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Rating Action:

Moody's assigns Baa3 rating to PEMEX's new $2 billion global notes

19 Oct 2018

New York, October 19, 2018 -- Moody's Investors Service (Moody's) assigned a Baa3 senior unsecured rating to Petroleos Mexicanos' (PEMEX) 6.50% $2 billion notes due 2029. The company will use the proceeds of the notes for general corporate purposes, including investments and debt refinance. The outlook on the ratings is stable.

The notes will be jointly and severally guaranteed by the company's subsidiaries, namely Pemex Exploración y Producción, Pemex Transformación Industrial, Pemex Perforación y Servicios and Pemex Logística.

RATINGS RATIONALE

PEMEX's Baa3 ratings are based on its b3 Baseline Credit Assessment (BCA) and takes into consideration the company's large proved hydrocarbon reserves; daily production averaging 2,592 thousand barrels of oil equivalent per day (boe/d) in the twelve months ended June 30, 2018; dominant role and integrated operations in the energy industry in Mexico; and position as a major crude oil exporter to the US. However, its ratings also consider PEMEX's weak liquidity; a heavy tax burden and the resulting weak free cash flow; high financial leverage and low interest coverage; and challenges related to crude production and reserve replacement. Although the company's liquidity needs have declined in the last couple of years given lower expenses and capital expenditures as well as ongoing debt refinancing, PEMEX still faces significant operating and financial challenges related to crude oil and fuel production, high tax burden and large debt maturities in 2020 and beyond. Accordingly, PEMEX's credit metrics will remain weak in the next few years and the company will continue dependent on debt capital markets to fund negative free cash flow. In addition, despite winning a number of oil blocks in recent auctions in Mexico and farming out a few oil assets, it is unclear if further associations and joint ventures will occur under the new government of Mexico. Thus, PEMEX's limited ability to spend capital will continue to affect the company's oil and fuel production performance as well as its resource base in the foreseeable future.

PEMEX's ratings also consider Moody's joint-default analysis, which includes the rating agency's assumptions that there is i) a very high likelihood of extraordinary support from the government of Mexico (A3 stable) to avoid default, and ii) a very high default correlation between PEMEX and the government. The Baa3 rating incorporates six notches of uplift from PEMEX's b3 BCA. Moody's view on the likelihood of support considers the prominent role of PEMEX in the Mexican economy, its 100% government ownership, and both verbal statements and factual evidence during 2016 of support from the government for the company for over $4 billion. Moody's believes that it is important to the government to facilitate PEMEX's continued access to the capital markets given the company's role in generating hard foreign currency through oil exports and in paying large annual amounts in duties, royalties and taxes which in aggregate currently represent about 10% of the government's annual budget, according to the Ministry of Finance (SHCP) and Moody's estimates.

PEMEX's liquidity position is weak. Moody's estimates that, from October 2018 to December 2019, the company will have about $13.6 billion in assured liquidity sources compared to about $15 billion in liquidity needs (capital expenditures, interest payments and debt maturities), and will remain dependent upon debt market access for the difference. Assured liquidity sources are comprised of $5.6 billion of cash and $8 billion unused committed revolver facilities (maturing in 2019, 2020 and 2021). Moody's estimates that uses are comprised of negative free cash flow of $9 billion and debt maturities of $6.3 billion. It is worth noting that, since 2017, PEMEX has entered into hedges equivalent to around 20% of crude production, which help to reduce earnings' downside risk. PEMEX has also been able to access the capital markets: in February 2018, it issued $4 billion in global notes due in 2028 and 2048, of which $1.8 billion were used to repurchase existing notes. In addition, in May 2018, PEMEX issued CHF 365 million due in December 2023, and EUR 3.1 billion in four tranches maturing between 2022 and 2029, improving its debt maturity profile.

The stable outlook on PEMEX's Baa3 ratings reflects mostly the stable outlook on the rating of the government of Mexico. However, it also reflects Moody's opinion that the company's standalone credit profile will continue weak in the foreseeable future.

Growing liquidity concerns, material increase in financial leverage, or significant deterioration in production could result in a downgrade of PEMEX's BCA and debt ratings. In addition, because PEMEX's ratings benefit from implicit support from the government of Mexico, a downgrade of the government's rating or a change in Moody's assumptions about government support could lead to a downgrade of PEMEX's ratings.

For a rating upgrade to be considered, PEMEX would need to improve its liquidity position and operating profile further, reduce debt and increase retained cash flow. Simultaneously, Moody's would have to at least maintain its current expectations for sovereign support. Improving operating metrics and a lower tax burden that supports higher levels of internal funding for capital spending and prospects for a solid trend of increases in production and reserves could benefit the company's BCA.

Founded in 1938, PEMEX is Mexico's productive state-owned enterprise. The company's oil-dominant status should gradually change derived from the energy reform in 2013, although, in the foreseeable future, PEMEX will remain the main energy company in the country, with fully integrated operations in oil and gas exploration and production (E&P), refining, distribution and retail marketing, as well as petrochemicals. PEMEX is also a leading crude oil exporter, around 60% of its crude exported to various countries, mainly to the US. In June 2018, the company posted $83.5 billion in revenues in the last twelve months, and $108.5 billion in assets and produced an average of 1,881 thousand bpd of crude oil. In 2017, PEMEX had total proved reserves of 7.5 billion barrels of oil equivalent (boe), which represented 8 years of reserve life.

The methodologies used in this rating were Global Integrated Oil & Gas Industry published in October 2016, and Government-Related Issuers published in June 2018. Please see the Rating Methodologies page on www.moodys.com for a copy of these methodologies.

REGULATORY DISCLOSURES

For ratings issued on a program, series or category/class of debt, this announcement provides certain regulatory disclosures in relation to each rating of a subsequently issued bond or note of the same series or category/class of debt or pursuant to a program for which the ratings are derived exclusively from existing ratings in accordance with Moody's rating practices. For ratings issued on a support provider, this announcement provides certain regulatory disclosures in relation to the credit rating action on the support provider and in relation to each particular credit rating action for securities that derive their credit ratings from the support provider's credit rating. For provisional ratings, this announcement provides certain regulatory disclosures in relation to the provisional rating assigned, and in relation to a definitive rating that may be assigned subsequent to the final issuance of the debt, in each case where the transaction structure and terms have not changed prior to the assignment of the definitive rating in a manner that would have affected the rating. For further information please see the ratings tab on the issuer/entity page for the respective issuer on www.moodys.com.

For any affected securities or rated entities receiving direct credit support from the primary entity(ies) of this credit rating action, and whose ratings may change as a result of this credit rating action, the associated regulatory disclosures will be those of the guarantor entity. Exceptions to this approach exist for the following disclosures, if applicable to jurisdiction: Ancillary Services, Disclosure to rated entity, Disclosure from rated entity.

Regulatory disclosures contained in this press release apply to the credit rating and, if applicable, the related rating outlook or rating review.

Please see www.moodys.com for any updates on changes to the lead rating analyst and to the Moody's legal entity that has issued the rating.

Please see the ratings tab on the issuer/entity page on www.moodys.com for additional regulatory disclosures for each credit rating.

Nymia C. Almeida
Senior Vice President
Corporate Finance Group
Moody's de Mexico S.A. de C.V
Ave. Paseo de las Palmas
No. 405 - 502
Col. Lomas de Chapultepec
Mexico, DF 11000
Mexico
JOURNALISTS: 1 888 779 5833
Client Service: 1 212 553 1653

Marianna Waltz, CFA
MD - Corporate Finance
Corporate Finance Group
JOURNALISTS: 800 891 2518
Client Service: 1 212 553 1653

Releasing Office:
Moody's Investors Service, Inc.
250 Greenwich Street
New York, NY 10007
U.S.A.
JOURNALISTS: 1 212 553 0376
Client Service: 1 212 553 1653

No Related Data.
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