FINAL TRANSCRIPT. MEXP-B - Q Petroleos Mexicanos Earnings Conference Call - English. Event Date/Time: Oct. 28.

Transcription

1 FINAL TRANSCRIPT MEXP-B - Q Petroleos Mexicanos Earnings Conference Call - English Event Date/Time: Oct / 4:00PM GMT

2 CORPORATE PARTICIPANTS Rolando Galindo Petroleos Mexicanos - PEMEX - Head - IR Mauricio Alazraki Petroleos Mexicanos - PEMEX - Deputy Director - Finance and Treasury Gustavo Hernandez Petroleos Mexicanos - PEMEX - Deputy Director - Exploration and Production Carlos Morales Gil Petroleos Mexicanos - PEMEX - Director - PEMEX Exploration and Production Carlos Murrieta Cummings Petroleos Mexicanos -- PEMEX - Corporate Director - Operations Ignacio Alvarez Petroleos Mexicanos -- PEMEX - Deputy - Operations CONFERENCE CALL PARTICIPANTS Consuela Baraona MetLife - Analyst John Kollar HSBC - Analyst Anne Milne Bank of America - Analyst PRESENTATION Good morning, ladies and gentlemen, and welcome to the PEMEX results as of the third quarter of 2011 conference call, hosted by Mauricio Alazraki, Executive Director of Treasury, Carlos Morales Gil, Director of PEMEX Exploration and Production and Carlos Murrieta Cummings, Corporate Director of Operations. There is a support presentation for this conference.the link is available at PEMEX's webpage, in the financial information category within the Investor Relations section. At this time all participants have been placed on listen-only mode. The floor will be open for questions following this presentation. Questions may be asked only by phone. It is now my pleasure to introduce Rolando Galindo, Head of Investor Relations.You may begin. Rolando Galindo - Petroleos Mexicanos - PEMEX - Head - IR Thank you and good afternoon, morning here in Mexico. And before we start we would like to remind our listeners that our comments during this conference call may include forward-looking statements. Listeners are cautioned not to place undue reliance on any forward-looking statements and to review the cautionary notes that appear in the last pages of our earnings report published in the Investor Relations section at the PEMEX website. For this conference and its respective support documentation quarterly variations are computed as compared to the same quarter of the previous year and cumulative variations are computed as compared to the same period of the previous year unless it is otherwise specified. Now I would like to introduce Mauricio Alazraki, Deputy Director of Treasury.Thank you. 1

3 Thank you very much, Rolando.We'll start with the context. During the third quarter of 2011 prices of crude oil recorded strong volatility primarily due to changes in global growth expectations which as you might well know are due to, among other factors, inflationary pressures in some regions of Asia, the financial and economic crisis in the Euro Zone and to a slowdown of the US economy. Nevertheless the social political crisis in some countries of Africa and the Middle East, as well as an increased demand from emerging economies such as India and China, among other factors, gave stability to the prices of oil and other fuels.the prices of gas representative of a more local market reported a downward trend as a result of moderate or mild temperatures in North America, the favorable evolution of inventories, a positive outlook of production and a possible decrease in consumption due to reduced economic activity in the US. The prices of gasoline in the US Gulf of Mexico recorded a considerable increase as compared to the third quarter of 2010 due to international prices of crude oil and its derivatives. During the third quarter of 2011 the average exchange rate recorded an average [station] as compared to the average recorded in the same period of However, the uncertainty generated by the economic and financial problems in some European countries caused a considerable depreciation from the Mexican peso during the third quarter of The main highlights for the quarter the revenues from sales amounted to MXN392 billion, continuing to show an upward trend due to an increasing international crisis of hydrocarbons and towards stable production platform. Crude oil production remained above 2.5 million barrels per day. EBITDA, which is a proxy of cash flow recorded an increase of 32.5% due to increased revenues. Taxes paid increased 35%, amounting to MXN214 billion, approximately $16 billion. During the third quarter PEMEX recorded a net loss of MXN81 billion primarily due to a foreign exchange loss of MXN49 billion caused by the depreciation of the Mexican peso against the US dollar, as well as taxes and duties, which represented 55% of total revenues. During the first nine months of 2011 PEMEX recorded a net loss of MXN67.7 billion as a result of an exchange loss of MXN39.5 billion due to the depreciation of the Mexican peso against the US dollar, as well as to tax burden. Now I leave you with Gustavo Hernandez, Deputy Director of PEMEX Exploration and Production. Gustavo Hernandez - Petroleos Mexicanos - PEMEX - Deputy Director - Exploration and Production Good afternoon, everyone. Good morning to you in Mexico. Let me tell you that in regard to crude oil during the third quarter of 2011 crude oil production averaged 2,525,000 barrels per day, 1.6% below the average production recorded in the same quarter of This variation is primarily due to maintenance of the [Impagapeeso] floating production storage unit, unfavorable weather conditions caused by tropical storm, Nate, and delays in the completion of wells at Cantarell due to the fact that contracting of drilling equipment ran behind schedule in consequence of longer trend of processes.the aforementioned when partially offset by an increase in production at the Aceite Terciario del Golfo (ATG) project, which considers the Chicontepec region by 24% or 10,000 barrels per day. Due to new operational strategies of wells and installations combined with (inaudible) and technological advances. At the same time, the projects Ogarrio Magallanes and Delta del Grijalva of the southern region and the Yaxche, of the southwest offshore region recorded increases in production of light and extra-light crude oil. In regards to Cantarell, during the first nine months of 2011, Cantarell's production represented 20% of total crude oil output, which represents and will continue to represent one of our most important assets. Therefore we will continue implementing measures to stabilize production and increase the hydrocarbons recovery factor. 2

4 Very briefly, one of the many actions that we have taken to stabilize production is the drilling of new wells far off from the water-gas contact zones, as well as the shutdown of wells in these areas. The previous mix of (inaudible) our execution times. As it is observed in this quarter, delays or backlogs of administrative processes or tenders for drilling equipment, cost of production deferrals. Nonetheless, during the January-September 2011 period, the production of Cantarell averaged 511,000 barrels per day, and the average decline rate decreased to 1%, reaching its slowest in the last four years. It's important to highlight the efforts made to diversify our project portfolio and production resources, which imply, among many other things innovation and transformation. Examples of this are the wording of the integrated [EMP] contract, which we will discuss in a moment, as well as reorganization of PEMEX exploration and production oriented in very broad terms towards the achievements of goals and the generation of sustainable variables. Natural gas production and gas flaring. Regarding natural gas production, during the third quarter of 2011 a decrease of 7.9% was recorded primarily due to, one, a decrease in associated gas production of the Antonio J. Bermudez assets in the southern region and of the Cantarell assets in the northern marine region, as well as from a decrease in non-associated gas production in the (inaudible) Veracruz assets of the northern region. The decreased production in assets of the northern region is due to reduced drilling programs activity and completion of wells due to factors such as current prices of natural gas.the decrease in natural gas production was partially offset by an increased in production of associated gas and at the Litoral de Tabasco in the southwest marine region, and at the ATG assets of the northern region. Gas flaring. Gas flaring decreased by 48% primarily due to, one, the installation of infrastructural or marine platforms for the handling and transportation of gas. Number two, the implementation of the strategies to strengthen operational reliability, and number three, the execution of strategies in Cantarell to optimize the exploitation of wells with high gas content. In consequence, during the third quarter of 2011 natural gas implementation amounted to almost 96%. Infrastructure. The number of operating wells increased by 32% primarily as a result of -- as a result of the incorporation of on-shore drilling rigs due to increased exploration and development activity at the Antonio J. Bermudez and Delta del Grijalva assets in the Samaria Somero project of the southern region, and in the Chicontepec project of the northern region. Well completion. During the third quarter of 2011, the completion of wells decreased by 61 wells, as compared to the same quarter of 2010, due to the changes in the development drilling strategies at the ATG and Burgos projects and to an increase in drilling time of exploratory wells in the southern region. Seismic information and discovery. During the third quarter of 2011, 2D seismic data position decreased by 6.5% as a result of decreased seismic activities in the north region as the data obtained during the previous quarters is now being analyzed. On the other hand, 3D seismic data acquisition recorded a considerable increase due to increased exploratory activities in deep waters in the Gulf of Mexico. Main discoveries. Even though we expect that in the future an important amount of our hydrocarbons production might come from reservoirs and deep waters, Mexico holds important resources in both shallow waters and on shore. In fact, PEMEX carries out successfully production tests in exploratory tests in (inaudible) which confirms the existence of a new light crude oil deposit from 37 API. The field is located northwest of Ciudad del Carmen, Campeche in waters measuring 22 meters depth. This field is part of the crude oil Crudo Ligero Marino project, which represents a great advantage to PEMEX because of its proximity to existing infrastructure, as well as because of the knowledge and expertise we have in this region. 3

5 Integrated exploration of production contracts. One significant event that took place during the third quarter of 2011 was the successful awarding of the first round of integrated contracts for exploration and production for mature fields in the southern regions. The fields Magallanes and Santuario were awarded to Petrofac Facilites Management Limited, who offered [$10.01] per barrel for both fields.the Carrizo field was originally awarded to Administradora de Proyecto de Campos. However, on October 19 this year after the winning company failed to comply with legal requirements of the agreement, PEMEX reassigned the contract to Dowell Schlumberger of Mexico SA, which had submitted the second-lowest bid in the public tender carried out on August 18, 2011., and with an offer of $9.40 per barrel. The process raised great interest among companies in the industry, both domestic and international. A total of 53 bid packages were acquired by 27 companies for the three contractual areas. The fields awarded hold reserves of 207 million barrels of oil equivalent, and currently produce 14,000 barrels per day. Its production is expected a total output of 55,000 barrels once this contract come into effect. We believe these contracts will bring great value to PEMEX. Through this, we expect to increase our production levels and execution capacity and to leverage the expertise and technology from other companies. We are also expecting to launch a second round of contracts for mature fields in the northern region during the fourth quarter of 2011.Thank you very much for joining us. And I will now leave you with Ignacio Alvarez, our corporate assistant -- corporate deputy of operations. Ignacio Alvarez - Petroleos Mexicanos -- PEMEX - Deputy - Operations Thank you very much. Good morning, and thank you again for joining us today. Regarding crude oil processing, total crude oil processing decreased by 2.2% as a result of maintenance and repurchasing the national refining system. Our outages in the Madero and Salina Cruz refineries and primary services outages at the Madero and Salina Cruz refinery. These issues also affect our process because of the amount of time it takes to restart the plants once the maintenance works have concluded, but once services are reestablished. Primary distillation capacity decreased by 2.7%, as compared to the same quarter of 2010, as a result of a lower utilization of plants and due to the start of stabilization (inaudible) of operations in the primary Maya Plant of Minatitlan. In response to these decreases, petroleum products production decreased by 4.3%. In addition, the national refining system recorded a variable refining margin of minus $2.31 per barrel in response to crude oil and petroleum product prices volatility in the international markets, due largely to sociopolitical factors as well as macroeconomic effects. At this point, I would also like to mention that we are currently evaluating and implementing measures to improve the reliability of our plants and strengthening our processes. Regarding the Minatitlan reconfiguration, better configuration works at the Minatitlan refinery concluded during the second quarter of 2011.Therefore, an increase in the refining capacity of the national refining system is expected.the production of the new plants is expected to stabilize during the last quarter of this year. Under this scheme, better consolidation of the Salamanca refinery is expected t start during the first half of the In natural gas processing, total natural gas processing increased by 1.8%, primarily due to the greater availability of sweet wet gas, mostly from fields in the northern region. Moreover, condensates processing increased by 12.6% due to increased production from the marine and northern regions. As a result, dry gas and natural gas liquids production increased by 3.1% and 1.6% respectively, as compared to the third quarter of Finally, in petrochemicals, the production of petrochemical products decreased by 12.4% in line with the Company's strategy of channeling production into the most profitable chains. In consequence, the production in the methane derivatives chain 4

6 recorded an increase of 19%. The aromatics and derivatives chain production decreased as a result of our reduction of the gasoline components in manufacturing in response to increased input costs. While the production of the propylene and derivatives chain decreased due to a decrease in demand for these products, the decrease in production of (inaudible) derivatives chain is due to unplanned down times caused by auxiliary maintenance.thank you very much. And I think we're open to your questions. No. I'll continue with the main highlights of the financials, thank you very much. Thank you very much, Ignacio. Regarding the financial results for the quarter, we would like to highlight the following. Total sales, as we mentioned, amounted to MXN392 billion, which represented a 23.5% increase as compared to the same quarter of the previous year due to the higher hydrocarbon prices and our stable production platform. Likewise, operating income increased 16.5%, totaling MXN158 billion. Additionally, the comprehensive financial result was less favorable than the one recorded during the same period of the previous year, primarily due, as we mentioned before, to the depreciation of the Mexican peso against the US dollar. Regarding other revenues, it recorded a 225% increase, primarily due to a 205% increase in the IEPS credit, which was partially upset by an increase in other sundry expenses. However, taxes and duty paid increased in the period 35.1% compared to the previous period in 2010, sorry. As a result, a net loss of MXN81 billion, approximately $6 billion, was recorded. During the third quarter of 2011, total sales increased by 23.5% as a result of an increase of 45.9% in the price of the Mexican crude oil basket, which averaged $ per barrel during the quarter and was partially offset by a 4.1 decrease in the volume of crude oil exports, which recorded an average volume of 1,302,000 barrels per day. In addition, an increase of 43.6% in the regular gasoline in the price of US Gulf of Mexico was recorded, going from $1.96 per gallon to $2.82 per gallon. Finally, higher prices for domestic products sold were recorded, including gasoline, fuel oil, diesel, jet fuels and asphalt. Also, increases in sales volume of premium gasoline, diesel, fuel oil and asphalt were also recorded. With respect to the cost of sales, they're at 33.4% increase recorded during the third quarter of 2011.This is primarily explained by a 50.7% increase in purchases for resale due to higher prices of hydrocarbons and derivatives. A 29.6% increase in operating expenses due to increases in the cost of personal services, material, services payable to third parties and insurance and guarantee letters. These increased expenses were partially offset by a 96.6% decrease of fees paid to third parties and a 63% increase in exploratory expenses, as well as a 49.8% increase of in the preservation and maintenance expenses. The previous was partially offset by a decrease of 3.7% in amortizations, 3.6% in the net cost of a period of employee benefits and 1.9% in the cost of non-successful wells. General expenses increased by 0.3% due to a 13.4% increase in the distribution expenses, which was partially offset by a 5.5% decrease in administrative expenses. The comprehensive financial result recording a variation of MXN74 billion compared to the same quarter of last year as a result of higher interest expense due to the financial [instrument valuation] and to an increase in exchange laws to the greater depreciation of the Mexican peso against the US dollar as compared to the depreciation recorded during the same period of the previous year. 5

7 Taxes and duties increased during the third quarter are primarily a result of higher reference price of the Mexican crude oil basket, which increased 45.9% in the third quarter of 2011, as compared to the same period of 2010 from $59.30 per barrel to $ per barrel in 2011.The former was partially offset by the accrued amount of IEPS credit. During the third quarter of 2011, as we mentioned, Pemex recorded a net loss of MXN81 billion, or around $6 billion, as a result of negative comprehensive financial result of [MXN67 billion] due to the depreciation of the Mexican peso. The previous was partially offset by an increase in sales and other revenues. Here we see the debts of some of the external structural impacts that we have, cost of some subsidies or not recognized costs of distribution of gasoline, labor obligations. The taxes, these just illustrate that -- these costs were recognized the net result would be substantially different for the period. In the next slide, we have a consolidated accounting cash flow just to illustrate the size of the cash flow generated by the Company, but also you can see here the amount of taxes paid by the Company, no? More or less, the cash at the beginning of the period and at the end of the period has remained relatively stable, which demonstrates the capacity of PEMEX to generate positive US dollars. Total debt increased by 8.8%, primarily due to a 7.4% depreciation of the Mexican peso against US dollar during the first nine months of This was charged in total debt of almost MXN49 billion. The main operations during the third quarter in the capital markets were on July 20, Petroleos Mexicanos reopened the $1 billion -- for $1 billion. It's 5.5% notes due on January 2021 that were issued last year in July. Also, on September 27, Petroleos Mexicanos issued MXN10 billion of Certificados Bursatiles in two tranches, the first MXN7 billion pesos due in 2017 at (inaudible) 28 date loss of spread of 24 basis points, and the second one for approximately MXN3 billion denominated in UDIS (investment units) due in 2021 as a 3.55% semiannual fixed income. In addition, on October 12, 2011, Petroleos Mexicanos reopened for $1.25 billion. Its 6.5% notes due in June 2014 that were originally issued in May of Finally, I would like to mention that as of September 30, 2011, Petroleos Mexicanos holds liquidity credit lines for about $3.5 billion, out of which $3.25 billion are currently available. And with this, we finalized the conference. And we leave the floor open to Q&A. QUESTIONS AND ANSWERS ( Instructions) The first question comes from the line of Anne Milne from Bank of America. Please proceed. Anne Milne - Bank of America - Analyst Thank you very much. Good morning. Good afternoon. A couple questions here. The first is I know that you've presented your CapEx plan or your investment program proposal for approval for I was wondering when you would have that -- your information available regarding the funding and financing plans for the year. Second question has to do with the recent purchase of Repsol shares and the agreement you have with Sacyr in Spain. The question would be would PEMEX further increase its stake in Repsol? And then under what conditions would or could you terminate the agreement with Sacyr if it ended up having problems with its banks? 6

8 And then finally on the operating side, just wanted to know what the new capacity of the Minatitlan refinery would be now that the reconfiguration has been completed. And then I think you mentioned on ATG that production was up nicely this quarter. I think it was up 10,000. Could you actually give us the production number at ATG right now for the third quarter of 2011? Thank you very much. And I just want to compliment you on a very comprehensive press release and conference call. Sure. Thank you very much, Anne. For 2011, we hope shortly to post our financial program. As you see, we have to first have with Hacienda the approval of the financial program for Once we have that, probably early in December, we will be able to post, as we did this year, the financing program for 2012, no? With respect to Repsol shares, currently we have no plans to increase our stake in Repsol. And as we have mentioned, the agreement with Sacyr is in place and [holds]. I would leave Gustavo for the operating data questions. Gustavo Hernandez - Petroleos Mexicanos - PEMEX - Deputy Director - Exploration and Production Yes. Good afternoon, Anne. I'd just say that for the third quarter, the production and the ATG project or Chicontepec have reached [60,000] figures and have been increasing a long time. And as I said during the presentation of this information, we have been increasing the production from 40,000 barrels at the beginning of the year to the current production of 65,000. But the third quarter was 61,000 barrels per day in ATG. Ignacio Alvarez - Petroleos Mexicanos -- PEMEX - Deputy - Operations You mentioned the capacity of the Minatitlan refinery after reconfiguration. The refinery will have a capacity of - a crude processing capacity of 240,000 barrels per day compared to 162,000.With this, we're expecting gasoline production to increase by 58,000 barrels per day. The last question I think it was what was the LGP production in the third quarter. I'll have to check that number -- check that number back. Rolando Galindo - Petroleos Mexicanos - PEMEX - Head - IR We'll just get back to you on the LPG production for (inaudible). That's LPG production of (inaudible), I think. Rolando Galindo - Petroleos Mexicanos - PEMEX - Head - IR Yes.The total LPG production.we'll get back to you on that. The next question comes from the line of Consuela Baraona, [MetLife] Please proceed. 7

9 Consuela Baraona - MetLife - Analyst Hi. Good morning. Hello, Mauricio and company [during] PEMEX. I have a couple of questions. One is regarding the maintenance cost. And can you explain a little bit when the maintenance is done during the year? It's always during the third Q or we would expect more maintenance those for the following quarter, for the fourth Q. In the same time, in the same conditions, can you explain us a little bit about a delay in the Cantarell [constructed position]? And you mentioned that you had problems with the weather conditions and some delays in operations. Can you explain us a little bit of that? Gustavo Hernandez - Petroleos Mexicanos - PEMEX - Deputy Director - Exploration and Production Gracias, Consuelo. Gustavo Hernandez speaking. [On what were] your questions, on Cantarell, as we said, we have problems with the wells. Provided we have in September a tropical storm that was originated in the Gulf of Mexico in the area of Campeche. So we had to take the necessary measures to shut down some production. Because of the weather conditions we couldn't operate our [supply] vessels. We couldn't operate our tankers, so we had to reduce the storage capacity. And that's one of the reasons to shut down some production. In regards to maintenance, we keep on with the program that we have in the upstream part of the Company in the oil areas. Offshore and onshore facilities, we have the program for running the maintenance throughout the year. So we are not stopping or deferring maintenance activity in our facilities. So let me talk to you a little bit more about the activity we've been doing in Cantarell. As we said, the production in Cantarell averages over 500,000 barrels per day. And we've been working shutting down wells close to the -- that are shut -- in the transition zones between the oil and gas contact close to the -- close to the oil and gas contact in the oil zone. We are shutting those wells, but we are replacing those (inaudible) wells with activities -- [work over] activities existing wells, as well implementing the drilling of additional wells to replace the wells that have been [shutted in]. I hope to have had answered in this regard, and I will leave my colleagues to further questions, okay? The next question comes from the line of John Kollar from HSBC. Please proceed. John Kollar - HSBC - Analyst Good morning, everybody. Just one question and one clarification, if I might. The first one is on the capital spending side, it looks like CapEx for the first nine months came in at $7.8 billion. Do you have an estimate of where capital spending is going to come in for or what the budget is for 2011? That's the first question. And then a clarification on the EBITDA side.you mentioned that EBITDA had increased 32.5% year-over-year in the period. But on page 19 in the slides, EBITDA shows a 24.8% increase in the period. And I'm wondering what the difference is. If you could clarity that for me, I'd appreciate it.thank you. Thank you very much, John. With respect to the CapEx, first let me make a clarification.the one that we're showing in the cash flow slide is according to accounting rules. 8

10 So you have to take out not a capitalizable maintenance and also unsuccessful exploration. So that accounts for an important amount. And also usually if you see a PEMEX capital expenditure, it moves faster in the last quarters, especially in the last quarter of the year, no? With respect to your EBITDA question, one is for the first nine months and the other one is comparing quarter to quarter. Quarter to quarter is 4.8% percent. And for the first nine months, recorded an increase of 32.5%, no? So one is quarter to quarter and the other is for the first nine months. ( Instructions) I would now like to turn the call over to Mr. Mauricio Alazraki. Please proceed. If there are no further questions, thank you very much for attending the third quarter conference call of Petroleos Mexicanos, and we hope to have you on the next quarter. This concludes today's presentation.you may now disconnect. Have a great day. DISCLAIMER Thomson Reuters reserves the right to make changes to documents, content, or other information on this web site without obligation to notify any person of such changes. In the conference calls upon which Event Transcripts are based, companies may make projections or other forward-looking statements regarding a variety of items. Such forward-looking statements are based upon current expectations and involve risks and uncertainties. Actual results may differ materially from those stated in any forward-looking statement based on a number of important factors and risks, which are more specifically identified in the companies' most recent SEC filings. Although the companies may indicate and believe that the assumptions underlying the forward-looking statements are reasonable, any of the assumptions could prove inaccurate or incorrect and, therefore, there can be no assurance that the results contemplated in the forward-looking statements will be realized. THE INFORMATION CONTAINED IN EVENT TRANSCRIPTS IS A TEXTUAL REPRESENTATION OF THE APPLICABLE COMPANY'S CONFERENCE CALL AND WHILE EFFORTS ARE MADE TO PROVIDE AN ACCURATE TRANSCRIPTION,THERE MAY BE MATERIAL ERRORS, OMISSIONS, OR INACCURACIES IN THE REPORTING OF THE SUBSTANCE OF THE CONFERENCE CALLS. IN NO WAY DOES THOMSON REUTERS OR THE APPLICABLE COMPANY ASSUME ANY RESPONSIBILITY FOR ANY INVESTMENT OR OTHER DECISIONS MADE BASED UPON THE INFORMATION PROVIDED ON THIS WEB SITE OR IN ANY EVENT TRANSCRIPT. USERS ARE ADVISED TO REVIEW THE APPLICABLE COMPANY'S CONFERENCE CALL ITSELF AND THE APPLICABLE COMPANY'S SEC FILINGS BEFORE MAKING ANY INVESTMENT OR OTHER DECISIONS. 2011,Thomson Reuters. All Rights Reserved T18:58: