Pemex’s $44/bl Hedge Floor Adds Ps30bn To Deficit

(Argus, 7.May.2020) — The hedge contracted by Mexico’s state-owned Pemex has a floor of $44/bl, leaving the company exposed to losses below that following the global rout in crude prices, the company’s annual report reveals.

“Pemex contracted coverage instruments that protect against declines in reference prices in the range of $49/bl to $44/bl,” according to the annual report filed on 5 May.

Mexico’s crude basket price that reflects a mix of its export grades dropped to $-2.37/bl on 20 April — the first negative price in history — amid the Covid-19 pandemic and the crude price war unleashed between Saudi Arabia and Russia.

The price has since recovered to $21.67/bl, with a first quarter average of $40.90/bl, but it remains well below the $49/bl forecast in Pemex’s 2020 budget.

Pemex does not expect crude prices to increase above $32/bl for the rest of this year, leaving it open to heavy losses on all of its targeted 1.75mn b/d of production.

Pemex director Octavio Romero said previously that the company would receive Ps7.5bn ($313mn) under the hedge based on initial calculations but he did not mention the price floor.

The company expects to face an additional Ps30bn deficit this year given the limited nature of the hedge coverage in the face of the fall in crude prices, a demand contraction because of Covid-19 and the 100,000 b/d output cut in May and June as part of the wider Opec+ output agreement.

It plans to cut operational costs, reduce output in yet unspecified fields and reduce non-strategic investments, prioritizing those that it said will be more profitable. Pemex has so far announced cuts of Ps40.5bn in exploration and production activities, the only profitable part of the business.

Pemex has contracted its own hedge, separate to the finance ministry’s $1.37bn annual hedge, since 2017.

This year’s Pemex hedge covers 242,000 b/d — 14pc of March’s total 1.73mn b/d output — between December 2019 and December 2020, some 24pc less than last year’s hedge and 45pc less than the 2018 hedge, according to the report.

Around 16pc of Mexico’s federal budget depends on oil revenues, with an estimated 77pc of federal oil revenues protected under the finance ministry’s annual hedge.

— By Rebecca Conan

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