Fitch Ratings has assigned a 'BBB+(exp)' long-term rating to Petroleos
Mexicanos' (Pemex) $5 billion senior unsecured debt issuance composed of:
--$750 million due in three years;
--$1,250 million due in five years;
--$3 billion of 10-year notes.
The company expects to use the proceeds from the issuances for general
corporate purposes and to finance its capital investments. The debt
issuances are guaranteed by Pemex Exploracion y Produccion; Pemex
Cogeneracion y Servicios; Pemex Perforacion y Servicios; Pemex
Logistica; Pemex Transformacion Industrial and their respective
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 competitive pretax cost structure, 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 110.6% 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 excluding nitrogen has been relatively
stable during recent years at approximately 5.8 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
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 after the recently announced restructuring of Pemex's high
pension liability, which currently impacts its financial profile as
pension obligations amounted to approximately USD90.5 billion at the end
of September 2015.
In December 2015 the company announced an estimated reduction on its
pension liabilities of approximately $11 billion, which the government
is expected to match. This would lower pension liabilities to
approximately $78 billion. On Dec. 24, 2015, the government injected
approximately $2.9 billion in the form of none-tradable notes maturing
in 2050. Towards the end of 2015 the company reached an agreement to
change its pension plan into a defined contribution from a defined
benefits plan and increased he retirement age for employees that have
been with the company for less than 15 years to 60 years of age and 30
years of service from the previous 55 years of age and 25 years of
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 implementing
large transfers to central government in the form of very high duties,
royalties and taxes. 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 Sept.
30, 2015, Pemex's funds from operations, calculated by Fitch, were
approximately negative USD2 billion and net operating cash flow was
close to zero, which compared with cash capital expenditures of USD14.7
billion, resulting in negative FCF of USD14.8 billion.
Adequate Pre-Tax Credit Metrics
As of Sept. 30, 2015, Pemex's latest-12-months (LTM) EBITDA (operating
income plus depreciation plus other income) was approximately USD25.8
billion. Leverage as measured by total debt-to-EBITDA was 3.4x. 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. As of Sept.
30, 2015, total debt was USD87.3 billion.
Fitch's key assumptions within our ratings case for the issuer include:
--WTI crude prices average USD45 per bbl in 2016, increasing to USD65
per bbl by 2018 in the long term.
--The company continues to face difficulties increasing its production
over the next four year.
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.
Pemex has adequate liquidity of USD6.5 billion as of Sept. 30, 2015. The
company has committed revolving credit lines for USD4.5 billion and
MXN23.5 billion; as of Sept. 30, 2015 USD130 million were available. The
company's debt is well structured, with manageable short-term debt
maturities. The company's liquidity is further bolstered by its robust
pre-tax cash flow generation supportive by its competitive operational
cost structure. Fitch estimates Pemex's operating cash cost to be less
than USD23 per barrel of oil equivalent, including interest costs and
full allocation of administrative expenses to the upstream business.
FULL LIST OF RATINGS
Fitch currently rates Pemex as follows:
--Long-term 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 at 'www.fitchratings.com'.
Corporate Rating Methodology - Including Short-Term Ratings and Parent
and Subsidiary Linkage (pub. 17 Aug 2015)
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