Fitch Rates Pemex's Certificados Bursatiles Issuances 'A-'

CHICAGO--(BUSINESS WIRE)-- Fitch Ratings has assigned the following ratings to Petroleos Mexicanos' (Pemex) debt instruments with a long-term local currency international rating of 'A-' and a national long-term rating of 'AAA(mex)'.

--Certificados Bursatiles issuance with ticker PEMEX 15. The issuance amount is -- together with other Certificados Bursatiles issuances referred to herein -- of up to MXN15 billion with maturity up to three years at a variable rate;

--Certificados Bursatiles issuance with ticker PEMEX 15U. The issuance amount is -- together with other Certificados Bursatiles issuances referred to herein -- of up to MXN15 billion with maturity up to 20 years at a fixed rate.

Fitch has also assigned a long-term local currency international rating of 'A-' to the following issuance (Fitch also maintains an existing national rating of 'AAA(mex)'):

--Third and previous reopening of the Certificados Bursatiles issuance with ticker PEMEX 14-2.

The debt issuances are guaranteed by Pemex Exploracion y Produccion, Pemex Cogeneracion y Servicios, Pemex Perforacion y Servicios, Pemex-Refinacion, and Pemex-Gas y Petroquimica Basica. Previously, the Certificados Bursatiles issuance with Ticker PEMEX 14-2 was guaranteed by Pemex Exploracion y Produccion, Pemex Cogeneracion y Servicios, Pemex-Refinacion, and Pemex-Gas y Petroquimica Basica. Such guarantee was replaced by the guarantee of Pemex Exploracion y Produccion, Pemex Cogeneracion y Servicios, Pemex Perforacion y Servicios, Pemex-Refinacion, and Pemex-Gas y Petroquimica Basica, once Pemex's Board of Directors approved the creation of the state-owned productive enterprise Pemex Perforacion y Servicios.

The company expects to use the proceeds from the issuances 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, national and export-oriented profile, sizable hydrocarbon reserves and its strong domestic market position. The ratings are constrained by Pemex's significant unfunded pension liabilities, substantial tax burden, large capital investment requirements, negative equity and exposure to political interference risk.

Strong Linkage to the Government:

Pemex is the nation's largest company and one of the Mexican central government's major sources of funds. During the past five years, Pemex's transfers to the government have averaged 52.6% of sales, or 109.1% of operating income. These contributions, through royalties, exploitation, taxes and production duties have averaged 30% to 40% of government revenues. As a result, Pemex's balance sheet has weakened, which is illustrated by its negative equity balance sheet account since the end of 2009. Despite pari passu treatment with sovereign debt in the past, Pemex's debt currently lacks an explicit guarantee from the government.

Oil Production Decline Stemmed:

Currently at approximately 2.3 million barrels per day (bb/d), crude oil production has continued to marginally decline in recent years, although not at the same speed as it did during a precipitous fall in 2008-2009. Natural gas production has been relatively stable during recent years at approximately 5.7 billion cubic feet per day (bcf/d). Pemex has been able to stem production decline through 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 in the medium to long term, which likely will prove challenging as the company's capital spending capacity is constrained by a high tax burden, pension obligations and the currently lower oil price environment.

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. Before the implementation of the energy reform, the company budgetary approval process from congress, coupled with high tax burden, 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 on the reform for Pemex will be positive but gradual and the company will continue to face heavy tax burden in the medium term. The energy reform would also benefit the company's capital structure if it succeeds at restructuring Pemex's high pension liability, which currently impacts its financial profile as pension obligations amounted to approximately USD97.5 billion, or approximately 53% of total adjusted debt at the end of June 2015.

Negative Free Cash Flow Due to Capex:

Fitch expects the company to present negative free cash flow (FCF) over the foreseeable future, considering Fitch's price deck, as it continues to implement sizable capital investments to sustain and potentially increase current production volumes as well as continue of high tax burden. The company's historical significant tax burden has limited its access to internally generated funds, forcing a growing reliance on external borrowings. For the 12-month period ending June 30, 2015, Pemex's funds from operations, calculated by Fitch, were approximately USD0.7 billion and net operating cash flow was USD1.4 billion, which compared with cash capital expenditures of USD16.7 billion, resulting in negative FCF of USD15.2 billion.

Adequate Pre-Tax Credit Metrics:

As of the second quarter of 2015 (2Q15), Pemex's latest 12 months (LTM) EBITDA (operating income plus depreciation plus other income) was approximately USD34.3 billion. Leverage as measured by total debt-to-EBITDA was 2.5x and adjusted leverage was 4.1x. 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 funds from operations (FFO) adjusted leverage has averaged approximately 9.7x over the past four years and as of 2Q15 stood at approximately 12.2x.

As of June 30, 2015, total debt was USD85.5 billion which more than double to USD183 billion when adjusting for the unfunded pension plan and other post-employment benefits. Positively, Pemex has adequate liquidity of USD5.9 billion as of June 30, 2015. The company has committed revolving credit lines for USD4.5 billion and MXN23.5 billion; as of March 31, 2015 USD1.05 billion and MXN3.5 billion were available. The debt is well structured, with manageable short-term debt maturities.

KEY ASSUMPTIONS

Fitch's key assumptions within our ratings case for the issuer include:

--WTI crude prices average USD50 per bbl in 2015, increasing to USD75 per bbl by 2017.

--The company continues to face difficulties increasing its production over the next four year.

--Transfers to central government continue high at approximately 100% of pre-tax income.

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.

FULL LIST OF RATING ACTIONS

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;

--National short-term rating 'F1+(mex)';

--Notes outstanding in foreign currency 'BBB+';

--Notes outstanding in local currency 'A-';

--National scale debt issuances 'AAA(mex)';

--Short-term Certificados Bursatiles Program 'F1+(mex)'.

Date of Relevant Rating Committee: May 6, 2015.

Additional information is available on www.fitchratings.com.

Applicable Criteria

Corporate Rating Methodology - Including Short-Term Ratings and Parent and Subsidiary Linkage (pub. 17 Aug 2015)

https://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=869362

Additional Disclosures

Solicitation Status

https://www.fitchratings.com/gws/en/disclosure/solicitation?pr_id=991169

Endorsement Policy

https://www.fitchratings.com/jsp/creditdesk/PolicyRegulation.faces?context=2&detail=31

ALL FITCH CREDIT RATINGS ARE SUBJECT TO CERTAIN LIMITATIONS AND DISCLAIMERS. PLEASE READ THESE LIMITATIONS AND DISCLAIMERS BY FOLLOWING THIS LINK: HTTP://FITCHRATINGS.COM/UNDERSTANDINGCREDITRATINGS. IN ADDITION, RATING DEFINITIONS AND THE TERMS OF USE OF SUCH RATINGS ARE AVAILABLE ON THE AGENCY'S PUBLIC WEBSITE 'WWW.FITCHRATINGS.COM'. PUBLISHED RATINGS, CRITERIA AND METHODOLOGIES ARE AVAILABLE FROM THIS SITE AT ALL TIMES. FITCH'S CODE OF CONDUCT, CONFIDENTIALITY, CONFLICTS OF INTEREST, AFFILIATE FIREWALL, COMPLIANCE AND OTHER RELEVANT POLICIES AND PROCEDURES ARE ALSO AVAILABLE FROM THE 'CODE OF CONDUCT' SECTION OF THIS SITE. FITCH MAY HAVE PROVIDED ANOTHER PERMISSIBLE SERVICE TO THE RATED ENTITY OR ITS RELATED THIRD PARTIES. DETAILS OF THIS SERVICE FOR RATINGS FOR WHICH THE LEAD ANALYST IS BASED IN AN EU-REGISTERED ENTITY CAN BE FOUND ON THE ENTITY SUMMARY PAGE FOR THIS ISSUER ON THE FITCH WEBSITE.

View source version on businesswire.com: http://www.businesswire.com/news/home/20150922006499/en/

Fitch Ratings
Primary Analyst
Lucas Aristizabal
Senior Director
+1-312-368-3260
Fitch Ratings, Inc.
70 W. Madison Street
Chicago, IL 60602
or
Secondary Analyst
Alberto De Los Santos
Associate Director
+52 81 8399 9100
or
Committee Chairperson
Daniel R. Kastholm, CFA
Managing Director
+1-312-368-2070
or
Media Relations
Alyssa Castelli, +1 212-908-0540
[email protected]

Source: Fitch Ratings

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