Fitch Ratings has rated the following Petroleos Mexicanos SA
(Pemex) debt instruments with a long-term local currency
international rating of 'A-' and a National Long-term rating of
'AAA(mex)'.
--Additional Certificados Bursatiles of the fourth reopening of
the Certificados Bursatiles issuance with ticker PEMEX 13. The
issuance amount is -- together with other re-openings referred to
herein -- of up to MXN30 billion with maturity on Feb. 28, 2019 at
a variable rate;
--Additional Certificados Bursatiles of the fourth reopening of
the Certificados Bursatiles issuance with ticker PEMEX 13-2. The
issuance amount is -- together with other re-openings referred
herein -- of up to MXN30 billion with maturity on Sept. 12, 2024 at
a fixed rate;
Concurrently, Fitch rated a National Long-term rating of
'AAA(mex)' to Pemex's second reopening of the additional
Certificados Bursatiles issuance with ticker PEMEX 14U. The
issuance amount is -- together with other re-openings referred
herein -- of up to MXN30 billion with maturity on Jan. 15, 2026 at
a fixed rate.
The debt issuances are guaranteed by PEMEX-Exploracion y
Produccion, PEMEX-Refinacion, and PEMEX-Gas y Petroquimica Basica.
The company expects to use the proceeds from the issuance to
finance capital investments and refinancing needs as well as for
general corporate purposes.
KEY RATING DRIVERS
Pemex's ratings reflect its close linkage to the government of
Mexico and the company's fiscal importance to the sovereign.
Pemex's ratings also reflect the company's solid pretax income,
export-oriented profile, sizable hydrocarbon reserves and its
strong domestic market position. The ratings are constrained by
Pemex's significant adjusted debt levels, substantial tax burden,
large capital investment requirements, negative equity and exposure
to political interference risk.
Strong Linkage to the Government
Pemex is Mexico's largest company and one of its major sources
of funds. During the past five years, Pemex's transfers to the
government have averaged 54% of sales, or 122% of operating income,
and contributions to the government from taxes have averaged 30% to
40% of government revenues. As a result, Pemex's balance sheet has
weakened, which was illustrated by a negative equity balance sheet
account at the end of 2013. Despite pari passu treatment with
sovereign debt in the past, Pemex's debt lacks an explicit
guarantee.
Oil Production Has Stabilized
Oil production has stabilized at around 2.5 million barrels per
day (bpd), after a precipitous fall during the last decade. This is
mostly the result of a more intensive use of technology in the
Cantarell field, improvements in operations, and increased
production from a diversified number of fields.
The diversification of the oil production asset base, with
Cantarell representing less than 20% of oil production, reduces the
risk of large production declines in the future. The company's goal
is to increase total crude production to three million bpd by 2018,
which likely will prove challenging as the company's capital
spending capacity is constrained by limited budgetary flexibility
and a high tax burden.
Approved Energy Reform; Long-term Positive for Pemex
Although Pemex's credit ratings will continue to be highly
linked to those of the sovereign, the reform would likely give the
company financial flexibility through budgetary independence. Up to
now, the company has had to obtain budgetary approval from congress
on an annual basis, which, coupled with a high tax burden, has
hindered the company's investment flexibility. Also, the company
would benefit by being able to partner with oil and gas companies
in order to share exploration risk.
The overall impact of the reform for Pemex will be positive but
gradual, and the company will continue to face a heavy tax burden
in the medium term. Despite the possible long-term positive
implications of the ongoing energy reform, company financials
continue to be significantly affected by the high level of unfunded
pension liabilities as long as appropriate measures are not put in
place to resolve the situation, as pension obligations amounted to
approximately USD88 billion, or approximately 55% of total adjusted
debt at the end of June 2014.
Negative Free Cash Flow Due to Transfers to Government
Fitch expects Pemex to present negative free cash flow (FCF)
over the next two to three years, considering Fitch's price deck
and as Pemex continues to transfer a significant amount of funds to
the central government in the form of duties and implement capital
investments to sustain and potentially increase current production
volumes. The company's historical significant tax burden has
limited its access to internally generated funds, forcing a growing
reliance on borrowings. The introduction of new energy and tax
reforms should help mitigate Pemex's tax burden, freeing operating
resources that could be used to increase investments.
Fitch expects this to be the case only in the long term, as over
the next three to five years the company most likely will continue
being a significant source of funding for the central government as
it seeks to maintain revenues from oil and gas constant at 4.7% of
GDP. For the last twelve months (LTM) ended on June 2014, Pemex's
funds from operations (FFO) were approximately USD5.8 billion and
cash from operations USD5.0 billion, which compared with cash
capital expenditures of USD32.5 billion, resulting in negative
FCF.
Strong Pre-tax Credit Metrics
For the LTM ended June 30, 2014, Pemex's EBITDA (operating
income plus depreciation plus other income) was approximately
USD72.7 billion. Credit metrics were solid with EBITDAP (EBITDA
before pension expenses)-to-fixed charges (interest plus pension
expenses) at 5.6x. Leverage as measured by total debt-to-EBITDA was
low at 1.0x and adjusted leverage was 2.2x.
Pemex cash flow metrics are weak due to the company's high cash
transfers to the government in the form of taxes and production
duties. Pemex's FFO adjusted leverage has averaged approximately
5.6x over the past five years and as of the end of 2013 stood at
8.9x. This high tax and production duties burden has resulted in an
average net income of approximately USD6 billion per year over the
past five years and has hindered Pemex's investment ability.
As of June 30, 2014, total debt was USD70.9 billion which more
than doubles to USD159.4 billion when adjusting for the underfunded
pension plan and other post-employment benefits. Positively, Pemex
has adequate liquidity of USD6.8 billion as of June 30, 2014,
enhanced by committed revolving credit lines for USD2.5 billion and
MXN10 billion. The company's debt is well-structured, with
manageable short-term debt maturities.
Pemex, Mexico's state oil and gas company, is the nation's
largest company and ranks among the world's largest vertically
integrated petroleum enterprises. As of December 2013, it reported
total crude oil production of 2.5 million bpd and a refining
capacity of 1.69 million bpd. The company reported hydrocarbon
proved reserves of 13.4 billion boe as of Jan. 1, 2014. Pemex's
proved reserves life was 10 years and its reserve replacement rate
declined to 67.8% at Jan. 1, 2014 from 104.3% at Jan. 1, 2013 after
it grew from 23% in 2005. This was due mainly to lower development
activity in the Chicontepec region.
RATING SENSITIVITIES
An upgrade of Pemex could result from an upgrade of the
sovereign coupled with a continued strong operating and financial
performance and/or a material reduction in Pemex's tax burden.
Negative rating action could be triggered by a downgrade of the
sovereign's rating, the perception of a lower degree of linkage
between Pemex and the sovereign, and/or a substantial deterioration
in Pemex's credit metrics of adjusted leverage levels higher than
4.5x.
Fitch currently rates Pemex as follows:
--Long-term Issuer Default Rating (IDR) 'BBB+'; Outlook
Stable;
--Local currency long-term IDR 'A-'; Outlook Stable;
--National long-term rating 'AAA(mex)'; Outlook Stable;
--Notes outstanding in foreign currency 'BBB+';
--Notes outstanding in local currency 'A-';
--National scale debt issuances 'AAA(mex)'.
Additional information is available at
'www.fitchratings.com'.
Applicable Criteria and Related Research:
--'Corporate Rating Methodology' (Aug. 5, 2013);
--'Rating Oil and Gas Exploration and Production Companies'
(Aug. 9, 2012).
Applicable Criteria and Related Research:
Corporate Rating Methodology: Including Short-Term Ratings and
Parent and Subsidiary Linkage
http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=715139
Rating Oil and Gas Production Companies
http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=682334
Additional Disclosure
Solicitation Status
http://www.fitchratings.com/gws/en/disclosure/solicitation?pr_id=862874
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Fitch RatingsPrimary Analyst:Lucas Aristizabal,
+1-312-368-3260DirectorFitch Ratings, Inc.70 W. Madison
StreetChicago, IL 60602orSecondary Analyst:Alberto De Los Santos,
+52 81 8399 9100Associate DirectororCommittee Chairperson:Ricardo
Carvalho, +55 21 4503 2627Senior DirectororJaqueline Carvalho, +55
21 4503 2623Media Relations, Rio de
Janeirojaqueline.carvalho@fitchratings.comorElizabeth Fogerty,
+1-212-908-0526Media Relations, New
Yorkelizabeth.fogerty@fitchratings.com