Petroperú launches an SOS to the State

Oil is revered in Latin America.

The raw material - converted into the true El Dorado: that golden delirium that was coveted in ancient times - has marked the political, economic and social life of the region in the last century.

For those countries that have found it in their subsoil, it has meant an almost inexhaustible source of wealth.

But it has also been one of the causes that have caused some of the greatest financial misfortunes in the area.

Peru is in this position.

Its flagship company, Petroperú - dedicated to the transportation, refining, distribution and marketing of hydrocarbons, and with a minimal participation in crude oil exploration - has accumulated an unsustainable debt, after years of mismanagement, and which has just led it to request to the Government of Dina Boluarte a millionaire ransom.

“The company faces a problem of financial sustainability in the short and medium term,” says Adriana Eraso, director of Latin American Corporates for Fitch Ratings.

In January, Pedro Chira, still president of the company, raised the voice for help: the firm needs about 2.5 billion dollars (2.3 billion euros) in the short term to give some respite to its debt, which in total amounts to almost 6 billion dollars.

“It is said that this is a bailout, but we prefer to call it shareholder support,” Chira said last January during a press conference, the last before he resigned at the end of February. “The money is going to be returned through benefits and taxes in the coming years.”

The Government, however, has refused to provide new financial support to the company, which was accumulating a series of negative indicators, including operating losses, high financial expenses and a considerable net loss.

Furthermore, it does not have sufficient liquid assets to cover its obligations and relies heavily on debt to finance its daily operations.

“The situation is extremely critical,” warns Carlos Oliva, president of the Fiscal Council of Peru, an autonomous public sector body that advocates for the health and transparency of state finances.

“The figure claimed by the company is equivalent to almost one percentage point of GDP and implies debt forgiveness and capital contributions to get out of the hole that compromises the country's public finances,” highlights Oliva.

This is not the first time he has demanded a bailout (as the request for help is called in Peru).

The company, with more than 50 years of history, has had to be rescued up to four times.

The most recent: in 2017 and 2022. The consequences of the latter have left cracks that are difficult to heal.

Loss of confidence

The bomb exploded in the first half of 2022, when Petroperú lost the trust of its creditors and the financial world, in general, after a dispute with its auditor (PwC) and the delay in the publication of its financial statements for the previous year, which which led the risk rating agencies (Fitch Ratings and S&P) to lower the company's solvency rating.

This was combined with a constant rotation of its senior managers (which still continues) and a complaint for criminal organization and aggravated collusion linked to the general manager appointed at the time by Pedro Castillo, then president of Peru.

“Management and governance deficiencies in 2022 led to a serious reputational and liquidity crisis,” he argued in an S&P report.

Confidence in the markets is extremely important for Petroperú, since it depends largely on loans for its daily operations.

Currently, for example, between 75% and 80% of its liquidity needs come from lines of credit.

“What happens when they lower your grade?

All credits are beginning to be restricted and are becoming more expensive,” Chira acknowledged at the January press conference.

Before the rating downgrade, the manager added, the average interest rate that the firm obtained in the market was around 2% and 2.5%, but in 2023 it reached around 12%, also driven by a more monetary policy. restrictive.

“There is a large percentage of the financing that costs us very dearly,” he said.

Added to the difficulties in accessing credit is the prolonged and difficult start-up of the Talara refinery (in the north of the country), built in 1917 and which has been modernized to be able to refine 45% more barrels of oil (about 95,000 a day).

This ambitious project – the largest the country has had in the last three decades and in which the Spanish company Técnicas Reunidas was awarded most of the contract – began in 2013 and was completed almost 10 years later, with a cost that exceeded the 2.73 billion dollars to 6.5 billion.

Of all the refineries that the Peruvian State has, Talara is the most important.

Between 30% and 40% of the fuel consumed in the country comes from there.

So for some time during the construction stage the brakes were put on and the Andean country was forced to import fuel, in a context where the price of crude oil had skyrocketed due to geopolitical tensions.

“Peru is a net importer, so it has bought hydrocarbons in the market at high prices due to the international context,” highlights Eraso, from Fitch Ratings.

“This has created a hole in the cash flow [cash available to cover its daily operating expenses or financial obligations] which is what is affecting the company,” he concludes.

And perhaps that need will continue in the coming years.

With Talara, Petroperú's objective is to control 51.8% of the refining capacity in the country.

But achieving that goal will not be easy.

A refinery, after its construction, takes between 12 and 18 months to be fully operational, explains the Fitch Ratings expert.

Talara is in this process, which is one of the five refining facilities (two of them are out of service) that the State has.

In total there are seven in the territory.

Two of them are private.

The largest belongs to Repsol and has a refining capacity of 117,000 barrels per day, that is, 47.4% of the market.

Fitch expects Petroperú – which has declined to answer questions from EL PAÍS – to maintain a constant debt of an average of $5.7 billion for at least the next two years.

Without state intervention, it is expected that the debt will be approximately 8.8 times greater than the operating result (ebitda) expected for this year.

Leverage will only have a slight decrease starting in 2026. This will occur as the Talara refinery begins commercial and financially viable operations, says Fitch, which after learning of the Government's refusal has once again lowered the firm's rating.

“The company needs fresh capital to maintain its operations,” emphasizes Julio Loc Lam, an analyst with the rating agency Apoyo & Asociados Internacionales. In the midst of these turbulence, the Government has remade the company's management team and has offered it a guarantee of loan for up to 800 million dollars.

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