Pemex: oil price and financial management in the context of elevated fiscal burden.
| Autor | Tacuba, Angelica |
Introduction
The influence of oil price in oil endowed economies, also called "petro-states", has been analyzed from different perspectives (Priest, 2012; Alekperov, 2015; Bouoiyour et al., 2017; Sanchez, 2016). The effects of price volatility depend on the social, economic and geopolitical conditions of the country or region. In the case of Mexico, the economy is marked by the "paradox of abundance" or the "resource curse" (Sanchez, 2016); oil revenues contribute between 25 and 30% of public revenues (CEFP, 2019), making it, highly dependent on them (Anderson and Park, 2016; Huizar, 2015; Sierra and Mendez, 2017). Mexico is among the top 20 crude oil-and-condensate-producing and -exporting countries (EIA, 2020). Compared to other oil companies, Pemex is cost-competitive and profitable (Pemex, 2020a). However, the link between oil and public finances is an opportunity cost at a corporate level. The bonanzas from price increases go mostly to finance the federal budget through TDC, which, during 1977-2019, represented, on average, 98.5% of Pemex's profits (Pemex, 2019a, b; SIE, 2019).
At a corporate level, the best way to look at the price effect is through the BS (Cornejo et al., 2012; Morales et al., 2013). On a financial level, the situation of Pemex is defined by two variables, which play a determining role in the cash flow achieved annually: the oil price and the payment of TDC. The payment of TDC is an expense recorded in the BS and an accounting overview of inflows and outflows that reflects the balance of losses or profits of the firm at the end of the year (Pemex, 2019a). Conversely, the price is an external element to Pemex which is regulated by the international market, and in Mexico, that is taken as a reference to prepare the federal budget due to its influence on the public income and the investment decisions (Rodriguez and Lopez, 2019; Reed et al., 2019).
In BS, the annual balance is determined by making a sequential subtraction of Pemex's total income, which, in turn, is determined by the oil price. The objective of this study is to understand how oil price expansions are reflected in Pemex BS and how they affect its corporate income and investment. For this purpose, six variables are used as follows: (1) total income; (2) sales revenue; (3) operating cost; (4) investment; (5) payment of TDC (6) payment of interest on debt. Total income includes sales of goods and services (internal and external); operating cost, salaries, rents and purchase of supplies; investment, i.e. the use of capital in various activities that yield benefits; TDC, i.e. the payment of tax obligations to the state and interest, i.e. the cost of indebtedness (Pemex, 2019a). This information is incorporated into a VAR model, which has been used in different research on oil prices (Cologni and Manera, 2008; Muhammad et al., 2018; Mrmirani and Cheng Li, 2004; Ismail et al., 2021; Kamaljit and Vashishtha, 2020).
Oil in Mexico is managed by a company that has its own accounting records where it reflects revenues and expenses that are equally affected by price. However, Pemex embodies two contradictory objectives within the national economy. On the one hand, it serves as a financial ark for the public treasury, which obtains a third of its financing from oil revenues; on the other hand, it needs resources to strengthen itself corporately (Pemex, 2019b). Over time, Pemex management adjusts to the two scenarios which cannot be linearly related, as it would be proposed by a deterministic regression model that omits mutual adjustment dynamics of variables. Consequently, this research uses a VAR model because it assumes endogenous dependence of variables, i.e. the price and BS variables are mutually determined and are not the result of rational processes (Sims, 1982; Rodriguez, 2011). It should be noted that the results support this endogenous dependence between variables; however, there is a strong bias in favor of using Pemex financial management as an instrument of tax collection over the productive strengthening of the company. The contribution of the paper, in this sense, is an analysis of a corporate and accounting vision of Pemex. The results give solid support to the recommendation of reducing the tax burden and an impulse to new research with a micro-economic or financial focus, focusing on an in-depth proposal of a real plan for recovery and strengthening of Pemex, as opposed to the alternative of leaving it in the role of a supplier of public funds, exclusively (Sanchez, 2016; Hernandez and Bonilla, 2020). Our first hypothesis is that Pemex responds to the state tax collection objectives and, at the same time, has investment needs; these two elements compete at a financial level, affecting the use of available resources. The second is that the oil price has a positive impact on Pemex's total income, but all the potential effect on investment is absorbed by TDC.
The rest of this paper is structured as follows. Section 2 reviews the most relevant literature on oil prices and literature focused on Mexico. Section 3 presents descriptive statistics on oil price, oil revenues and oil production, as well as a financial description of the variables and BS balance. Section 4 describes the method. In Section 5, the paper exhibits the results while Section 6 discusses them, including practical implications of the research. Finally, Section 7 presents the conclusion.
Literature review
Regarding oil price, the same variation is perceived differently by households, politicians, financial markets and economists (Baumeister and Kilian, 2016), depending on the conditions of each country, its position (oil exporter or importer), macro-economic policy and its level of development (Derbali et al., 2019). This has been corroborated by Muhammad et al. (2018), for BRICS economies with a time-varying structural vector auto-regressive (TV-SVAR) model, which simulates the transmission dynamics of the effects stemming from random shocks and by Cologni and Manera (2008) for G-7 countries with a structural-cointegrated VAR model. In general, global energy demand reshapes oil trade (Priest, 2012), influencing the productive dynamics of countries (Shen et al., 2018; Abboud and Betz, 2021) and the best incentive for oil investment, in the face of price uncertainty, is non-distortionary taxes (Blake and Roberts, 2006).
Unlike companies that demand oil-derived inputs and experience a rise in costs, price expansions benefit those that produce oil, since they generate a higher-cash flow than expected. In this sense, the studies of Iqbal and Shetty (2018) are important, which address the impact of oil prices on capital expenditure of a group of oil companies, applying a VAR model, impulse-response function (IRF) and augmented-Dickey -- Fuller test; they find that price effect depends on the sector in which they are located (exploration and extraction and refining) and size. ElFayoumi (2018) performs a similar analysis for USA companies in the manufacturing, commercial and mining sector, using a financial approach and a VAR model. His results show that price variations do affect company profits And that of Wahhed et al. (2018), who estimate the effect of price on the stocks of companies in different sectors in Pakistan, finding that an increase gives positive signals to stock markets, boosting their performance. VAR models were born as a solution to classical econometric modeling based on the work of Sims (1982). Sims strongly criticized the classical macro-econometric models, since they do not consider many restrictions of economic theory that would cast doubt on the veracity of the results obtained (Rodriguez, 2011, pp. 86-87).
In the case of Mexico, oil is usually examined from a sectoral perspective and particularly from its contribution to public revenues (Bazan and Gonzalez, 2011; Beshears, 2013; Fuentes and Cardenas, 2010; Martinez, 2004; Sanchez, 2016; Silva et al., 2021; Huizar, 2015). Pemex is crucial for the Mexican state. Well-documented economic and market-based reasons (Alvarez, 2014; Lopez and Nava, 2018; Salazar and Venegas, 2018), among other reasons, highlight the strategic value of oil and the possibility that Mexico can play its oil card to enhance its development. Pemex is a firm that, despite the policy of fiscal asphyxiation which has characterized it, has survived and generates profit. If the fiscal burden, the cost of its debt and other liabilities had been administered in the past within a framework balancing the national and business priorities, they could have been covered adequately or with minimal damage to the corporate finances, taking advantage of the periods of high prices that also led to higher income (Rodriguez and Lopez, 2019; Sanchez, 2016). Any strategy to revitalize and stimulate oil activity requires considerable resources and high prices as incentives for investment (Bazan and Gonzalez, 2011). The current government has undertaken a rescue plan for Pemex, which is a task of maximum complexity due to financial fragility caused by tax burden, excessive indebtedness (which exceeds US$100bn) (Fitch Ratings, 2020) and a drop in production (Hernandez and Bonilla, 2020). Most notably, Pemex is once again playing an important role in national politics and is expected to progressively improve its presentation card in the global environment (Pemex, 2019b; Alvarez, 2014; Duran-Encalada and Paucar-Caceres, 2012; Cabrera and Diaz, 2021).
The originality of the research consists of examining the impact of oil prices at the company level using Pemex BS variables, which is something that in the case of Mexico has not been proposed in the literature. The benefit from price increases is diluted by subtracting TDC payment, which is the highest compared to the rest of the BS expenditures. The VAR model captures this situation, giving quantitative support to the analysis and demonstrating empirically that Pemex management, in...
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