Petroleos Mexicanos PEMEX (English Results) July 28, 2015

Transcription

1 Petroleos Mexicanos PEMEX (English Results) July 28, 2015 Corporate Speakers Mario Beauregard PEMEX CFO Gustavo Hernandez PEMEX Director - Operations, Exploration and Production Jorge Martinez PEMEX Deputy Director Refining, Planning Julio Valle PEMEX Acting IR Head Conference Participants David Gamboa TPH Analyst Luis Serrano Credit Suisse Analyst PRESENTATION Operator^ Good morning ladies and gentlemen, and welcome to the PEMEX's results as of June 30th, 2015 conference call, hosted by Mario Beauregard, Chief Financial Officer; Gustavo Hernandez, Director of Operations, of Exploration and Production; and Jorge Martinez, Deputy Director of Refining - Planning. There is a support presentation for this conference. The link is available at PEMEX's webpage, in the financial information category within the Investors section. At this time, all participants have been placed on listen-only mode. The floor will be opened for questions following this presentation. Questions may be asked by phone and webcast. It is now my pleasure to introduce Julio Valle, Acting Head of the Investor Relations Office. You may begin. Julio Valle^ Thanks and good morning to everyone. Before we start, we'd like to remind our listeners that our comments during this conference call may include some forward looking statements. Our listeners are cautioned not to place undue reliance on any forward looking statements and to review the cautionary notes that appear in the last pages of our earnings report, published in the Investor Relations section of the PEMEX website. For this conference call and its respective support documentation, quarterly variations are computed as compared to the same quarter of the previous year, and cumulative variations are computed as compared to the same period of the previous year, unless it is otherwise specified.

2 Now, I would like to introduce Mario Beauregard, our Chief Financial Officer. Thank you. Mario Beauregard^ Thank you very much, Julio. Good morning everybody, and thank you very much for joining us this morning. Before we begin with this presentation, I would like to provide a brief summary of the key takeaways that we will cover during this call. First of all, we continue to face an adverse environment from the supply and demand standpoint in the oil market, as well as a strong dollar against other currencies. Second of all, the discovery recently announced becomes yet more important due to its location, which makes them yet more competitive. Additionally, we continue facing the effects of the incident at Abkatun, along the entire value chain, and by the end of the quarter, there were still 20 million barrels per day pending incorporation into production. Last but not least, performance indicators of the company assess the high competitiveness and value generation capacity. Although its results are heavily affected by current market conditions and the heavy tax burden. Our financial strategy will continue to focus on taking advantage of the new tools offered by the new legal framework, on diversifying our sources of funding, and on taking advantage of any new opportunities that become available. We will start the presentation by taking a look at the context on the prices of crude, natural gas, gasoline, and the Peso/Dollar exchange rate. If you see the graph located on the -- at the upper left of this slide, we can see the crude oil price behavior since early Here, we can see that the market mix averaged $53.95 per barrel in the second quarter of 2015, versus $97.09 per barrel during the same period in This translates into a reduction in price of 44%. As we explained during the fourth quarter of 2014 and first quarter of 2015 calls, the industry is facing structural changes that have profoundly changed the crude oil and fuel prices at the global level since late Even though crude production in the US peaked last March, their stock is still at maximum levels and their drilling activities are not growing anymore. On the other hand, the Greece effect has had its impact in the growth expectations of the Euro zone while China s signs of deceleration prevail. Also, the cumulative production by the Organization of Petroleum Exporting Countries, the OPEC, remain at maximum levels and Iran's nuclear agreement will increase global crude supply. Under this

3 environment, we consider that the markets continue to be oversupplied and price volatility will prevail as we move forward. Now, if we take a look at the upper right graph, we can see the evolution of Henry Hub's natural gas prices. We experienced a reduction of 43% during the second quarter of 2015, based on the cumulative stock and the cold season is over. In the lower left graph, we can see the Northern Gulf of Mexico regular gasoline prices. Average prices experienced a 33% reduction between April and June 2015, based on the excess supply of crude oil. Finally, at the lower right graph, we can see the Peso/Dollar evolution. During the second quarter of 2015, a 1.47% depreciation was observed, while a 0.78% slight appreciation occurred during this same period of The strengthening of the dollar was explained by the market expectations on an interest rate increase by the user reserve as well as by the Euro zone impacts by Greece. I will now turn the word to Gustavo Hernandez, the Director of Operations, Exploration and Production, so that he can share with you some of the results from our operations. Gustavo Hernandez^ Thank you, Mario, and good morning ladies and gentlemen. Moving onto our exploration and production results, if you look at the upper left graph, the last column shows that during the second quarter of 2015, total crude oil production averaged million barrels per day. That is 9.8% decrease as compared to the same period of This was due to a 9.9% decrease in the production of heavy crude oil as a result of the natural decline in production and an increase in the fractional water flow of wells in highly fractured deposits of the Cantarell business unit, also due to a 13.6% decrease in extra-light crude oil production, primarily due to an increase in the fractional water flow of wells located in the Samaria-Luna business unit, a natural decline in production at the Costero field, as well as an increase in the fractional water flow with high salt concentration of wells in the Macuspana-Muspac business unit. Finally, we also observed an 8.4% decrease in production of light crude oil, primarily due to production deferrals at fields of the Abkatun-Pol-Chuc business unit, as a result of the incident that occurred at the Abkatun-Alpha Permanente platform. I would like to highlight that by the end of the quarter, the decrease in production volume due to the pending restoration of Abkatun-Alpha Permanente platform was 20,000 barrels per day. This decrease was partially offset by a 2.5% increase in production from the Litoral de Tabasco and Ku-Maloob-Zaap business units. Let's move on to the next slide on natural gas production which during the second quarter of 2015 decreased by 6.3% as compared to the same quarter of This was due to a decrease in production of associated gas, also as a result of the incident that occurred at

4 the Abkatun-A Permanente platform which put out of service several gas completion modules in that platform, as well as an increase in the fractional water flow of wells in highly fractured deposits of the Bellota-Jujo and Samaria Luna business units in the Southern region. Furthermore, we also observed a 0.9% decrease in non-associated gas production during this period, primarily at the Veracruz and Macuspana business units of the Northern and Southern region respectively. Regarding the lower graph of natural gas use as a percentage of production, we observed a significant variation, primarily as a result of the incident that occurred at Abkatun, but also due to the delays in the completion of works for gas utilization and problems with compression equipment located on marine platforms. As a result of this, gas used as a percentage of production decreased to -- from 95.5% to 90.2%. Finally, I would like to share with you a bit of information regarding the discoveries recently announced. On the map that we are presenting, we can see two of the fields recently discovered which are located within the limits of the Southwestern Marine region which are the Batsil and Cheek fields. These fields discovered hydrocarbons from the Cretacious Age, which has been the production play for about four decades. As a result of the exploratory activities carried out during the second quarter of 2015, the Batsil-1 well confirmed the existence of heavy crude oil. The field is located 102 kilometers northwest of Ciudad del Carmen, Campeche, at water depths of 82 meters. Additionally, the Cheek-1 well confirmed the existence of light crude oil and is located closer to the shore, at 69 kilometers, northwest of Ciudad del Carmen, at water depths of 28 meters. The initial production of the first field was nearly 1,200 barrels per day, and the second field reached more than 2,100 barrels per day. We're currently evaluating the volume of hydrocarbon reserves in these deposits. Nevertheless, we would highlight that these discoveries are located in shallow waters and that they are quite near existing exploitation infrastructure. We are also awaiting approval of its development plan as well as corresponding authorizations. After this, we could see production jump start in approximately 16 months, achieving a stable production platform six months later. With this, I would like to conclude the E&P section of this presentation. And I will now let Jorge Martinez go over the downstream results. Thank you very much for your attention. Jorge Martinez^ Thank you, Gustavo. Good morning everyone. As you can see on the upper right graph, during the second quarter of 2015, total crude oil processing decreased by 11.7% primarily due to scheduled maintenance cycles, non-

5 scheduled maintenance cycles, and overhaul works and operational problems resulting from the quality of crude oil supplied by producing areas. Moreover, the ratio of heavy crude oil to total crude oil processed by the National Refining System increased 2.5% as part of an effort to take advantage of highly specialized equipment to convert residuals and maximize gasoline and diesel output. Let's now please focus on the graph on the bottom. Here, we can see that total petroleum products output decreased 13.2% compared to the same period of 2014, from 1.4 (million) to 1.2 million barrels per day, primarily due to a decrease in the amount of crude oil processed during this period. Finally, I would like to highlight the graph on the right that shows the performance of the variable refining margin which increased by $5.29 per barrel during the second quarter of 2015, compared to the same period of 2014, from $3.56 to $8.85 per barrel, as a result of processing a heavier crude oil mix. Moving on to the next slide, on the upper graph, we can see that natural gas processing decreased 8.3% during the second quarter of 2015, in response to the decreased availability of sour and sweet wet gas. As a result of this, as we can see on the bottom graph, dry gas and natural gas liquids production decreased by 8.8% and 12.1% respectively compared to the same period of Finally, on the same graph, we can see that condensates processing decreased 15.7% during the second quarter of 2015, primarily due to a decreased availability of sour condensates in the marine regions. Moving onto petrochemicals, on this graph, we can see that total production decreased 8.5% during this quarter. This was the result of a reduction of 140,000 tons in production in the methane derivative chains due to a decrease in the supply of natural gas and a reduction of 60,000 tons in the production of other petrochemicals, as a result of an increasing the use of gasoline components in the production of additional high octane gasoline. This decrease was partially offset by three factors^ one, an 11,000 increase -- 11,000 tons increase in production in the ethane derivatives chain, mainly due to the increase in production at the Swing plant; two, a 57,000 tons increase in production in the aromatics and derivatives chains, due to the increase in production of high octane gasoline; and three, a 13,000 tons increase in production in the propylene and derivatives chains, mainly due to increased output of propylene as a result of the stabilization of acrylonitrile production plant. With this, I conclude the presentation of our Industrial Transformation activities, and I now leave you with Mario Beauregard, our CFO. Thank you very much.

6 Mario Beauregard^ Thank you, Jorge. On the following three slides, we will cover the financial results for the second quarter of As you can see, corresponding numbers for the same period of 2014 are shown on the bottom part of the graph. Revenues from total sales, net of IEPS which means special tax on production and production and savings in Spanish, totaled MXN 310 billion of which MXN 191 billion were domestic sales, MXN 115 billion were export sales, and MXN 3 billion were revenues from services. Total sales during the quarter decreased by 27% as compared to the same period of Domestic sales, net of IEPS decreased by MXN66 billion, or 26%, due to a price reduction on international reference prices. Please bear in mind that approximately 90% of the products sold by PEMEX in Mexico are petroleum products, and their revenues are referenced to prices in the US Gulf Coast. Therefore, when these reference prices decrease, our revenues also decrease. Revenues from sales of natural gas and petrochemicals are also closely related to international reference prices. Moreover, we also recorded a 38% or 51,000 barrel per day decrease in fuel oil sales, and a 12% decrease in natural gas sales, due to a lower demand from the Federal Electricity Commission. Moving on to exports, this declined by MXN 50 billion or 30% as a result of a MXN 43 billion decrease in crude oil exports, and a MXN 7 billion decrease in petroleum products exports. Crude oil exports decreased primarily as a result of a drop in the average price of the Mexican crude oil basket from $97.09 to $53.95 per barrel. The price effect on the exports of oil and condensates had a negative impact of MXN 42 billion, and sales volume decreased by MXN 2 billion. Cost of sales increased by MXN 1.2 billion or 0.6% due to higher operating costs. It is important to mention that as of January 1st, 2015, PEMEX's tax regime was modified and established in the Hydrocarbons Revenue Law, which sets forth that direct taxes and duties such as the Hydrocarbon Extraction Duty, the Hydrocarbon Exploration Duty, and the Hydrocarbon Extraction Activity Tax should be recorded under the Cost of Sales. As a result of the above, gross income totaled MXN 91 billion during the quarter, down by MXN 115 billion or 56% as compared to the same period of If we were to calculate gross income without including these taxes and duties, gross income would have amounted to MXN 120 billion, down by 42% as compared to the second quarter of Additionally, general expenses were up by 5% or almost MXN 2 billion during the quarter, amounting to MXN 37 billion. This variation was primarily due to an 80% or nearly MXN 600 million decrease in other revenues, a 7% increase in distribution,

7 transportation and sales expenses, as well as a 2% increase in administrative costs -- expenses. As a result, operating income totaled MXN 54 billion, down by 69% or MXN 117 billion as compared to the second quarter of Interest expense amounted to MXN 16 billion and interest income totaled approximately MXN 1 billion. Income due to financial derivatives increased by 110% mainly due to the appreciation of the US dollar against other currencies, different than the Mexican Peso in which we have entered into cross-currency swaps. In addition, we recorded MXN 32 billion foreign exchange loss, as a result of a 2.7% depreciation of the Mexican Peso, relative to the US dollar, during second quarter of 2015, as compared to the 0.4% appreciation of the Mexican Peso relative to the US dollar during the same period of Profit sharing in nonconsolidated subsidiaries and affiliates represented about MXN 1 billion. All of this resulted in a financial cost of MXN 41 billion. Three-quarters of our financial debt is denominated in US dollars or swapped into US dollars through the use of cross-currency swaps. Costs associated to financial derivatives reflect the market value of financial derivative instruments. The foreign exchange loss is therefore an almost non-cash item that records the impact of currency translation of foreign debt into Pesos. As a result of the previous, income before taxes and duties, totaled MXN 13 billion during the quarter, which represent a 92% decrease as compared to the same period of 2014, but MXN 11 billion more than the previous quarter. As we have discussed on other occasions, since 2015, PEMEX has been subject to a new and simplified fiscal regime that is more in line with the rest of the oil and gas industry. However, and according to international standards, a significant portion of the tax burden is calculated on the profit generated. What we can say here is that our cash flow is clearly and significantly being affected by the current fiscal regime. So, during the second quarter of 2015, taxes and duties paid amounted to MXN 98 billion. The ratio of taxes to duties paid to operating income was 181% during the second quarter of 2015, as compared to 127% during the same period of 2014.

8 Again, bear in mind that based on the new fiscal regime applicable as of January 1st, 2015, some of the taxes and duties are recorded under the Cost of Sales. Therefore, operating income between 2014 and 2015 periods is not entirely comparable. In addition, taxes and duties paid were at least seven times the income before taxes and duties realized during the second quarter of 2015, as compared to 1.3 times during the second quarter of As a result of everything that we have just mentioned, PEMEX recorded a net loss of MXN 85 billion during the quarter, MXN 15 billion less than the previous quarter. In order to achieve all of the expected benefits from the Energy Reform and to contribute to a stronger PEMEX, we believe an important step towards adopting international standards would be allowing the company to benefit from a tax regime that is more in line with that of the contracts proposed under the Round Zero, Round One -- sorry. However, we also understand the implications that this would have to the income of the Federal Government. Let's now look at the evolution of our liabilities. On the upper graph, we can the different components that have an impact on our liabilities. Financial debt increased by MXN 188 billion and the reserve for employee benefits increased by MXN 43 billion. The previous was partially offset by a MXN 58 billion decrease in suppliers and remaining liabilities decreased by MXN 9 billion. As a result, total liabilities as of June 30, 2015 amounted to MXN 3 trillion. Now, let's look at the evolution of our financial debt on the bottom graph. During 2015, Petroleos Mexicanos and PMI s total financing activities amounted to MXN 236 billion or $15 billion, while total debt payments made during the period totaled MXN 98 billion or $6 billion, and the impact generated on our debt and currency translation amounted to MXN 49 billion. Moving on to the next slide, we recorded a decrease of MXN 171 billion in equity due to a net loss of MXN 185 billion during the first half of 2015, which was partially offset by Federal Government contributions of MXN 10 billion and comprehensive accumulated results of MXN 4 billion. Comprehensive accumulated results largely reflect the conversion effect of affiliates and subsidiaries of -- on previous periods. To conclude this call, I would like to review the key takeaways that have been covered throughout this call. The results of the company continue to record the clear impact caused by the current environment where the markets continue to be oversupplied and the US dollar keeps getting stronger. Also, the discoveries announced provide a good outlook as well as a new approach and a breath of fresh air to continue to generate value for the company and the country. On the other hand, the incident occurred at Abkatun continues to impact several parts of our

9 business and the pending production to be reincorporated has a marginal impact on average yearly production. And last, our results continue to show corresponding effects by current market conditions and the current fiscal regime. As I've said before, we will continue evaluating the new opportunities offered by the current legal framework to get a hold of competitive resources and financial structures, while complying with our mandate of value creation. Thank you very much. And let's now move to our Q&A sessions. Operator^ Thank you. QUESTIONS & ANSWERS We will now begin the question and answer session. (Operator Instructions) Please stand by as questions are compiled. Our first question on line comes from David Gamboa from TPH. Please go ahead. David Gamboa^ Hi. Good morning. I've got a number of questions, if I may. The first one is, given the current oil price scenario and taking into account the recent impacts on production from the incident at Abkatun, can you please give us some color or an update on your expectations for CapEx and production levels for the remainder of this year and 2016 if it s possible. And it would be interesting to know which fields will be drivers for any production growth. Also, regarding offshore activity, are you able to give us some commentary around PEMEX s near to medium term demand for jack-ups. So, if you could give us an approximate number of what's your jack-up count for this year and the next year? And if I may, just the last one, on the shallow water discoveries, I'm interested in finding out how you see profitability over there, and if you could give us some indication of break/even levels for both the heavy and the light oil discoveries. Thank you. Gustavo Hernandez^ Okay. Good morning. In regard to your question related to the demand of jack-up counts, for now, we have currently into operation around 60 jack-ups for all our operations. And since the oil price has fallen through this year, we have reduced the use of these jack-ups because -- some of

10 them came into a contractual end. So we're not hiring to their current contract prices. But we expect that derived from the Round 1.1, which is exploratory blocks, some jackups will be re-utilized, derived from the exploratory activity that will be performed by the contractor that was awarded the blocks number two and number seven in Round One. A few days ago, that same company has stated that probably they will start some trading exploratory activities by sometime in the second half of next year. So, what we anticipate in regard to the demand of jack-ups is keeping the same trend, with a slight move up derived from the private activities from all the players participating in Round One. In regard to your question about our -- the discoveries recently announced, what I can tell you is that the breakeven could be between the range $5 to $7 per barrel of oil equivalent. So, with that and with the current activity level mainly work-overs and development wells that were still on plan, we are expecting to have pretty much the same order of production, 2.28 million barrels per day, so I guess, it's pretty much the answer we can provide to this guide. Mario Beauregard^ Okay, next question. Okay, there is a question on the Web. I will read the question and then we will answer it. There are several questions. My first question is about the significant improvement in variable refining margin. Can you please elaborate on this topic? Going forward, at what level the variable refining margin is suspected to stabilize. And the second question is about the initial production of the discoveries of the slide eight of the presentation, when PEMEX is anticipated to start producing those 3,346 barrels of crude oil per year? Jorge Martinez^ First, on the margin, we have two reasons for the increase. As you could see in the graph that we show, we saw a decrease coming from the end of last year, the first quarter of this year, and this was due to the problems that I mentioned that we had with the quality of the crude oil supply, mainly in the Isthmus quality. And what happened there is that we accumulated a lot of intermediate compound that we capitalize in the second quarter of And the other reason, as I mentioned, is that we increased the percentage of heavy crude oil in the mix; it changed from 43.2% last year -- in the same quarter of last year, to around 45.5%. And as you know, the heavy crude oil is less expensive and we have better results for the refining margin. Gustavo Hernandez^ Yes. In regard to the second question about the discoveries and the initial production of the discoveries, as you mentioned, in our production test, we set the initial production 1,198 barrels per day on the Batsil-1 and on the Cheek-1, almost 2,100 barrels per day. So, that totalizes the amounts you indicated in your question, 3,346 barrels per day.

11 We -- anticipated first, these values were obtained to production test during the completion stage in each well. Before starting the development of these new discovered fields, we need to delineate those ones and as I mentioned, with the information that we have, provided they are located near current infrastructure and current producing fields, we spent to include them in our portfolio projects for the coming year and we are preparing the corresponding authorizations within PEMEX, our board, our Strategy and Investment committee, as well as the proper authorizations from the Ministry of Energy and the regulator, the National Hydrocarbon Commission. Then, we expect that 16 months after we start the works on these fields, on these two fields, we could get a stable production. So, with this, I can say that, yes, the 3,346 barrels per day, they're achievable and they can show an increase, their production figures derived from the production of these new fields. And finally, last but not least on the -- on regard to your question about the migration of the current service contracts, as we have stated before, there are 22 contracts that we're going to migrate into -- we have the intention to migrate into the new scheme of extraction -- exploration and extraction contracts. The first stage includes 10 blocks. We are working still with the authorities. We have completed pretty much the works on these first 10 blocks. We have submitted to the Ministry of Energy, Hydrocarbon Commission and the Ministry of Treasury in order to conduct the proper steps to come to an end with the migration of these contracts during this year. Thank you. Okay. Operator^ Thank you. Our next question on the line comes from Luis Serrano, from Credit Suisse. Please go ahead. Luis Serrano^ Hi. Thank you very much for the call. I just have two questions. The first one is on what you foresee demand for deepwater rigs to be in the case of PEMEX, and the second one is if you could provide an update on the negotiations with the union on your pension liabilities. Thank you. Gustavo Hernandez^ Thank you, Luis, for your question.

12 In regard to the demand of deepwater rigs, we have currently four into operation, two working on the Perdido Fold Belt area and the other one on the southern part of the deepwater Gulf of Mexico, in the gas basin, but with the intention to move one of these southern rigs into the Perdido area to keep exploring that promising area. So, we have the count of four. And with the current level of CapEx that has been authorized, we expect to continue with this four and maybe when the deepwater round has been launched by the CNH sometime next month and when those contracts are finally awarded sometime next year, we could think in increasing the number of deepwater rigs used to explore in the Gulf of Mexico -- in the Mexican jurisdiction. Mario Beauregard^ Okay. With regards to the negotiations with the union, what I can tell you is that they are ongoing and have stated a limit in the public debt and general law which is August 11, What we can say at this moment is that they are proceeding in an orderly fashion and strictly adhering to current legislations and the provisions included in the Energy Reform. Once we conclude with these negotiations, we will of course make the result public. Thank you. Operator^ Thank you. Our next question online comes from David Gamboa from TPH. Please go ahead. David Gamboa^ Hi. It's here, David Gamboa again. I just have a follow up, just hoping clarification. In terms of the shallow water discoveries, did you say $5 to $7 per barrel? I think that might probably be the up cost of operating in this area. But I was more looking for -- up to the break/even levels, so if I could just clarify that. And on the same line of thought, can you just provide us probably on an oil price that you would need to make a 10% return on these discoveries? Thank you. Gustavo Hernandez^ Yes. David, right, $5 and $7 is the production cost, but if you consider the $13 to $18 -- the finding and development, you can have probably $20 to $25 the breakeven the level for these shallow water discoveries. And with these values, we have alignment with the current values of our discoveries in that same base percentages, shallow water areas. David Gamboa^ Thank you. Operator^ At this time, I see we have no further questions. I would now like to turn the call over to Mario Beauregard for closing remarks.

13 Mario Beauregard^ Thank you very much to everyone. With this, we conclude our call. Thanks for your participation and remember that we have our Investor Relation Office and we'll answer any questions you may have at any time. Operator^ Thank you, ladies and gentlemen. This concludes today's conference. Thank you for participating. You may now disconnect. Thank you very much.