Halliburton Profit to Suffer as Mexico's Pemex Pulls Back

Halliburton’s biggest Mexican customer, Petroleos Mexicanos, is reducing its exploration plans in the Burgos field and others in Veracruz and southern Mexico, a move that will squeeze the oil field company’s profits in the fourth quarter. Halliburton, the world’s second-largest oil services company behind only Schlumberger, expects its fourth-quarter earnings to drop 2 cents per share as a result.

The culprit? Pemex, as Mexico’s state-owned oil company is known, decided to slash its drilling plans because of low natural gas prices and other constraints, Halliburton said in a statement. Pemex has already cut drilling plans at its $11.1 billion onshore Chicontepec field, where Halliburton operates. Other major oil field companies including Schlumberger have service contracts at Chicontepec.

Pemex is stuck in an odd spot these days. Odd, meaning, not great. The company is spending a record $19.5 billion on exploration in an effort to find new resources as production in the country’s existing fields continue to fall.

Mexico’s offshore Canterell field was the world’s third-largest deposit when it was discovered in the 1970s. Now Canterell’s output is falling faster than Pemex can replace it from new discoveries. Earlier this year, Canterell lost its “largest-field” status after the Ku-Maloob-Zaap oil field surpassed it with an average 787,00 barrels a day. Canterell was pumping more than 2 million barrels a day just three years ago.

Pemex’s proven reserves of crude-oil equivalent have fallen steadily over the past decade. And that trend may continue, according to a recent Bloomberg report. Proven reserves may decline 2.8 percent to 13.9 billion barrels, - the 11th straight year it has fallen, said Vinicio Suro, director of planning at Pemex’s exploration and production unit, in a recent presentation on its Web site. Pemex will report its reserves data in March.

Falling output at Canterell has left Pemex with few choices. In short, it needs to find more oil and it is ramping up its capital spending plan to do just that. Pemex’s 2010 capital spending program could come in between $18 billion and $20 billion, Energy Minister Georgina Kessel said in a report by Reuters. Pemex’s net debt is expected to rise by up to $4 billion as the company borrows more money to spend more on exploration. This week, Fitch Ratings downgraded Mexico’s foreign currency issuer default rating because of the financial crisis and the country’s fall in oil production.