PEMEX and Petrobras: A Stark Contrast

PEMEX recently released its financial statements for 2024, providing a timely opportunity to update the comparison I previously made with Petrobras based on its 2023 results. It is not an exaggeration to say that 2024 was the year that set the two companies completely apart, and a year where PEMEX placed itself in a position  that could threaten its long-term viability.

If we had to choose one single reason for the dramatic contrast between the two companies, this could likely be the fact that Petrobras is a public company: During the second presidential term of Luiz Inacio “Lula” da Silva, on Sept. 23, 2010, Petrobras went public on the New York Stock Exchange and the Madrid Exchange, raising more than US$70 billion. A very successful Initial Public Offering (IPO). Today, the Brazilian government only holds 28.67% of the stock of the company, while the Banco Nacional de Desenvolvimento Economico e Social and the Fundo Soberano do Brasil, both public entities, together hold 7.94%. 

An IPO reflects the fact that the Brazilian politicians across the political spectrum recognize certain important economic concepts inherent to the oil and gas industry:

1. The Oil Economic Rent is different from Profit. The economic rent is captured by the state through royalties, and the oil and gas operating company only receives a profit, net of the Rent that rightfully belongs to the original owner of the hydrocarbons in the subsoil, as per the Napoleonic tradition, only absent in the United States.

2. The Economic Rent can multiply if there are many oil and gas operators, because all of them will be paying royalties to the state. Economic Rent is optimized if any given operator is efficient in extracting oil, minimizing cost and maximizing the recoverable rate of hydrocarbon resources “in situ.”

3. A state-owned oil corporation may advance an energy sovereignty agenda, and assist in the social objectives of the state, as long as it is profitable and economically viable in the long run.

The  figures I am about to present derive from the same source: Form 20-F filing presented before the Securities and Exchange Commission, for the years 2023 and 2024. These figures are audited, with the exception of some rate of exchange conversions for the PEMEX business segments’ Income Statement. 

In 20023, total revenues were rather similar, but the reduction in revenues for year 2024 was more significant for PEMEX than for Petrobras. This level of revenue still puts both companies in the same league, in spite of the fact that Petrobras produces 2.7 million barrels per day, while PEMEX is down to 1.3 million barrels per day.

The dramatic contrast becomes evident when examining the key financial ratios of both companies: Net Margin on income fell for both companies, but in the case of PEMEX, it became negative, falling to -46.67%. Net Margin for Exploration and Production operations, which have been traditionally PEMEX´s stronghold, was higher for PEMEX than for its Brazilian peer in 2023, but for 2024, it shows a negative 10.25% compared with a strong 41.17% in the case of Petrobras. Net Margin for Refining operations is always lower than Exploration and Production, but Petrobras was able to double the positive Margin, while for PEMEX this ratio was negative by almost 60%.

PEMEX’s total liabilities are nearly twice the amount of its peer, and this says much about the way the two companies finance their investments. While PEMEX’s negative equity indicates that it must acquire debt in order to finance investment, Petrobras always has the option of using the equity markets. This becomes very clear when we look at the Equity account, which is a positive US$59.3 billion for Petrobras and a negative US$97.9 billion for PEMEX. The Lopez Obrador administration made some equity contributions for the first time since PEMEX’s foundation in 1938, allowing for a reduction of negative Equity from more than US$100 billion to the current level of US$97.9 billion, but is clearly not sufficient for Equity to become a source of funding to support an optimal level of investment.

Considering the negative number for PEMEX equity, a better measurement of profitability would be Return on Assets (ROA), which is the result of dividing Net Income by a firm’s Total Assets. Petrobras´ ROA is 4.19% for 2024, down from 11.51% in 2023. PEMEX´s ROA was negative 35.34% in 2024, falling from a slightly positive number in 2023. This is mostly explained by the refining results. Petrobras E&P´s ROA was a healthy 25.54% in 2024, while in the case of PEMEX E&P, it was negative 4.18% for 2024, down from a positive 8.42% in 2023. Petrobras Refining’s ROA was 26.75%, which shows that 2024 was a good year for refiners. PEMEX Refining, in contrast, shows an amazing negative ROA of 71.77%.  The higher number for Petrobras E&P might be attributed to its focus on deepwater assets, while the difference in refining reflects differences in business practices and corporate governance. 

It is relevant to mention that Petrobras reported a Foreign Exchange loss of US$11.1 billion, and PEMEX reported a Foreign Exchange loss of US$15 billion. This item has an impact on Net Income, but does not have a material effect on the comparison we are making regarding both operational and financial results, because both Brazil and Mexico experienced a local currency depreciation in the second half of 2024.

As I mentioned in my previous analysis, any diagnosis that may derive from these numbers must consider two relevant facts that differentiate both entities:

1. From the perspective of the Balance Sheet, PEMEX must find a way to finance its investments without further increasing its debt. The Mexican government most likely does not have the sufficient resources to capitalize PEMEX up to reasonable levels. Petrobras is an example of how to finance investments, while at the same time assuring the transfer of Economic Rent to the state.

2. The scrutiny of public markets contributes to better corporate governance, and therefore to a better decision-making process. The long-term viability of PEMEX as a healthy business concern requires a thorough and profound review of its business plan, considering the very grave situation of its refining unit.