting in Houston that “two years ago there was just one oil company operating in Mexico. Now there are 30 contracts with 30 companies.”

González Anaya said he was headed to New York to further discuss Pemex’s investment needs with Wall Street bankers.

Active private equity and foreign investors

Pemex, which was formed in 1938, has stayed clear of foreign investors for more than 70 years. Over the past 12 months, though, a number of transactions have been announced that reflect a significant break from the past.

One deal announced originally in May 2015 took shape last week. Bankers for the private equity firm KKR launched a $1.35 billion package of three loans and a credit revolver that would fund a sale lease-back agreement that involves an assortment of energy infrastructure assets owned by Pemex.

While KKR declined Monday to identify the assets, it did not dispute earlier press reports that 11 pipelines in Mexico, a set of subsea cables, two non-drilling platforms and one gas compression facility are to be bought by KKR from Pemex and then leased back to the oil company for a 15-year period. At the end of that time, Pemex will buy back the assets from KKR.

Analysts have described the lease-back deal as a way for Pemex to monetize assets and use the proceeds to either pay down debt or reduce its borrowing needs.

Almost a year ago, in March 2015, private equity firm First Reserve and investment management firm BlackRock partnered with a Pemex subsidiary and eventually took a $900 million, 45% stake in the north and south sections of the 446-mile Los Ramones Phase II natural gas pipeline.

Sempra Energy’s Mexico-based subsidiary IEnova offered in July to pay $1.325 billion for Pemex’s 50% stake in the natural gas pipeline joint venture Gasoductos de Chihuahua.

In December, Mexico’s newly configured anti-trust unit, the Federal Economic Competition Commission, delayed the deal after determining that Pemex had not sold a stake in a liquefied petroleum gas pipeline as it had been required by the previous anti-trust agency.

Some who have followed the recent Pemex moves have wondered, however, if the Mexican government’s ultimate intent is to break the company apart and privatize its parts. Given the long anti-foreign bias, that just feels like a step too far.