Fitch Ratings has assigned a 'BBB+' Long-term rating to Petroleos
Mexicanos' (Pemex) Euro 2.25 billion senior unsecured debt issuance
composed of:
--Euro 1,350 million due in three years;
--Euro 900 million due in seven years.
The company expects to use the proceeds from the issuances to finance
its investment program and working capital needs; also to refinance
indebtedness. The debt issuances are guaranteed by Pemex Exploracion y
Produccion; Pemex Transformacion Industrial; Pemex Perforacion y
Servicios; Pemex Logistica; and Pemex Cogeneracion y Servicios.
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 49.0% of sales, or 168.0% 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 5.5 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 15% of oil production, reduces the risk of large
production declines in the future. The company's previous goal was to
increase total crude production to three million bpd in the medium to
long term, which in Fitch's view was prove challenging. Pemex's current
goal is to maintain production at present-day levels of 2.2 million bpd.
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 after the recently announced estimated reduction on Pemex's
pension liabilities of approximately USD11 billion, which the government
is expected to match. At the end of 2015, the pension obligations
amounted to approximately USD74.4 billion.
On Dec. 24, 2015, the government injected approximately USD2.9 billion
in the form of non-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 the
retirement age for unionized employees that have been with the company
for less than 15 years and all non-unionized employees to 60 years of
age and 30 years of service, from the previous 55 years of age and 25
years of service.
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 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. At the end of 2015, Pemex's funds from
operations, calculated by Fitch, were approximately negative USD2.5
billion and net operating cash flow was approximately positive USD2.3
billion, which compared with cash capital expenditures of USD14.9
billion, resulting in negative FCF of USD12.6 billion.
Adequate Pre-Tax Credit Metrics
At the end of 2015, Pemex's EBITDA (operating income plus depreciation
plus other income) was approximately USD12.0 billion. Leverage as
measured by total debt-to-EBITDA was 7.3x. 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 December 31, 2015, total debt
was USD86.8 billion.
KEY ASSUMPTIONS
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 years.
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.
LIQUIDITY
Pemex has adequate liquidity of USD6.3 billion as of December 31, 2015.
The company has committed revolving credit lines for USD4.5 billion and
MXN23.5 billion; at the end of 2015 USD130 million and MXN9.1 billion
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: November 24, 2015
Additional information is available at '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=1000844
Endorsement Policy
https://www.fitchratings.com/jsp/creditdesk/PolicyRegulation.faces?context=2&detail=31
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