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GASOLINE OUTDOOR, OPPORTUNITY THAT KCSM USED

During the month of January there was a crisis of shortage of gasoline. More than 10 states were affected by the Mexican government’s plan to combat huachicoleo, a strategy that sought to reduce the theft of hydrocarbons. A strategic part of the plan was to close the valves of the pipelines that transport gas, crude oil and gasoline, which generated problems with the supply of fuel. In Mexico City, 85 of the 400 gas stations registered a problem. Mexico has 17,000 kilometers of pipelines belonging to Petróleos Mexicanos (PEMEX) and it is in these networks that the theft of hydrocarbons mainly occurs. In 2018, these robberies cost the Mexican state 60 billion pesos.
Thanks to the energy reform of 2013, the Mexican oil sector was opened to private investment, allowing various companies to sublease Mexican pipelines, which generates considerable savings in transportation costs, that is, it was possible to generate competitive conditions. But with the closure of these, they had to find another alternative to transport gasoline. PEMEX, where appropriate, reorganized its supply chain by transferring thousands of liters of gasoline in pipes. This shortage represented the first crisis of the government, however, a company took advantage of this crisis and managed to use it in their favor, increasing their sales.
Kansas City Southern de Mexico (KCSM) is a railway company dedicated to the transport of cargo and was used as one of the safest and least expensive options -including the pipes- to deal with the shortage of gasoline. This company is one of the most attractive options for the market – given the lack of private infrastructure to store gasoline and transport it via pipelines – and is investing to have a storage center in San Luis Potosí that will have a capacity of 300 thousand barrels . In such a way that the savings in the transportation of gasoline can reach up to 25% in relation to the use of pipes, besides that this option represents a safer option compared to the use of pipelines.
KCSM has a strategic alliance with ExxonMobil, a Texan oil company, with which it imported a total of 2.6 million barrels between 2017 and 2018. In February, in response to the crisis, KCSM had an increase of 135% in the volume of imported gasoline through their trains. And, according to the president of KCSM, José Guillermo Zozaya, it is expected that imports will continue to rise as companies -mainly international- do not want to have a shortage problem again; for what he has already added to Total S.A. as a new customer.
One of the advantages that KCSM presents is that its network is international, which places it as a leader in rail transportation of gasoline in Mexico. In addition, it has an adequate infrastructure for the use of advanced technology and is part of the Asset Health Strategic Initiative, which seeks to reduce mechanical service interruptions, improve the quality of wagon inspection and increase the efficiency of railway workshops. They also use 400 drones to monitor the most conflictive routes and monitor all trains through multiple security filters. These security measures have allowed the company to only have 0.02% vandalism.
In this way KCSM was able to take advantage of the crisis of the huachicol and was placed as the safest and most economical option for the transportation of gasoline. All thanks to an advanced security strategy, the use of technologies and the correct implementation of international protocols in the field.

Do you need help to see find opportunities in the midst of crisis? Write to info@riesgospoliticos.com.mx to provide you with the advice that your company requires.

 

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WHAT DOES IT MEAN TO CANCEL THE ENERGY REFORM?

In 2013, the energy reform took place, which meant the opening of the sector to national and foreign investment, generating competitive markets throughout the hydrocarbons and electricity value chain. Although its main objective was the development of the oil industry – seeking a development in required exploration and extraction infrastructure – it also promoted the generation of clean energy and electric power, promoting development with social responsibility and environmental protection.

The most visible change brought by the Energy Reform was the arrival of more than 50 new brands of gas stations that today compete with PEMEX, among which we can mention Eni , Total, Shell, and DEA Deutsche Erdoel . Likewise, there are more than a hundred companies that try to participate in the different links of the oil chain: exploration, extraction, transport, and logistics. In collaboration with these companies, the first crude oil finds have been obtained in shallow waters of the Gulf of Mexico. And as for the electricity industry, 42 companies are looking to build new plants in 19 entities in the country that, it is estimated, will have a capacity to generate up to 7.6 megawatts  . Likewise, 213 projects focused on clean energies have been contemplated. These include solar, wind, hydroelectric, geothermal and biomass projects. It is expected that by 2024 43% of electricity in the country will come from clean sources.

According to data from the Energy Secretariat (SENER), as of March 2018, the energy reform had triggered public and private investments of more than 200,000 million dollars. If this degree of investment continues, it is expected that in the next 5 years the energy industry in Mexico will demand more than 200,000 jobs specialized in digitization, advances in the use of machinery, equipment and industrial processes, according to Pedro Borda’s data. , former executive president of the Mexican Association in Human Resources Management. In order to meet this demand, Mexico should emphasize that universities provide trained professionals in these areas.

However, with the entry of the new government, the so-called energy reform has been one of the most exposed to facing changes. President Andrés Manuel López Obrador mentioned in recent days that those who promoted the energy reform made an error, which has generated speculation about its future and, although the reform has not been halted, the tenders for the exploration of fields were halted petroleum Also, the federal administration reported that it is reviewing projects for alleged corruption practices. The policies implemented by the current government suggest a possible cancellation of the energy reform, which could have significant consequences because, according to experts, it is difficult for Mexico to continue to have the level of investment that it has maintained without it.

On the other hand, the cancellation of the New Mexico International Airport and the downgrade of PEMEX’s credit rating by Fitch alert investors to the conditions prevailing in Mexico for the private sector. As mentioned by José Enoch Castellanos, next president of the National Chamber of the Transformation Industry (CANCINTRA), Mexico can not afford to turn back the energy reform since there is a latent risk of falling into shortage of gasoline, gas natural, LP gas and even electric power. Thus, Mexico would not have the viability in the short term to provide the demand for energy without the support of private initiative.

Added to this, a plan to rescue PEMEX was announced, which consists of an injection of resources to the oil company for 107 MMDP and a fiscal incentive for 15 MMDP. This plan was considered “insufficient” by banks and rating agencies such as BBVA Bancomer, Citi Banamex, Fitch Ratings and JP Morgan, who concluded that the measures taken by the president will help the company not to increase its debt, but will not It will help to increase the company’s production or to make it efficient or profitable.

Internationally, the picture is complicated since the World Trade Organization pointed out that world trade in goods has been at its lowest level in nine years , representing a slowdown in the global economy;    the  trade war between the USA and China has hit expectations of global economic growth, shaken financial markets and disrupted manufacturing supply chains. Added to this persists, the uncertainty surrounding the departure of the United Kingdom from the European Union; the British economy is the fifth largest in the world and the damage to international finances of the Brexit is still unclear. That is, the economic environment is extremely uncertain in the medium term, which leads us to the question: How can Mexico face this global uncertainty if we block investment in the key sectors for our growth, such as energy?

We are facing a scenario where investment looks weak and the slowdown of the global economy will impact the Mexican economy. In order to face this situation, it is necessary for the government to consider the financial realities of the oil company, the world economic system and the international conditions of the sector. Otherwise, where will the energy companies come from to maintain the industrial sector and encourage investment?

 

Political Risks can help your company is better prepared for legal or regulatory changes that mean the cancellation of structural reforms, write to info@riesgospoliticos.com.mx .

 

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THE DEBT OF PEMEX, UNPAYABLE?

Credit rating agencies, worth recalling, were partly responsible for the 2007 financial crisis. Hence, their reputation has been diminished and they have even been attacked. On that occasion, they were accused of being judges and partly by positively rating investment funds that contained unpayable mortgages, subprime calls , as they benefited financially from the payments they received from banks for these ratings. It is for the foregoing that even when the rating agencies are important entities in the international financial system, they are not exempt from making mistakes and allowing themselves to be dragged by political pressures.

These rating agencies also assign ratings to the sovereign debts of the countries and their parastatals, divided into long and short-term ones. The long-term credit ratings are assigned along an alphabetical scale divided into two groups. The first is “Degrees of Investment Bonds”, ranging from AAA to BBB, where AAA is the best and BBB the lowest. The second group is “No Investment Grade” or “Junk Bonus”, and ranges from BB to D. All of these ratings have their respective intermediaries with the +/- modifiers for each category.

At the end of 2018, Pemex had a debt of more than 2,000 million pesos, derived from the placement of bonds and the acquisition of other credit instruments. It should be mentioned that 81% of these financial obligations are referenced in dollars since, thanks to the export of crude oil, PEMEX prefers to request debt in this currency.

On January 28, 2019, Fitch Rating, one of the leading credit rating agencies in the world, downgraded BBB + to BBB- Pemex’s debt, a degree close to being considered “junk bond”. This credit decrease applies approximately 80 MMD of debt. The above is due to the fact that Fitch estimates that PEMEX will have negative cash flows of between 9,000 and 14,000 million dollars between 2018 and 2019.

Fitch also warned that the programs announced by the government to support Pemex’s finances are not enough to offset the deterioration of Pemex’s credit profile. The financial difficulties, the rating agency mentioned, can interrupt the supply of fuel, which would have great social and economic consequences for the country.

Undersecretary of Finance and Public Credit, Arturo Herrera Gutiérrez, said in a press conference that the decrease in the rating does not surprise the Mexican government, given that Pemex had already seen low performance, but it does worry. On January 31, President Andrés Manuel López Obrador accused Fitch of being a hypocrite and complicit in the looting of Pemex and the country’s low growth. It affirms that, in spite of considering important the comments of these qualifying organisms, “they are not infallible judges” and it is always possible to dissent. Although this accusation by the president is imprecise, since the rating agencies do not impact on the efficiency or lack thereof in the management of the companies, it is a sign of bad reputation that these agencies have been acquiring for the aforementioned. On the other hand,the Mexican Stock Exchange suffered a loss of 0.11% as a consequence of this adverse scenario of Pemex.

With certainty, we can speak of a complicated financial environment in the short term if the downgrade in the rating is seconded by other rating agencies, a situation that to date has not taken place. Thus, interest rates could rise due to the increase in financial risks of the largest public company in Mexico and, it is worth considering, the most indebted oil company in the world, according to a recent report by Moody’s. The panorama so that Pemex can leave the adverse financial cycle is full of challenges and this generates greater pressures to the Mexican economy and could reduce the resources for government programs, especially those that are welfare.

Do you know how to deal with the oscillations in the economy due to Pemex’s finances? How can it impact the business objectives of your company? Approach Political Risks to elaborate a risk mapping and thus you can mitigate any crisis.

 

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