New York, May 31, 2022 -- Moody's Investors Service ("Moody's") assigned a Ba3 senior unsecured rating to Petroleos Mexicanos' ("PEMEX") 8.750% $2 billion new notes due 2029. The company will use the proceeds of the notes for general corporate purposes, including the reduction of accounts payable to large suppliers. The new notes will be jointly and severally guaranteed by the company's operating subsidiaries, Pemex Exploración y Producción, Pemex Transformación Industrial and Pemex Logística. The new notes do not materially increase PEMEX's total debt or debt leverage, and Moody's expects that the company's total debt will remain stable or decrease somewhat by year-end 2022.The rating outlook is negative.
..Issuer: Petroleos Mexicanos
....Senior Unsecured Regular Bond/Debenture (Foreign Currency), Assigned Ba3
PEMEX's Ba3 corporate family rating and caa3 BCA reflect Moody's view that the company's liquidity needs, and negative free cash flow, will remain high in the next three years, despite currently higher oil prices than expected, due to high debt maturities and insufficient operating cash flow derived from the expansion of its refining business, which has generated operating losses in the last several years. Although oil and gas production growth has been below management targets, Moody's acknowledges that PEMEX has been successful in 2019-to date to post relatively stable production and reserves levels and believes that this will continue to be the case in 2022-23. However, Moody's expects that PEMEX's cash flow generation and credit metrics will remain weak in the next three years as the company increases fuel production, while grappling with limited capital investment ability, high debt maturities, and volatile oil and fuel prices.
PEMEX's Ba3 rating takes into consideration Moody's joint default analysis, which includes assumptions of very high government support in case of need and very high default correlation between PEMEX and the government of Mexico (Baa1 negative), resulting in six notches of uplift from the company's caa3 BCA. Since 2016, the government has supported PEMEX in various ways, including capital injections, tax reductions and early redemption of notes receivable from the government. In 2021, the government supported PEMEX with close to $20 billion between tax reductions and capital injections, for capital investments and debt payments. The government has stated its intention to continue to support PEMEX's debt payment obligations in 2022 and 2023. Moody's expects that support from the government will allow PEMEX to reduce its debt somewhat in 2022-23.
PEMEX has weak liquidity and is highly dependent on government support. On March 31, 2022 PEMEX had $2.4 billion in cash but no availability under its committed revolving credit facilities. The company needs to address around $12.6 billion in debt maturities from April 2022 to December 2023, besides substantial negative free cash flow in the period, driven by insufficient operating cash generation.
The negative rating outlook on PEMEX's Ba3 ratings is primarily based on the negative outlook on Mexico's Baa1 rating given the importance of the sovereign's credit strength and ongoing support to PEMEX's ratings.
FACTORS THAT COULD LEAD TO AN UPGRADE OR DOWNGRADE OF THE RATING
A downgrade of Mexico's Baa1 rating would likely result in a downgrade of PEMEX's rating. For Moody's to consider an affirmation of PEMEX's Ba3 rating following a sovereign downgrade, the company's BCA would have to substantially improve. Factors that could drive a higher BCA would be the ability of the company to (i) strengthen its liquidity position (ii) internally fund enough capital investment to fully replace reserves and deliver modest production growth and (iii) generate free cash flow for debt reduction. Because PEMEX's ratings are highly dependent on the support from the government of Mexico, a change in assumptions about government support and its timeliness could lead to a downgrade of PEMEX's ratings.
Downgrades in the company's BCA could also lead to further downgrades of PEMEX's ratings. Factors that could lead to a lower BCA include material increase in net debt, an operating performance worse than forecasted, reserves decline and decreases in reserves life.
A rating upgrade is unlikely in the near term given the negative outlook for Mexico's Baa1 rating and Moody's expectations for continued negative free cash flow at PEMEX.
The methodologies used in this rating were Integrated Oil and Gas Methodology published in September 2019 and available at https://ratings.moodys.com/api/rmc-documents/64319, and Government-Related Issuers Methodology published in February 2020 and available at https://ratings.moodys.com/api/rmc-documents/64864. Alternatively, please see the Rating Methodologies page on https://ratings.moodys.com for a copy of these methodologies.
Founded in 1938, PEMEX is Mexico's national oil company, with fully integrated operations in oil and gas exploration and production, refining, distribution and retail marketing, as well as petrochemicals. PEMEX is also a leading crude oil exporter, around 60% of its crude is exported to various countries, mainly to the US and Asia. In the three months ended March 31, 2022 the company produced an average of 1,755 thousand barrels of crude oil per day (excluding partners).
For further specification of Moody's key rating assumptions and sensitivity analysis, see the sections Methodology Assumptions and Sensitivity to Assumptions in the disclosure form. Moody's Rating Symbols and Definitions can be found on https://ratings.moodys.com/rating-definitions.
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