Oil companies in Latin America brace for a long haul
May 4, 2020 |
With no oil price stabilization in sight, making it to the other side of the crisis poses a great challenge for major Latin American oil companies.
Excess volume of crude oil and a severe shortage of storage capacity recently pushed the price of West Texas Intermediate (WTI) below zero for the first time in history, setting off a ruction in the global oil markets that has yet to settle out.
The COVID-19 pandemic, while not the main immediate cause of the collapse in prices, has compounded an earlier price war between major producers, Saudi Arabia and Russia.
For Latin American oil producers, which are benchmarked against Brent Crude prices, the impact has not been as pronounced. However, since early March the price is down 40%, and for much of the last eight weeks has remained below $30 a barrel, the average all-in production cost in the region.
“Everybody is nervous about how long prices will stay this low,” said Anne Milne, head of emerging market corporate credit research at Bank of America in New York. “It’s not going to be something that will resolve itself by the end of this year.”
So long as airplanes stay grounded and cars stay parked as the economic shutdowns hold, prices will remain low. In the meantime, having enough cash on the balance sheets to weather the storm is key, analysts agree.
“This is a waiting war and those who can wait the longest will be the winners,” said Juan Carlos Echeverry, former CEO of Colombia’s Ecopetrol. “The winners will be those with the capacity to lose money for every barrel of oil extracted “month after month after month.”
“It’s a bloodshed requiring patience and resilience because, in the long run, it’s more profitable to keep the production going until prices go up,” Echeverry said. He explained that closing oil fields to decrease production can lead to permanent or long term loss because recovering them can be extremely expensive.
Major oil companies have been coming to market with bond issuances to collect the necessary liquidity. Exxon issued $9.5 billion worth of bonds in mid-April. BP, Shell, Equinor, Valero and Total have also been raising sizeable amounts of money in the debt markets to weather the crisis over the last two months.
Colombia’s Ecopetrol issued on April 26, raising $2 billion, not long after Latin American sovereign issuers began to try the market --with Panama leading the way one month ago.
Colombia’s state-owned oil company had gotten permission to issue from the finance ministry in February. The authorization would allow “Ecopetrol to continue to strengthen its liquidity position in the event of unforeseen fluctuations in crude oil prices, to finance potential growth opportunities and to optimize its current debt portfolio and/or reduce refinancing risk," the company said in a securities filing.
“This, plus the cash that Ecopetrol already had, brings the company’s cash position to about $5.7 billion,” said Echeverry. “With this cash, Ecopetrol could hold out well into 2021, covering both operating costs and capex.”
Ecopetrol is the only oil company in Latin America that has come to the market since the coronavirus crisis broke out. And some analysts think it will be the only one.
“It’s the only oil company in the region that will have access to the market because it is investment grade,” said a banker in New York.
S&P Global and Fitch Ratings both give Ecopetrol a BBB- rating, the lowest rung in investment grade.
Mexico’s Pemex, whose credit ratings were cut in late April to junk status due to heavy indebtedness and lack of profitability, may not have the same access as Ecopetrol to the global financial markets. But its hedging program, which guarantees a price of $49 dollars per barrel for a part of its production, will secure the company 80% to 85% of its estimated income for 2020. The state-owned company also has the backing of a government which itself has access to a $61 billion flexible credit line with the IMF.
“Like all other companies, Pemex has taken drastic measures to reduce costs,” said the banker in New York. These include layoffs, less capex, closing of less profitable fields.
Brazil’s Petrobras, with an S&P Global risk level rating of corporate debt at BB-, may not be able to issue either in this time of crisis, in which only investment grade companies can make it to the market. But the company seems to have some cushion to hold it over the crisis.
“The market feels that Petrobras, with its pre-salt oil fields is in a good position to produce low cost oil,” said Milne. “Most of the oil from these fields is produced at less than $10 a barrel, which gives the company a big competitive advantage.”
The company had been drawing down on its credits lines and is currently in a good liquidity position and was working towards a debt to EBITDA ration of 1.5X by the end of this year, Milne said. A few days ago, Petrobras revised its debt outlook amid low oil prices, but “they’re at least keeping their debt flat for the year.”
Ecuador’s Petroamazonas asked bondholders on Tuesday to accept deferred interest payments and delay the maturity date of its 2020 bonds for almost a year. The company’s current dollar bond debt outstanding amounts to $150 million, according to data provider Refinitiv. The sum is tiny compared to debts held by other state-owned oil companies in the region, but the Ecuadorian government itself has been facing a tight cash flow and was also seeking payment extensions earlier in April. How this company will hold out through the crisis is not clear and analysts were not able to provide any detail.
With its majority owner, the Argentinean government, in virtual default, YPF may also have little access to international financing. But there is a chance that the government of Argentina will return to the “criollo barrel” policy that was implemented from 2015 to 2017 to secure profitability for local oil companies, when world prices previously fell. A so-called criollo barrel price is one set by the government that is higher for locally produced oil that what is being quoted in international markets.
“There is talk in Argentina of establishing a price for crude oil at around $49 a barrel in the local market, and they would prohibit imports,” said Milne.
The return to the “criollo barrel” is still being debated. “If they do adopt this policy, that would be positive for companies like YPF and Panamerican Energy and all the other oil producers as well,” Milne said.