Months go by and state-run oil company Petróleos Mexicanos (Pemex) continues to amass enormous debts by not paying its suppliers and contractors. Officially, it has not suspended payments nor activities. Upon releasing its quarterly report, it denied not having honored commitments, but it acknowledged that there is a ongoing process of “institutional negotiation” for re-scheduling payments.
What does that mean? We have been informed that Pemex’s finance department and its subdepartment in charge of administering services for exploration and production (known as SASEP) have opened up a direct channel of communication with contractors and are interviewing them privately to renegotiate the payment of liabilities corresponding to full-year 2020. In the video-conference interviews, Pemex asks them not to draw up cost estimates or to send in pre-invoices for work that they have carried out.
In that discretional format, which goes against standard accounting practices, Pemex is negotiating with companies one by one, starting with the highest debts. Nothing is formalized nor written, everything is verbal, and Pemex asks for due dates to be extended and offers special consideration for doing so.
Last April, Pemex’s Exploration and Production subsidiary (known as PEP) took a 40.5 billion peso (or 15 percent) cut in its investment budget, putting the annual limit to its expenditures at 229.4 billion pesos (roughly US $10 billion). But that meant only having enough cash flow on hand to cover operations in the first semester, and thus being left with no money to make payments to contractors in the second half of the year.
PEP has informed its contractors that, starting in this month of August, there will be no more payments and that work and services carried out by third parties should be invoiced next year, with work done in July and August to be paid in January, work in September and October to be paid in February, and work in November and December to be paid in March.
In accounting terms, Pemex thus has not defaulted on payments, but in practice it does have liabilities, based on past-due pre-invoices, totaling 47.2 billion pesos (US $2.1 billion), in addition to estimated non-registered liabilities of about 50 billion pesos, since Pemex has not allowed these pre-invoices to be issued. Moreover, if contractors now accept to work without invoicing during the second half of 2020, they will in fact be financing Pemex with another 50 billion pesos or more, which will be a hit on PEP’s budget next year.
Thus, Pemex will end year 2020 with non-declared liabilities to its contractors of about 150 billion pesos (US $6.6 billion), payment of which will be in doubt next year in the context of severely deteriorated public finances in Mexico as a result of the economic crisis. These liabilities would compromise more than half of PEP’s anual investment budget in 2021.
Desperation has set in and payrolls are not being covered in many contractor companies. Operations have been halted on some oil platforms, due to non-payment or to Covid-19 outbreaks. Unexpected stoppages could occur due to lack of liquidity. It is rumored that at least two of the companies supported by the current government, who got contracts to develop new priority fields, have fallen out of favor since they have only poor results to show and now have suspended some administrative staff, leaving their operational teams on the ground without salaries or support.
It is feared the situation may get out of control. Some companies –especially, foreign firms– have said that for accounting reasons they cannot accept not to invoice. But they want to keep working with Pemex and are asking for a solution. Could the Finance Ministry come to the rescue? It would be best for Pemex’s operational and payment problems to be solved before lawsuits and arbitration get underway, which could be imminent.
Meanwhile, credit risk agencies have threatened to take Pemex’s debt down another notch, which could lead to Mexico losing its investment grade. To its auditors, Pemex continues to be “a going concern” and has not been declared in default thanks to explicit support from the Sovereign. The ship has not yet capsized, but water is pouring in on all sides. And if Pemex sinks, we will all be sunk.