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Pemex’s $6 billion net profit? Not as good as it looks

(Adds financial details, analysts’ comments, company background)

By Adriana Barrera and Stefanie Eschenbacher

MEXICO CITY, Feb 26 (Reuters) – Mexico’s Petroleos Mexicanos (Pemex), the world’s most indebted state oil company, reported on Friday a multibillion-dollar net profit. But the numbers are not as good as they look.

Fourth-quarter 2020 net profit at Pemex was 124.28 billion pesos ($6.23 billion,) compared with a net loss of 171.52 billion pesos in the same quarter the previous year.

It was the first time in four years that the company, which was stripped of its coveted investment grade rating last year, posted two consecutive quarters of net profit.

“It’s a great achievement,” Chief Executive Officer Octavio Romero Oropeza told investors on a call.

But not everyone was impressed. The operations made losses, financial debt rose and crude oil production fell.

And despite two consecutive quarters of net profit, Pemex ended 2020 with a net loss of 480.76 billion pesos.

“The results reflect entirely the improvement in global financial conditions that helped alleviate its foreign exchange operations,” said Victor Gomez, a senior economist at local broker-dealer Finamex.

“Hence, although the net gain depends on the latter driver, coupled with the government’s significant support, the operating figures exhibit the pandemic’s severe effect on the current Pemex’s operating strategy.”

Pemex said the exchange rate boosted net profit in the quarter; it used a net appreciation of 11.2% for the peso against the dollar for the fourth quarter when compared with the previous quarter.

“They continue to have a large operating loss,” said Luis Gonzali, co-director at Franklin Templeton Investments in Mexico. “The net income was entirely due to foreign exchange income.”

Pemex operates mostly in U.S. dollars so foreign-exchange distortions do not reflect the actual situation of the company.

Its peso-translated financial reports mean some amounts look much bigger when the Mexican currency’s value improves or slides.

Aaron Gifford, an emerging markets sovereign analyst at T. Rowe Price, said the results were a bit worse than expected.

“One positive surprise, however, was Pemex’s announcement that the government will be offering capital injections equivalent to the company’s amortization schedule during the year in addition to the already announced reduction of Pemex’s profit-sharing duty,” Gifford said.

Pemex also reported total income of 248.90 billion pesos for the fourth quarter, down 22% from the same quarter last year, as the pandemic crushed internal demand for its products.

Financial debt rose 13.9% to $113.2 billion compared with the year-ago period, the accounts showed.

Crude oil pumping stood at 1.676 million barrels per day (bpd), not including partner production, down 1.0% compared with the same period in 2019.

Investors see more challenges ahead. “Risks piling up in 2021 will increase reliance on the sovereign backup as long as the oil company’s intrinsic circumstances do not show a significant turnaround,” Gomez said.

Mexican President Andres Manuel Lopez Obrador has promised to rescue the company he inherited from his predecessors.

Earlier this week, the energy nationalist said his predecessors “deliberately destroyed Pemex to leave the market in the hands of foreigners.” ($1= 19.9500 pesos at end-December) (Reporting by Adriana Barrera and Stefanie Eschenbacher in Mexico City Editing by David Evans and Matthew Lewis)


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