Daily Management Review

Pemex acquires its premier hedging programme


04/26/2017


Mexican state-owned oil company Pemex for the first time signed its own hedging contract worth $ 133.5 million against a decline in oil prices to $ 42-37 per barrel.



rutlo via flickr
rutlo via flickr
The government of Mexico has been insuring itself against low oil prices since 1990. The insurance payments are always directed the state budget, whereas the agreement signed by Pemex is aimed at protecting the company's own financial balance.

The hedging contract covers volume of production of 409 thousand barrels of oil and is valid from May to December 2017, with $ 37-42 per barrel - this is the range corresponding to the most likely scenario associated with the reduction of quotations. If oil costs less than $ 37, Pemex will receive the maximum compensation for its losses.

"For the first time in 11 years, Pemex has its own hedging program", the company said. 

In 2016, Mexico for the second year in a row received substantial payments for its insurance, covering damage from falling in oil prices. In 2016, the country received $ 2.65 billion, and in 2015 - $ 6.3 billion. In August 2016, Mexico bought international insurance against the fall in the price of oil for 2017 for more than $ 1 billion.

The contract’s terms stipulates that the average annual oil price in 2017 is fixed at $ 42 and covers production of 250 million barrels. According to the Mexican authorities’ documents, the state usually uses hedging banks such as JPMorgan, Goldman Sachs, Morgan Stanley, Barclays, Citigroup and BNP Paribas.

Hedging is not uncommon for the oil market. Airlines do this for insurance against rising prices. Shale producers in the US rely on hedging to capture revenues. Yet, no deal will ever come close to the annual hedge in Mexico. "Mexico is the largest country that annually hedges its oil revenues", told Goran Trapp, Energex Partners' founder and former head of the Department of World Oil Trade at Morgan Stanley. During the past ten years, the hedge's nominal value was $ 163 billion. "This is a contract that all banks are waiting every year", says Richard Fullarton,creator of Matilda Capital Management commodity fund and former employee of Glencore and Royal Dutch Shell. "The hedge is so great that it can make or ruin their year in terms of profit", adds the trader. 

The oil hedge in Mexico is of real economic importance. Until recently, about a third of the country’s income came from oil revenues. As a result, the Mexican budget was exposed to the dangerous effects of price cycles of growth and decline in the oil market. Current and former government officials said the main purpose of insurance is not to earn, but to shelter the country's budget from variations in oil prices.

Mexico actually regards its hedges as a source of income. Sometimes there is big money, as it was in 2008-2009. During the last six years, the country earned $ 2.4 billion (profit from hedging $ 14.1 billion and payments of $ 11.7 billion to brokers and banks).

The recent results of the country's government looked particularly good. Mexico gained $ 6.4 billion in 2015 and $ 2.7 billion in the last year. Last summer, the government spent over $ 1 billion on the purchase of options with a minimum price of $ 38 per barrel. If prices remain the same as they are now, that is, about $ 50 per barrel, then Mexico will earn nothing. 

source: bloomberg.com, ft.com






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