How Latin America’s oil champions lost their swagger

Price collapse has reversed the fortunes of economies that were a magnet to western groups
From black gold to black hole. For a stark illustration of how oil price pain is spreading, look no further than the humbled state energy champions of Latin America.
The collapse in oil prices during the past 12 months from Mexico to Brazil has sliced into profits, taken chainsaws to budgets and stemmed the flow of taxes paid into government coffers. In some cases, the rout is poised to reverse it.
“The 70 per cent drop in prices is a major shock. Oil was contributing in some countries from 20 to 50 per cent government revenues and 50 to 96 per cent of exports,” said Luisa Palacios, head of Latin America at Medley Global Advisors, a risk consultancy owned by the Financial Times. “No wonder we are starting to question the financial viability of some countries and some national oil companies.”
Venezuela, flirting with default even though it made a $1.5bn bond payment last week on its $120bn of foreign debt, is the most desperate example. But in Brazil, Petrobras, the world’s most indebted big oil group and subject of a multibillion-dollar corruption probe, has debt costs that have hit 13 per cent from 4 per cent a few years ago. Its predicament has led to talk of a bailout.
Investment-grade countries and companies have been swept up by the turn of the commodity super cycle that has also forced western energy groups to cut jobs, shelve projects and adapt to a world of $50 oil or less.
Pemex, the world’s eighth-biggest oil producer, lost $30bn last year, prompting the Mexican government to say it would help plug the state-owned company’s $91bn of pension liabilities and potentially even recapitalise it.

The oil revenue shortfall also forced Mexico to cut more than a percentage point of gross domestic product from spending. Lower export sales, meanwhile, helped drive the current account deficit to a near 20-year high and savaged the peso — now trading near levels, after adjusting for inflation, last seen in the 1995 Tequila crisis.

Pemex “is an amply solvent company”, José González Anaya, its chief executive, said this week as he outlined a $5.5bn cost savings plan. “What we have to do is adjust to the new reality.”

Ecopetrol of Colombia, hit by collapse in its market capitalisation from $130bn three years ago to $15bn, is cutting its 48,000 workforce by a third. The peso has lost 37 per cent against the dollar in a year and the current account deficit has exploded to 6 per cent of GDP.

Bogotá puts a brave face on the downturn. “We are doing an ordered and fluid adjustment,” said Mauricio Cardenas, finance minister. “We have tightened public spending and let the exchange rate depreciate.”

Even so, the loss of oil revenues that account for half of exports comes as Bogotá banks on a strong jobs market to better absorb guerrillas demobilised under the peace deal it hopes to reach on March 23. Four years in the making, the talks aim to end a half-century conflict that has claimed more than 200,000 lives.
When oil prices were more than $100 a barrel just a few years ago, international energy companies were clamouring to get into Latin America, drawn by Brazil’s newly discovered deepwater fields, Colombia’s liberal regime, and the largest reserves in the world in Venezuela.
Today, many companies are struggling to collect their bills from cash-strapped state groups. In Mexico, international service providers are $6bn in arrears, in Venezuela they are owed $20bn, while in Brazil cancelled orders have forced international providers, such as Singapore’s Keppel, to take hefty provisions.

Ecopetrol is expected to post its first annual loss since it listed in 2007. Nowhere, though, is the fall from grace more dramatic than at Petrobras, which five years ago launched the biggest equity offering in history, raising $70bn.

Brazil’s state-owned energy champion is laden with more than $105bn of debt and struggling to cover its operational costs and debt payments. Credit Suisse, the investment bank, reckons Petrobras is leeching $8bn of cash a year. In a January 11 report it warned of the “risk that, at some point, the company will have to resort to some kind of equity issuance”.
But Brasília, struggling with its deepest recession in a century and a fiscal deficit that hit 10 per cent of GDP last year, is in no position to bail Petrobras out.

Increased competition for capital could prompt a wave of mergers and acquisitions, as the nationalist era of the commodity super cycle perforce recedes and foreign buyers step in. Brazilian mergers and acquisition activity rose at the end of 2015 to a near-20 year peak. On February 26, Petrobras said it had agreed a $10bn loan from China Development Bank against future oil deliveries.

Still, low production costs of around $15 a barrel mean that Latin American state companies can carry on pumping and producing cash even at current depressed prices.

But after allowing for non-cash costs, operations break even only at around $25 a barrel. Reduced investment means output will probably continue to fall — perhaps by as much as 470,000 barrels per day this year, Ms Palacios estimates, making the region “very much part of the ongoing global oil supply adjustment”. Total Latin American production is more than 10m b/d a day, comparable to Russia’s total output.

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