PEMEX and Petrobras: Two Different Sides of the Financial Coin

I have read many dissertations on the state of business at PEMEX, but as far as I know, there have been no comparisons between PEMEX and its peers. I embarked on the task of comparing from a purely financial perspective the 2023 behavior of two entities that share a lot in common: PEMEX and Petrobras. Both were born as fully state-owned monopolies. In Mexico, we know a lot about the history of PEMEX, but very little about Petrobras. 

Petrobras was founded in 1951 by President Getulio Vargas, a populist general, whose legacy as labor champion and President of Brazil has been reclaimed by Luiz Inacio Lula da Silva. We could say that Vargas was the “Lazaro Cardenas” of Brazil. Notwithstanding the strong ideological burden of Petrobras as a national enterprise, the truth is that oil was not an important part of the Brazilian economy as in the case of Mexico. Perhaps precisely for that very reason, there were certain important economic concepts assimilated by the subsequent Brazilian governments:

1. Oil Economic Rent is different from Profit. The economic rent is extracted by the state in the form of 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, absent only in the United States.

2. 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, insofar as it is profitable and economically viable in the long run.

For the above reasons, in 1997, after the return of democracy to Brazil, and during the government of President Fernando Henrique Cardoso, a social democrat, the Brazilian Congress passed Law N 478, ending the monopoly of Petrobras, and creating theNational Petroleum Agency (ANP), an autonomous entity that would manage the country’s hydrocarbon resources without political interference. In 1999, the ANP started signing oil and gas exploration and production contracts with private operators.

During da Silva’s second presidential term, on Sept, 23, 2010, Petrobras went public on the New York Stock Exchange and the Madrid Exchange, raising more than US$70 billion. It was a very successful Initial Public Offering (IPO). Today, the Brazilian government only holds 28.67% of the company’s stock, while the National Bank for Economic and Social Development and the Brazilian Sovereign Fund, both public entities, hold 7.94% of the stock. 

The IPO performed during the Lula government confirms that the understanding of the Brazilian government is that Economic Rent is in the royalties and not in the profit. 

Notwithstanding the notorious scandals involving Petrobras in the last decade, Petrobras has behaved like a publicly owned entity in many respects, and that is reflected in a high level of corporate governance and social responsibility. There has also been some political interference in the decision-making process at the board level. The Bolsonaro administration pushed for the sale of downstream assets, and there was a recent dispute between the current minister of energy and the CEO of Petrobras regarding the distribution of extraordinary dividends.

Brazil was for most of its history a net importer of oil. It only gained its oil independence in 2007. Today, Brazilian crude oil production averages 3.4 million barrels per day, while Petrobras accounts for 2.8 million bpd.

Let’s talk about the numbers now. To make a fair comparison, the accounting data presented here has the same source: Form 20-F of the Securities and Exchange Commission.

Total revenues are strikingly similar: US$102.4 billion for Petrobras, and US$101.6 billion for PEMEX. 

Net margin, that is, net income as a percentage of total revenue paints a differentiated story: 24.41% for Petrobras and 0.47% for PEMEX. This is a result of a significant difference in the net margin for the most important business segments: For the segment of Exploration and Production (E&P), Petrobras has a net margin of 33.56%, while for PEMEX the E&P net margin is 34.87%. PEMEX has an even better net margin than that of Petrobras. This shows that PEMEX is very strong in this business segment and that the strategy of concentrating its efforts in shallow waters and new onshore fields is providing good results. In the case of refining, Petrobras shows a net margin of 3.20% while PEMEX shows a net margin of -15.23%. It is well known that refining is a complicated business with low returns and high volatility, but Petrobras is still able to produce positive numbers. PEMEX’s refining results are dismal, a cause of great concern, and designing a new business model is a matter of corporate governance. In fact, total capital injections to PEMEX by the current administration are – more or less – equal to the amount of losses in PEMEX’s refining segment.

The difference of liabilities and equity between the two companies is stark. This is the result of the differentiated strategies to finance investment. Notwithstanding the fact that the current administration is the first to inject fresh capital into PEMEX, the company has suffered since its inception in 1938 from capital starvation. PEMEX has had to finance itself through the issuance of debt, and the result is an astounding number of US$233.8 billion in total liabilities, with a negative equity of US$97.7 billion. The case of Petrobras is very different: It has healthily financed its investment requirements with both capital from financial markets and a cautious level of indebtedness: Total liabilities are US$138 billion, and equity is positive at US$79 billion.

Considering the negative number for PEMEX’s 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 11.51%, and PEMEX’s ROA is 0.35%. This is partly explained, again, by the refining results. Petrobras E&P’s ROA is 16.16%, while in the case of PEMEX E&P, it is 8.42%. Petrobras Refining’s ROA is 8.72%, with -15.44% for PEMEX Refining. The higher number for Petrobras E&P might be explained by its concentration on deep-water assets, while the difference in refining is again a matter of the conduct of the business and corporate governance. 

Any diagnosis that may derive from these numbers must consider two relevant facts that differentiate both entities:

1. From the perspective of its balance statement, PEMEX needs to find a way to finance investment without the need to increase 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 grave situation of its refining unit.