Virtual Round Table Addressing
Onshore Opportunities in Mexico
With Warren Levy, CEO, Jaguar E&P; Yann Kirsch, COO, Perseus Energy & José Pablo Rinkenbach, CIO, Ainda Energia y Infraestructura
Summarized by Alexandra Ashikhmina, MD, Americas, Energy Council
2 April 2020
The onshore opportunities panel at the Mexico Assembly (scheduled to place April 1-2 but now postponed) included questions around infrastructure challenges, operational updates and capital raising plans. With the rapid spread of the Covid-19 pandemic, other, more pressing, factors became the focus of conversation as participants discussed – the effects of COVID-19, both short and long term; oil price modelling; onshore advantages and investment climate.
Below is a summary of the virtual round table discussion.
How have you seen COVID-19 effect the energy industry so far?
- Total shut down of new investment. Any deal that was in the making in Latin America has been delayed because price is nearly impossible to negotiate.
- Risk has changed its definition. How to evaluate risks and even types of risks are big questions. These will take time to answer as we have never experienced a scenario like this before.
- Demand has plummeted. Even 5% demand drop equates to 5-6 million barrels a day, which is a massive fluctuation. How do you prepare for it?
- The projects that will be most affected are those in start-up stages like exploration and appraisal and unless you have your own capital, these types of operations will not be going ahead right now.
- A recent government announcement stating what operations are essential and what equipment has this status is a concern. Distributions of diesel is considered essential but is drilling? We don’t know yet. But we expect delays in supply, delays in equipment and delays in approvals across the board.
- CNH and ASEA are now closed. They still accept emails and documents, but they will not respond and so if you are pending any approvals, these will not happen.
And what about the oil price drop? How are onshore operations comparing to other energy sectors?
- We have never modeled for $20 oil so, as smaller companies, we need time to adjust our projections accordingly. There is a lot of uncertainty right now.
- Onshore has an advantage as we don’t need massive capital to make a new decision, so everything is on a smaller scale with less money involved – we are flexible and can adjust relatively fast.
- If you aren’t self-funded, you are in trouble right now.
What can the government do right now to help the industry?
- Delay evaluation process by an extra year
- Decrease or delays to paying royalties to the Mexican Petroleum Fund
Government has no interest in defaulting the companies or losing them entirely, but it will happen if they don’t adjust their position. Their position must be to help the industry so all can thrive. Penalising anyone in this current situation will not help, especially when it applies to the majors and not to PEMEX.
We expect the government to adjust the timing and certain deadlines before they think about reduction of taxes or contract renegotiation.
What about long-term effects of this crisis?
- I see major improvements in HSE. Safety and equipment on-site, even such simple things like safety equipment requirements, goggles, masks, etc. to be taken much more seriously.
- Costs will have to go down and with that, unfortunately, some suppliers might be out of business soon.
- M&A will be on the rise when pricing and risks are established. Distress selling.
- Financing will become well by well and will be done with equity.
- Debt will continue to be difficult and we expect big discounts. The U.S. is dealing with 25% discount in shale right now, Mexico should prepare for the same.
- More companies and investors are going back to conventional and mature operations now.
- Insurance prices will go up massively and will be taken more seriously.
What opportunities should the market expect in Mexico?
- U.S. is Mexico’s neighbour so we hope one way or another, stability and help will come from across the border if Mexico struggles further.
- Lowering costs overall and consideration for these costs across the board.
- Remote connectivity and limited travel will continue, so companies have to come up with remote monitoring and automation. The industry is decades behind other industries and now it is time to catch up – we have no choice but to become more efficient.
- PEMEX will have to divest to survive, forced by the banks. To refinance PEMEX they will require some drastic changes, like farm-outs, although we anticipate this will happen in a mid-term, not straight away. Will there be buyers though?
The three biggest opportunities this crisis will bring?
- M&A and consolidation
- Buyers’ Market
Bigger companies with a long-term focus, healthy balance sheets and their own pool of money will be the ultimate winners in this situation.
At the end of 2015, 25 million Mexicans were each worth US$80. With an estimated monthly need of $163 per person, it is hard to imagine the devastating effect COVID-19 is having on the livelihoods of people who already live from day to day.
Here are 3 other stories from Mexico that are worth paying attention to right now:
- Fitch downgraded PEMEX’s bonds to junk status. With losses over $9billion in the last quarter of 2019, tough choices will have to be made regarding refinancing
- Government announcing essential and non-essential services and equipmen. Mining has been deemed non-essential and drilling isn’t clear yet
- Mexico’s hydrocarbon storage capacity is between 1-3 days. Storage capacity has been a long-term issue and now critically, Mexico needs more.
We look forward to hearing how the views of the panelists adjust and develop by the time Mexico Assembly takes place later this year. Email [email protected] if you are interested in joining the CEO Energy Network in Mexico.