As the oil prices boomed, Latin America’s biggest national oil companies spent big in pursuit of new reserves and binged on debt to finance it. Now payments are coming due just as weak prices cripple cash flows. Government intervention, restructuring or even default are now likely.
The region’s three largest national oil companies – Brazil’s Petrobras, Venezuela’s PdV and Mexico’s Pemex – have a combined U$45 billion in debt repayments due over the next two years. With international oil benchmarks trading in the mid-$30s – or lower for Venezuela’s heavy crude grades – the cash crunch will stretch the companies’ finances and divert funds needed for investment.
President Dilma Rousseff said in in 2015 that she couldn’t rule out a bailout for Petrobras if oil prices didn’t recover. The company board is aware of the finances of the country and considers this bailout a “last resort”. But with close to $23 billion in debt payments due over the next two years, the firm’s new management team has slashed capital spending and says it is prioritizing the financial health over growth. Spending has been cut from U$130.3 billion to U$98.4 billion leaving the company’s other businesses running on bare-bones budgets.
Spending cuts will help, but honoring the debt payments will depend on Petrobras’s divestment plan. The firesale got off to a slow start in the company’s assets sold in 2015. That leaves more than U$14 billion to pay this year, at a time when sellers outnumber buyers. To pull in potential suitors Petrobras will probably have to sell some of former President Lula da Silva highly coveted pre-salt oilfields.
Pemex may need help from the government as losses mount and the company faces almost U$12 billion in debt payments in the next two years. After a third quarter loss, Mexico’s finance minister, Luis Videgaray, said that state oil company could get a capital injection if it cut costs and bring in more foreign partners.
The promise of a government backstop helped reassure jittery investors ahead in a successful bond sale last January. The offering was oversubscribed, suggesting demand for the company’s debt remains robust. Pemex plans to raise more so this year but plunging oil output will make recovery more difficult.
The hardest hit and most vulnerable is Venezuela’s PdV. The company’s heavier crude slate means its oil price languished in the mid-$20s a barrel. In English, the operational cost is higher than selling price, to make matters worse, the government relies in oil for nearly all of its earnings.
A default in PdV is possible in 2016, unless the oil price recovers or China steps in with its own bailout. Besides, PdV’s 2016 bond, which matures in October, is trading very low and is a sure sign of widespread doubts about the company’s ability to pay.
All these companies are central to their countries’ energy strategy, so consequences of failure are unthinkable. The obvious solution is a raise in oil prices, but companies could use the situation to improve efficiency. On the bright side, the state run companies are a great source of money for the pockets of well known corrupt politicians. Lula da Silva in Brazil, Chavez in Venezuela and Calderon in Mexico are very popular for their wrong doings so as bad as this hurts now, it’s likely these countries will get future benefits with the crisis in the state companies.