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Critical insight: Why Pemex is so important to the Mexican economy

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Pemex – The Mexican government’s mainstay revenue

Pemex is the largest company in Mexico and one of the largest oil companies in the world. Mexico’s energy sector is regulated by the Secretaría de Energía (or SENER). The Comisión Nacional de Hidrocarburos (or CNH) provides additional oversight.

For several decades, Pemex accounted for one-third of the tax revenues paid to the Mexican government in the form of oil taxes and other associated taxes.

PEMEX GOVT REVENUE

The affairs of the company had little scrutiny, and as long as oil flowed from Pemex’s oilfields, there were few concerns raised about the status quo.

But, in 2004, production started declining. Thanks to the staggering amount of tax the company had been paying, the state-owned monopoly came to depend on borrowings to make ends meet.

The most recent quarter marked Pemex’s sixth consecutive quarterly loss. A huge tax bill played a major role in loss.

In other words, the oil and gas giant started wobbling. The following part of this series discusses the problems that started surfacing, eventually leading to a need for reforms.

Why these reforms matter to U.S. companies and ETFs

Given that the Eagle Ford Shale in Texas extends into Mexico, U.S. companies that have major operations in the Eagle Ford might consider extending their operations. This extension could be geographically and logistically beneficial.

Companies that have major operations in the Eagle Ford and that might want to tap into Mexico’s reserves include Chesapeake Energy (CHK), Murphy Oil (MUR), EOG Resources (EOG), and Marathon Oil (MRO). All these companies are components of the Energy Select Sector SPDR ETF (XLE).

The following part of this series discusses the first signs of weakness in Mexico’s oil and gas industry.

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