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Mexico’s state-owned oil major is on pace to record its lowest annual production in three decades

Petroleos Mexicanos (Pemex) has transformed its energy policies and welcomed investments with open arms, but the progress is no match for the 53% drop in Mexico crude oil basket prices from one year ago.

Pemex posted a loss of 167.6 billion pesos, or $9.9 billion, in its Q3’15 earnings release. The difficult commodity environment was not the only factor – the peso has depreciated against the U.S. dollar by roughly 20% on a trailing twelve month basis. Production for the first nine months of 2015 has averaged 2,263 MOBPD and is on pace for its lowest output since 1982. Overall crude production has fallen by about 35% since 2007 alone, and its market share of North American production has declined to 13% from 22% in the same time frame. Its standing among global producing countries has fallen to tenth overall, compared to fifth in 2007.

Well completions dropped by 58.3% on a quarter-over-quarter basis, and the company has completed only 284 wells to date in 2015, roughly equal to number of wells completed in the second half of 2014. Running rig counts for the two respective periods have decreased to an average of 74 from 102.

Moving forward, Pemex has working capital of $64.6 billion and total debt of $87.3 billion. The company has raised $21.3 billion in equity thus far in 2015 (including a landmark deal with BlackRock and First Reserve) in an effort to take advantage of opportunities in the downturn. Credit ratings from the Big Three (Fitch Moody’s and Standard & Poor’s) all place Pemex’s rating as “Stable” due to its role as a state-owned oil company.

Won’t Happen Overnight

At face value, criticizing Mexico’s hydrocarbon developments seems warranted. However, the country itself has been very active on the collaboration front, signing joint agreements and enticing investment from international firms. In 2015 alone, Pemex has signed memorandum of understandings with industry mainstays like Dominion Technologies, GE (ticker: GE) and NuStar Energy LP (ticker: NS).

The same day as its Q3’15 announcement, Pemex announced a crude swap agreement with the United States had been finalized. According to the terms, the company can exchange up to 75 MBOPD of its heavy crude for United States light crude in a straight 1-for-1 swap. Initial requests were for up to 100 MBOPD, and Pemex refined an average of 1,061 MBOPD in Q3’15. Commenting on the agreement, Alejandro Martinez, General Director for Pemex, said, “The inputs of light-oil and condensates will allow PEMEX to increase the output of gasoline and diesel, reduce the production of fuel oil and refinery products with high sulfur content and improve the installed utilization capacity thereby generating additional value for the company.”

us-exports-to-mexicoRicardo Garcia-Moreno, Partner for Haynes & Boone, anticipated some growing pains in Mexico’s new public hydrocarbon initiatives but is encouraged by the strides being taken by President Enrique Pena Nieto and the Mexican government.

Mexico’s National Hydrocarbon Commission, independently from Pemex, conducted two offshore lease sales in fiscal 2015, selling a total of five blocks to industry majors like Eni S.p.A. (ticker: E) while securing the lion’s share of revenues. Midstream projects have already been finalized to increase natural gas imports from major U.S. shale plays. Howard Energy Partners, a private midstream company, is one of the first players on the revamped import market. “Being a first mover in Mexico is not dissimilar to being a first mover, say, in the Marcellus when it was brand new in 2009,” said Mike Howard, Chairman and Chief Executive Officer of Howard Energy Partners, in an exclusive Top Minds in the Business interview with Oil & Gas 360®. The company is constructing a 200-mile pipeline and is expected to be online by 2017.

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