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Rating Action:

Moody's downgrades PEMEX's ratings to A3.mx/Ba3 in national and global scale; outlook remains negative

 The document has been translated in other languages

27 Jul 2021

On July 30, 2021 the press release was corrected as follows: In the last sentence of the methodology paragraph, the hyperlink was changed to www.moodys.com.mx. Revised release follows.

Mexico, July 27, 2021 -- Moody's de Mexico, S.A. de C.V. (Moody's) downgraded Petroleos Mexicanos' (PEMEX) senior unsecured ratings on the company's existing notes, as well as the ratings based on PEMEX's guarantee, to A3.mx/Ba3 from A2.mx/Ba2. Moody's also affirmed PEMEX's MX-2 short term national scale. These rating actions follow Moody's Investors Service (MIS) rating action of downgrading PEMEX's corporate family rating to Ba3 from Ba2. MIS also lowered PEMEX's Baseline Credit Assessment (BCA), which reflects its standalone credit strength, to caa3 from caa2. These rating actions were based on PEMEX'S high liquidity risk and increasing business risk as the company faces high debt maturities while it expands its refining capacity and production. Moody's believes that such strategy will generate higher refining operating losses in the short and medium term. The outlook on Pemex's ratings remains negative primarily given the negative outlook on the Mexico government's Baa1 rating.

Ratings actions as follows:

Downgrades:

..Issuer: Petroleos Mexicanos

....Senior Unsecured Regular Bond/Debenture, Downgraded to A3.mx/Ba3 from A2.mx/Ba2 (PEMEX 14, PEMEX 11U, PEMEX 11-3, PEMEX 13-2, PEMEX 14U, PEMEX 14-2, PEMEX 12U, PEMEX 15U, PEMEX19)

Affirmations:

..Issuer: Petroleos Mexicanos

....Commercial Paper, Affirmed NP

....Commercial Paper, Affirmed MX-2

RATINGS RATIONALE

PEMEX's Ba3 corporate family rating reflects Moody's view that the company's liquidity needs and negative free cash flow will rise in the next three years due to high debt maturities and lower operating cash flow derived from the expansion of its refining business, which has generated operating losses in the last several years (close to $17 billion in 2018-20 alone, as reported). Although oil and gas production growth has been below management targets, Moody's acknowledges that PEMEX has been successful in reverting production and reserves declines in the last two years and believes that this trend will continue in 2021. However, Moody's expects that that PEMEX's cash flow generation and credit metrics will deteriorate further 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 A3.mx/Ba3 ratings take into consideration Moody's joint default analysis, which includes the rating agency's assumptions of very high government support in case of need and very high default correlation between PEMEX and the Government of Mexico, 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. For 2021, the government announced a $3.5 billion reduction in PEMEX's taxes and cash transfers to help the company repay debt maturities of $6.5 billion in the year. Moody's assumes that the government will continue to fund PEMEX's cash needs and help the company comply with its debt amortization obligations of $5.8 billion in 2022 and $6.4 billion in 2023.

PEMEX has weak liquidity and is highly dependent on government support. On March 31, 2021, PEMEX had $2 billion in cash and currently has less than $175 million in available committed revolving credit facilities to address over $10.8 billion in debt maturities from April 2021 to the end of 2022, besides substantial negative free cash flow in the period, driven by insufficient operating cash generation to pay taxes and invest in capital.

The negative outlook on PEMEX's A3.mx/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 RATINGS

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 ratings 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.

Further 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.

An 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 these ratings were Integrated Oil and Gas Methodology published in September 2019 and available at https://www.moodys.com/researchdocumentcontentpage.aspx?docid=PBC_1172345, and Government-Related Issuers Methodology published in February 2020 and available at https://www.moodys.com/researchdocumentcontentpage.aspx?docid=PBC_1186207. Alternatively, please see the Rating Methodologies page on www.moodys.com.mx 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 twelve months ended December 31, 2020 the company produced an average of 1,706 thousand barrels of per day of crude oil (excluding partners).

The period of time covered in the financial information used to determine Petroleos Mexicanos's rating is between 31/12/2016 and 31/12/2020 (source: Mexican Stock Exchange).

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 May 2016 entitled "Mapping National Scale Ratings from Global Scale Ratings". While NSRs have no inherent absolute meaning in terms of default risk or expected loss, a historical probability of default consistent with a given NSR can be inferred from the GSR to which it maps back at that particular point in time. For information on the historical default rates associated with different global scale rating categories over different investment horizons, please see https://www.moodys.com/researchdocumentcontentpage.aspx?docid=PBC_1280297.

REGULATORY DISCLOSURES

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 at: https://www.moodys.com/researchdocumentcontentpage.aspx?docid=PBC_79004.

Information sources used to prepare the rating are the following: parties involved in the ratings, public information, and confidential and proprietary Moody's information.

The ratings have been disclosed to the rated entity 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 18/11/2020.

For ratings issued on a program, series, category/class of debt or security this announcement provides certain regulatory disclosures in relation to each rating of a subsequently issued bond or note of the same series, category/class of debt, security 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 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 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.

This credit 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 general principles for assessing environmental, social and governance (ESG) risks in our credit analysis can be found at https://www.moodys.com/researchdocumentcontentpage.aspx?docid=PBC_1263068.

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
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

Marcos Schmidt
Associate Managing Director
Corporate Finance Group
JOURNALISTS: 0 800 891 2518
Client Service: 1 212 553 1653

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: 1 888 779 5833
Client Service: 1 212 553 1653

No Related Data.
© 2021 Moody’s Corporation, Moody’s Investors Service, Inc., Moody’s Analytics, Inc. and/or their licensors and affiliates (collectively, “MOODY’S”). All rights reserved.

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