Risk Management: The Key to Growth at PEMEX

Transcription

1 Risk Management: The Key to Growth at PEMEX 5 November 2002 John McCormack Senior Vice President Stern Stewart & Co

2 Why Transfer Risks? What is the Economic Benefit? Charlie and I always have preferred a lumpy 15% return to a smooth 12% Warren Buffett Chairman s Letter Berkshire Hathaway 1990 Annual Report

3 Risk Management Usually Assumed to be Value Neutral A few exceptions: RM may provide cheapest way to reduce expected insolvency costs RM may reduce conflicts between equity and debt holders RM may transfer risk from non-owner corporate stakeholders at a risk-bearing disadvantage Insurance companies may be more efficient in loss assessment, claims administration Transactions costs often outweigh these benefits 3

4 Super-majors shift little risk Little hedging of commodity prices Most transactions are related to marketing not to corporate assets (e.g. reserves in ground) BP doesn t hedge big P&C risks 1 Though it does employ outside claims administration Little cost hedging Relatively few long-term contracts with drilling rig owners and service providers 1. See Corporate Insurance Strategy: The Case of British Petroleum Doherty, Smith; Fall 1993 Journal of Applied Corporate Finance 4

5 Why Don t They Transfer Risks? They Don t Need To

6 Risk Management is a Substitute for Equity Debt Capital + Risk Management Equity Capital Super-majors have a lot of Equity Equity is a cushion against lumpy returns 6

7 PEMEX is Different Can t issue shares Government s claims limit cash flow Taxes Royalties Dividends Governments obligations unrelated to PEMEX s opportunities Debt capital is essential to a PEMEX growth strategy 7

8 PEMEX Needs Risk Management to Make Cash Flows More Predictable PEP has many NPV+ projects to exploit PEP s proportion of proven, undeveloped reserves is much higher than at investor-owned oil companies PEP has many Real Options: Optimal timing of development required PEP will have chances to create Real Options Often best economics are when spot hydrocarbon prices have collapsed 8

9 Risks Affecting Cash Flows Commodity Prices Operational Performance Natural Disasters 9

10 #1 Commodity Price Hedging Long-dated markets for crude oil and gas Commodity price hedging does, though, create counterparty credit risk Selection of counter-parties and credit derivatives an essential part of an integrated risk management strategy Basis/Liquidity risks will still exist for PEMEX (e.g. lightheavy crude spreads, infrequently traded refined products) May want to separate price risk counter-parties from physical counter-parties Hedging commodity risk does NOT involve Transfer of title to resources Payment in kind Payment as a function of production 10

11 #2 Operational Risks Two kinds of operational risks Relating to particular projects and management (engineering, geological etc.) Some particular performance risks may be shifted to outside service companies via multiple service contracts (MSCs) Relating to macro-economic factors Day rates for drilling rigs and oil field services are correlated with hydrocarbon prices Risks may be reduced via long-term indexed contracts with service providers or Through more integrated commodity hedging 11

12 #3 Natural Disasters Extensive insurance markets exist to insure against Fires Hurricanes Earthquakes 12

13 Risk Management and Growth Exploiting Opportunities

14 PEP s Proven, Undeveloped (PUD) Reserves Several billions of barrels of PUDs Development could be accelerated dramatically if additional funds were available for capital investment Commodity price volatility limits ability to borrow for development 14

15 RM key to Capital Availability PEMEX could borrow more from banks and capital markets if commodity price risk were hedged Credibility of reserve estimates important Strength of outside engineering opinions would be critical to debt-rating agencies and investors Credit facilities might be highly structured, likely involve liens etc. Operational and hazard risk management would also increase debt capacity 15

16 Make PUDs self-funding Hedge future production from PUDs Borrow against present value of developed reserves Use proceeds for development Repay debt out of production; having effectively created oil or gas denominated liabilities to fund oil or gas assets 16

17 Successfully tested financial strategy Same or similar strategies: Use of production payments by US/Canadian E&P companies Shell Offshore 1993 deal ($700 million) Triton s 1995 development of oil field in Colombia 17

18 The Hard Parts Understanding the interplay between development costs and benefits Some development costs vary with hydrocarbon prices over time Risk and uncertainty surround all development efforts MSCs may allow some of these risks to be shifted Building exploration risk into an integrated risk management strategy 18

19 Immediate Challenges for PEMEX Create an Internal Risk Management Center (IRMC) Establish statistical relationships between different risks Provide market-based hedges to business units as condition for capital investment funds Improve economic clarity of investment decisions Remove noise from performance measurement Create financial arrangements to minimize capital funds needed to support risk management contracts 19

20 APPENDIX

21 Spot prices are far more volatile than longer-dated prices Term Structure of Oil Prices Jul-90 Oct Price: $/bbl Futures Months 21

22 Analysis of a multi-staged E & P Project (the Mars Field in the Gulf of Mexico as reported in The Wall Street Journal 4/4/96) Creating XROs Seismic Investigation Bid on Lease Converting XRO to PUDRO Drill Wildcat Well Defer, Abandon Converting PUD to PDP Construct Platform Defer, Abandon Drill 26 Developmental Wells Defer, Abandon Defer, Abandon Expenditure ($MM): /1984 5/85 1/89 10/93 4/96 Time: 22

23 Total PEP reserve values Rainbow Options Volatility Value Probable & Potential PUDs Real Option Value Static NPV PDNPs PDPs Total Net Present Value 23

24 EVA is a registered trademark of in the United States of America and other countries. The EVA Company