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