Fitch Ratings expects to assign a 'BBB+(exp)' long-term rating
to Petroleos Mexicanos' (Pemex) USD5.5 billion sr. unsecured debt
issuance composed of:
--USD1.5 billion due 2022;
--USD1 billion floating rate issuance due 2022;
--USD3 billion due 2027.
The company expects to use the proceeds from the issuances to
finance its capital investments, pay upcoming maturities and for
general corporate purposes. 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 successors.
KEY RATING DRIVERS
Pemex's ratings reflect its close linkage to the government of
Mexico and the company's fiscal importance to the sovereign and
strategic importance to the country. Pemex's ratings also reflect
the company's competitive pre-tax cost structure, national and
export-oriented profile, sizable hydrocarbon reserves and its
strong domestic market position. The ratings are constrained by
Pemex's substantial tax burden, significant unfunded pension
liabilities, 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% of
sales, or 126% of operating income. These contributions, through
royalties, exploration taxes and production duties have averaged
between 27% and 37% of government revenues. As a result, Pemex's
balance sheet has weakened, which is illustrated by its significant
increase in debt and negative equity balance sheet account since
the end of 2009. Pemex's debt lacks an explicit guarantee from the
government.
Strategically Importance for Energy Security
Pemex's linkage to the sovereign also arises from the company's
strategic importance for the supply of liquid fuels to Mexico. A
financial distress situation at Pemex holds the potential to
disrupt the supply of liquid fuels in the entire country, which
could have material social and economic consequences for Mexico, as
it is a fundamental input into the production of almost all goods,
as well as the mobility of goods and labor. Although Mexico is a
net exporter of crude oil, the company relies on the import of
basic oil products, including dry gas, petroleum products and
petrochemicals, in order to supply local demand.
Historically, the company was the only entity allowed by the
constitution to explore and produce crude. The industry was open to
private participation at the end of 2013 and so far there has been
modest interest in upstream investments. Interest in Pemex's
downstream businesses does not appear imminent, and over the short-
to medium-term the country will continue to rely on Pemex's
operations for its domestic liquid fuel supply. Mexico could see an
increase of private participation in the supply and distribution of
liquid fuels after price regulations decrease materially or
disappear and fuel prices are determined by a competitive market,
which might happen in the short term.
Symbolic Government Support
Mexico's support of Pemex has been evidenced in recent months by
the Ministry of Finance's public statements of support, as well as
announced modest capital injections and marginal tax reductions.
This support has been so far more symbolic than material, and Fitch
expects the Mexican government to execute more meaningful support
actions when the company needs them. In April of 2016, the Mexican
government injected approximately USD1.5 billion of new capital
into Pemex. Pemex also received capital to fund pension liabilities
and credit lines for an aggregate amount of MXN15 billion from the
country's development banks: Banco Nacional de Obras y Servicios
Publicos, S.N.C. (Banobras), Nacional Financiera, S.N.C. (Nafinsa)
and Banco Nacional de Comercio Exterior, S.N.C. (Bancomext).
Weak Stand-Alone Credit Quality
Pemex's stand-alone credit quality would be in line with a 'B-'
long-term rating if the company was not owned by the state and if
the government did not provide financial support should Pemex
require it. This stand-alone view also assumes that the Mexican
government continues to extract a large amount of funds from Pemex
in the form of taxes and duties, resulting in weak funds from
operations (FFO). Pemex's stand-alone credit profile has been
weakened in recent years by the significant increase in debt the
company has issued primarily in order to cover its large transfers
to Mexico in the form of taxes, duties and royalties. Pemex's debt
trajectory could continue to pressure the company's stand-alone
credit quality, which could reach an unsustainable level, should
the Mexican government continue issuing debt at Pemex's level to
transfer funds to the central government. Pemex made transfer
payments in the form of taxes and royalties to the government equal
to 1.3x its EBITDA during 2015. The company covered its 2015
negative FCF of USD13.8 billion mostly with debt issuances.
As of the last 12 months ended Sept. 30, 2016, Fitch calculated
Pemex's EBITDA (operating income plus depreciation plus other
income) was approximately USD12.8 billion after adjusting for asset
impairments and pension liabilities associated gains while cash
flow from operations was negative for the same period. The
significant difference results from the considerable transfers to
the government. 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. Leverage as measured by total
debt-to-EBITDA was approximately 7.8x in USD terms. As of Sept. 30,
2016, total debt was approximately USD99 billion. Pemex's total
debt-to-proved reserves have grown to approximately USD10/boe from
USD6.3/boe as of year-end 2014. Pemex's leverage could reach an
unsustainable level over the next two to three years absent further
changes to reduce its tax burden.
Capex Cuts to Reduce Production
Fitch expects Pemex's production to continue declining over the
next few years as a result of the significant capex cuts in
exploration and development in order to counter the decline in oil
prices while maintaining relatively high transfers to Mexico. 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
barrels per day (bpd) in the medium- to long-term, which in Fitch's
view, has proven challenging. Pemex's current goal for 2016 is to
have a crude production of approximately 2.1 million bpd.
Currently at approximately 2.2 million bbd, crude oil production
has continued to decline marginally in recent years. Natural gas
production excluding nitrogen has been relatively stable during
recent years at approximately 5.5 billion cubic feet per day
(bcf/d). Pemex was able to stem the steep production decline
through more intensive use of technology, improvements in
operations, and increased production from a diversified number of
fields. Pemex's recent success with its deep-water farm-out is very
long-term positive for the company, as it may see incremental
production come on line in approximately seven years with lower
government take and little cash outflows.
KEY ASSUMPTIONS
Fitch's key assumptions within our ratings case for the issuer
include:
--WTI crude prices average USD42 per bbl in 2016, increasing to
USD65 per bbl by 2020;
--The company continues to face difficulties increasing its
production over the next four years;
--Pemex will receive support from the sovereign.
RATING SENSITIVITIES
Although not expected in the short term, an upgrade of Pemex
could result from an upgrade of the sovereign coupled with a 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 liquidity is supported by the company's cash on hand of
approximately USD10.7 billion as of Sept. 30, 2016. The company had
available committed revolving credit lines of USD1.25 billion and
MXN23.5 billion; as of Oct. 28, 2016. The company's debt
amortization schedule is well balanced, with somewhat manageable
short-term debt maturities. Its liquidity is further bolstered by
pre-tax cash flow generation supported by its competitive
operational cost structure. Fitch estimates Pemex's operating cash
cost to be less than USD24 per barrel of oil equivalent, including
interest costs and full allocation of administrative expenses to
the upstream business.
FULL LIST OF RATING ACTIONS
Fitch currently rates Pemex as follows:
--Long-Term IDR 'BBB+'; Outlook Stable;
--Long-Term Local-Currency IDR 'BBB+'; 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 'BBB+';
--National scale debt issuances 'AAA(mex)';
--Short-Term Certificados Bursatiles Program 'F1+(mex)'.
Date of Relevant Rating Committee: June 30, 2016
Additional information is available at
'www.fitchratings.com'.
Applicable Criteria
Corporate Rating Methodology - Including Short-Term Ratings and
Parent and Subsidiary Linkage - Effective from 17 August 2015 to 27
September 2016 (pub. 17 Aug
2015)https://www.fitchratings.com/site/re/869362
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