Mexico highlights the problems with state owned oil companies

Fuel Fix:
“Higher prices are always a good thing but these are state-owned quasi-companies that have tremendous social obligations to their countries and little freedom to take rational cost-cutting steps,” said McNulty, director of Navigant’s valuations and financial risk management practice. “U.S. companies have to pay taxes, sure, but they don’t have to build schools.”

Petroleo Brasileiro SA said it isn’t changing its business plan in response to OPEC’s production agreement. Mexico’s Energy Ministry said it won’t change its auction plans because of OPEC. Petroleos de Venezuela SA, as the Venezuelan state-oil company is formally known, didn’t respond to requests for comment.
“Higher prices are positive for these companies to varying degrees,” said Lucas Aristizabal, a senior director at credit-rating company Fitch Inc. For Petroleos Mexicanos and PDVSA, the benefits are diminished by staggering debt loads that eat up cash that could otherwise go toward drilling to sustain production and replenish spent reserves, he said.

“Pemex needs much higher prices than this under the current taxation scheme to become cash-flow neutral while investing enough to replenish reserves,” Aristizabal said.

Once the world’s third-largest oil producer, Mexico now pumps less than the U.S. state of Texas, thanks to dwindling output from the once-gargantuan Cantarell field and lack of investment in new drilling technology. Aristizabal estimated the Mexican company, whose nearly $100 billion in debt is more than twice that of Exxon Mobil Corp., needs crude to fetch $80 a barrel to $100 a barrel to escape it downward spiral.
One of the big differences between Texas and Mexico is that in Texas producers have positive cash flow from the wells at the current prices.  Mexico is still bleeding red because of the socialist nature of its operations.  Venezuela and Brazil state-owned oil companies have the same problem.  In all three cases, they suffer from government greed.


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