LPO's report this week about an urgent meeting at Pemex Tower accelerated the Mexican Government's timing. On Monday afternoon, President Andrés Manuel López Obrador discussed with the new Finance Secretary, Arturo Herrera, the details of the business plan which hours earlier the oil company's Administration Council had approved.
On Tuesday, the President presented a portion of the new plan and the markets did not respond in a positive light. Despite CEO Octavio Romero said that the final document is over 200 pages long, which still has not been presented, the peso and the Government bonds dropped.
Moments after the announcement, the Mexican currency fell back .28%, and by noon, it dropped to .62%. According to Jesús López, an analyst for Banco Base, this reaction also comes from external factors, like a dollar correction, which may affect other currencies, "but the peso's drop is the most notorious and that has to do with internal figures", he explained to LPO.
It was foreseeable. Pemex's plan did not satisfy the rating agencies, bankers, or investment funds. More information was expected, and a more concrete turn in energy policy. The markets understand that if there is no strategy to quickly ignite production, Pemex's payment ability facing their debts might be compromised. A drop in the company's credit rating seems inevitable.
The business plan is a crucial document for rating agencies, which expected to have a better understanding of this administration's energy plan. From this plan, Pemex was dependent on whether they could save it from a cutback in its credit rating. None of the agencies has said anything so far, but experts have confided to LPO that a positive reaction is unlikely.
"It is going to be hard to change the investors' perception on Pemex with this business plan, because it does not contemplate private partnership, and a lot of what the agencies have been suggesting was needed to pump fresh resources via private investment", Arturo Carranza, an independent analyst, said to LPO.
Citigroup's analysis confirms this outlook, which had already been explained by former Secretary of Finance Carlos Urzúa, before leaving office last week. Now, Arturo Herrera was the one who had to convince López Obrador. He was not able to do it. Herrera had two central criticisms, which are the elements that cause nervousness to the markets. On one hand, the centralization of resources on the construction of the Dos Bocas refinery, when Pemex needs to focus their investment in the production of crude oil, the guarantee for their debt.
The new Secretary of Finance is also worried by Secretary of Energy Rocío Nahle's decision of blocking any sort of participation from the private sector. Nahle wants to prove that Pemex can handle everything by itself. "The problem is not whether they participate or not, but under what model", Carlos Urzúa said to his collaborators.
The Dos Bocas refinery project, which had already been highly criticized by several companies, is still intact, and the inclusion of private companies in the mining of oil wells will be done under the old system of service contracts. No one in the business world considers that this will add investment to the company.
"Pemex business plan: Is that all you got?", is the lapidary title of the Citigroup document, in which they harshly suggest that there is a high possibility that Moody's lowers the score for the Mexican oil company's debt.a
"Much ado about nothing", begins Citigroup. It summarizes their diagnosis in a very tough paragraph: "We believe the amount is disappointing", referring to the financial aid the government is providing to the company. "The strategy does not solve the main structural problems of the company, and the government confirms that they did not understand the nature nor the importance of Pemex's fragility".
For specialist Miriam Grunstein, the new Secretary's imprint is there. She celebrated, for example, that there would be a turn in focusing everything in the plan on the exploration and the production. However, she warns: "Investment is very well distributed, but I don't see the business. I see where they are investing, but not how or where they are going to sell. They are not telling us how this is going to be profitable", she said to LPO.
Expert Fluvio Ruíz agrees: "It is hardly a business plan", he said. "This seems more like a set of objectives, but it does not show a clear vision of how to achieve it. I am confident that this is only a summary of the business lines".
Alejandro Limón, an analyst for the Centre of Economic and Budget Research, points out that there is still a missing key piece to understanding the energy project: the budgetary package, which Herrera should present by mid-September. "In the revenue section, we will see it, without Pemex's income, but it will also be determinant to see in what oil price they are basing their forecasts".
To all of this, the expectations for economic performance during the second quarter must be added. The National Institute of Statistics and Geography (INEGI) will be publishing their economic numbers on the last day of July. The first estimates by Banco Base warn that there may be a contraction in the Mexican economy, increasing the chances of a recession. It would be the first one for Mexico since 2009.
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