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Rating Action:

Moody's de Mexico confirms PEMEX's ratings at Aaa.mx/MX-1; changes outlook to negative

 The document has been translated in other languages

24 Nov 2015

NOTE: On December 16, 2015, the press release was corrected as follows: In the second sentence of the first paragraph, the rating of the senior unsecured medium term program was corrected to (P)Baa1. Revised release follows.

Mexico, November 24, 2015 -- Moody's de Mexico confirmed Petroleos Mexicano's (PEMEX) national scale ratings of Aaa.mx and MX-1 and changed the outlook on all ratings to negative. Moody's de México also downgraded PEMEX's global scale senior unsecured rating to Baa1 from A3 and the senior unsecured medium term program rating to (P)Baa1 from (P)A3. In a separate action, Moody's Investors Service (Moody's) downgraded the company's global foreign currency and local currency ratings to Baa1 from A3. Simultaneously, Moody's lowered PEMEX's baseline credit assessment (BCA), which reflects its standalone credit strength, to ba3 from ba1. The actions were prompted by Moody's view that the company's current weak credit metrics will deteriorate further in the near to medium term. This concludes the review for downgrade initiated on August 25th, 2015.

RATING RATIONALE

"Moody's believes that Pemex's credit metrics will deteriorate further in the short to medium term as oil prices remain depressed, production continues to drop, taxes remain high, and the company's capex needs are financed with debt", said Nymia Almeida, a VP-Sr. Credit Officer at Moody's Investors Service.

In the last three years, PEMEX has increased debt to fund large outflows for taxes, duties and capital spending, without achieving sustained increases in production or operating efficiencies. Even when oil prices were at peak levels in 2014, cash flow from operating activities of USD 9.1 billion fell well short of covering USD 15.1 billion in capital spending outlays. In addition, since the sharp decline in oil prices that began in late 2014, PEMEX's operating expenses have been resilient, with negative effect on credit metrics.

In the remainder of 2015 and in 2016, Moody's estimates that production will decline 6% and 3%, respectively, as a consequence of many factors, including limited ability to invest in exploration and production given lower cash generation derived from lower oil prices but also high duties and taxes. The pressure on PEMEX to increase capex to boost production could decline in 2016 and probably in 2017 as well if the process to farmout existing production contracts accelerates and the company's partners take a significant share of investments in the oil fields instead of PEMEX. The company may also choose to sell some non-strategic assets or use Fibra E (MLP-type of financial instruments) to raise capital to fund capex. However, most of these funding alternatives have been and will continue to be hard to execute under a relatively new energy law.

Moody's recognizes that just recently PEMEX was able to negotiate a major change in its labor pension benefit plan, whose liability in December 2014 amounted to close to USD 100 billion. This change would improve PEMEX's capital structure starting most probably in mid-2016, as estimated by the company. As a consequence of the deal, the government should grant a similar amount to PEMEX in the form of short-term non-negotiable government bonds, which, however, will not immediately strengthen the company's liquidity position but will serve to reduce the pension liability going forward.

PEMEX's Baa1/Aaa.mx/MX-1 ratings reflect the impact of Moody's joint-default analysis, which include assumptions of very high support from the government of Mexico (A3 stable) and very high dependence between PEMEX and the government. This analysis provides 5 notches of uplift to PEMEX's ba3 BCA. Moody's assumptions reflect the view that, despite recent changes derived from the energy reform, PEMEX will remain closely linked to the government of Mexico, which will continue to provide very high support given its status as state-owned company and its importance to the government's budget, to the energy sector and to the country's exports.

PEMEX's ratings also reflect the company's sizable proved hydrocarbon reserves, which in 2014 amounted to about 12,380.2 million boe, equivalent to 10.1 years of life; its oil production averaging 2,429 mbd in 2014; its dominant role and integrated operations in the energy industry in Mexico; and its position as a leading crude oil exporter to the U.S. However, the ratings also factor in the company's heavy tax burden and high financial leverage. PEMEX's ratings also consider challenges related to production, which has been falling gradually in the last several years due to the company's limited ability to invest. In addition, the lack of a clear financial policy with regards to target debt leverage also constrains PEMEX's ratings, despite the company's stated commitment to reduce debt burden.

Since October 2014 and as a result of the energy law reform, passed by Congress in late 2013, PEMEX is a productive state-owned company, with more autonomy with regards to investment allocation. Also, the company's board is now 50% independent. However, the government continues to exert outright influence on the company's decisions. For instance, PEMEX's net financial balance as well as its maximum borrowing threshold must follow the government's guidance and are approved by Congress on an annual basis. In turn, government support to PEMEX is exemplified by the MXN 20 billion and MXN 10 billion injected as equity contribution in 2014 and so far in 2015, respectively. The government is free to transfer cash to PEMEX at any time provided that it generates income surplus.

Tax transfers to the government from PEMEX declined materially in 2015 from 2014 and will remain low in 2016, based on Moody's oil prices assumptions. However, the rating agency believes that PEMEX will continue to provide most of its operating cash to fund well-above 20% of the government's annual budget in the next 4 to 5 years. In the longer term, as the share of new oil exploration and production projects increase of the total, PEMEX's tax burden should gradually decline, based on the new tax regime for the oil industry, as established in the new energy law. When this happens, Moody's would re-assess its assumptions for support and dependence under its joint-default analysis.

PEMEX's liquidity is tight. As of September 2015, debt maturing in 4Q15 and 2016 amounted to USD 6.7 billion and USD 5.1 billion, respectively. This compares with management's goal to hold USD 4.5 billion in cash at the end of 2015. However, PEMEX has maintained good access to domestic and international markets, raising funds in US dollars, Australian dollars, Euros, Japanese yen, British pounds and Swiss francs, and through domestic issuance and export credit agencies. So far in 2015, the company has frequently tapped both international and local markets to refinance debt and fund capex. PEMEX is the number one issuer in the local market.

The negative outlook on PEMEX'S ratings is based on Moody's view that the company's credit metrics, particularly its financial leverage, will deteriorate further as debt is used to fund capex and taxes remain high.

Further material increase in financial leverage or significant deterioration in production could put pressure on 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 could lead to a downgrade of PEMEX's ratings.

An upgrade of Mexico's sovereign rating would not necessarily lead to an upgrade of PEMEX's rating. However, for an upgrade to be considered, sovereign considerations with regards to support and dependence would have to be accompanied by a fundamental improvement of the company's operations and credit metrics. A reduction in PEMEX's tax burden that supports higher levels of internal funding for capital spending and demonstrates a solid trend of increase in production and reserves could benefit the company's baseline credit assessment. These conditions would help reduce PEMEX's dependence on debt funding, with a favorable impact on its leverage profile.

The principal methodology used in these ratings was Global Integrated Oil & Gas Industry published in April 2014. Other methodologies used include the Government-Related Issuers methodology published in October 2014. Please see the Credit Policy page on www.moodys.com.mx for a copy of these methodologies.

The period of time covered in the financial information used to determine Petroleos Mexicanos's rating is between 01/01/2010 and 09/30/2015 (sources: audited financial statements and financial statements filed with the regulator).

Moody's National Scale Credit Ratings (NSRs) are intended as relative measures of creditworthiness among debt issues and issuers within a country, enabling market participants to better differentiate relative risks. NSRs differ from Moody's global scale credit ratings in that they are not globally comparable with the full universe of Moody's rated entities, but only with NSRs for other rated debt issues and issuers within the same country. NSRs are designated by a ".nn" country modifier signifying the relevant country, as in ".za" for South Africa. For further information on Moody's approach to national scale credit ratings, please refer to Moody's Credit rating Methodology published in June 2014 entitled "Mapping Moody's National Scale Ratings to Global Scale Ratings".

Founded in 1938, PEMEX, the state oil company of Mexico, is a productive state-owned company of the Federal Government of Mexico. The company is a decentralized public entity of the Mexican Government. Its monopoly status will change with the continued implementation of the new energy law, although, in the foreseeable future, the company will remain the dominant energy player in the country, with fully integrated operations in oil and gas exploration and production, refining, distribution and retail marketing, and petrochemicals. PEMEX is also a leading crude oil exporter, with approximately 50% of its crude exported in 2014. As of September 2015, its total assets amounted to USD 126 billion.

REGULATORY DISCLOSURES

Information sources used to prepare the rating are the following: parties involved in the ratings and public information.

The ratings have been disclosed to the rated entities prior to public dissemination.

A general listing of the sources of information used in the rating process, and the structure and voting process for the rating committees responsible for the assignment and monitoring of ratings can be found in the Disclosure tab in www.moodys.com.mx.

The date of the last Credit Rating Action was 21/09/2015.

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 rating action on the support provider and in relation to each particular 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.mx.

For any affected securities or rated entities receiving direct credit support from the primary entity(ies) of this rating action, and whose ratings may change as a result of this 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.

This Rating is subject to upgrade or downgrade based on future changes in the financial condition of the Issuer/Security, and said modifications will be made without Moody's de México S.A. de C.V accepting any liability as a result.

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

Moody's considers the quality of information available on the rated entity, obligation or credit satisfactory for the purposes of issuing a rating.

Moody's adopts all necessary measures so that the information it uses in assigning a rating is of sufficient quality and from sources Moody's considers to be reliable including, when appropriate, independent third-party sources. However, Moody's is not an auditor and cannot in every instance independently verify or validate information received in the rating process.

Please see Moody's Rating Symbols and Definitions on www.moodys.com.mx for further information on the meaning of each rating category and the definition of default and recovery.

Please see ratings tab on the issuer/entity page on www.moodys.com.mx for the last rating action and the rating history. The date on which some ratings were first released goes back to a time before Moody's ratings were fully digitized and accurate data may not be available. Consequently, Moody's provides a date that it believes is the most reliable and accurate based on the information that is available to it. Please see our website www.moodys.com.mx for further information.

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

The ratings issued by Moody's de Mexico are opinions regarding the credit quality of securities and/or their issuers and not a recommendation to invest in any such security and/or issuer.

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

Nymia C. Almeida
VP - Senior Credit Officer
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: 001-888-779-5833
SUBSCRIBERS:52-55-1253-5700

Marianna Waltz, CFA
MD - Corporate Finance
Corporate Finance Group
JOURNALISTS: 800-891-2518
SUBSCRIBERS: 55-11-3043-7300

Releasing Office:
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: 001-888-779-5833
SUBSCRIBERS:52-55-1253-5700

Moody's de Mexico confirms PEMEX's ratings at Aaa.mx/MX-1; changes outlook to negative
No Related Data.
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