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

Additional Disclosures

Solicitation Statushttps://www.fitchratings.com/gws/en/disclosure/solicitation?pr_id=1016160

Endorsement Policyhttps://www.fitchratings.com/regulatory

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Fitch RatingsPrimary Analyst:Lucas Aristizabal, +1-312-368-3260Senior DirectorFitch Ratings, Inc.70 W. Madison StreetChicago, IL 60602orSecondary Analyst:Alberto De Los Santos, +52 81 8399 9100Associate DirectororCommittee Chairperson:Joe Bormann, CFA, +1-312-368-3349Managing DirectororMedia Relations:Elizabeth Fogerty, +1-212-908-0526New Yorkelizabeth.fogerty@fitchratings.com