New York, April 17, 2020 -- Moody's Investors Service (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 Ba2 from Baa3.
Simultaneously, Moody's withdrew PEMEX's Baa3 issuer rating
and assigned a Ba2 corporate family rating to the company. Moody's
also lowered PEMEX's Baseline Credit Assessment (BCA), which reflects
its standalone credit strength, to caa2 from caa1. These
rating actions were triggered by the company's higher liquidity
and business risk and by Moody's announcement on April 17, 2020
that it had downgraded its ratings on the Government of Mexico's to Baa1
from A3 and maintained the negative outlook on the government's
ratings. The outlook on Pemex's ratings remains negative.
"We downgraded PEMEX's ratings and maintained the negative outlook
on its ratings following the downgrade of Mexico's rating and its negative
outlook given the critical importance of the government's financial strength
and support in the assessment of PEMEX's credit risk," commented
Nymia Almeida, Moody's Senior Vice President. "The actions
took in consideration our expectations for an extended period of negative
free cash flow and the need for external funding, despite the company's
efforts to adjust costs and investments to low oil prices."
Ratings downgraded as follows:
Downgrades:
..Issuer: Petroleos Mexicanos
....Gtd Senior Unsecured Medium-Term
Note Program, Downgraded to (P)Ba2 from (P)Baa3
....Gtd Senior Unsecured Regular Bond/Debenture,
Downgraded to Ba2 from Baa3
..Issuer: Pemex Project Funding Master Trust
....Gtd Senior Unsecured Medium-Term
Note Program, Downgraded to (P)Ba2 from (P)Baa3
....Gtd Senior Unsecured Regular Bond/Debenture,
Downgraded to Ba2 from Baa3
Withdrawals:
..Issuer: Petroleos Mexicanos
.... Issuer Rating, previously rated
Baa3
Assignments:
..Issuer: Petroleos Mexicanos
.... Corporate Family Rating, Assigned
Ba2
Outlook Actions:
..Issuer: Petroleos Mexicanos
....Outlook, Remains Negative
..Issuer: Pemex Project Funding Master Trust
....Outlook, Remains Negative
RATINGS RATIONALE
PEMEX's Ba2 corporate family rating and caa2 BCA reflect the company's
high vulnerability to low commodities prices given its fragile liquidity
position and excessive debt burden. Between mid 2019 and early
2020, management was able to stabilize oil production and refinance
debt. However, PEMEX's cash flow generation and credit
metrics will remain weak in the foreseeable future as the company grapples
with low oil prices, high debt maturities, and underinvestment
in exploration and production in favor of an expansion of its refining
business, which has generated losses for several years.
Moody's believes that PEMEX's need for external funding to
cover negative free cash flow will increase as a consequence of the company's
limited ability to improve its business results due to the mature stage
of oil fields; shortage of capital to sufficiently invest in exploration
and production, with negative consequences in production and reserve
replacement; and the mandate to expand the refining business,
which Moody's expects will continue to post operating losses and
be vulnerable to the oil and gas industry medium-term demands trends.
PEMEX's management believes that the company was able to replace
proved reserves at a rate of 120% in 2019; however,
it is unlikely that the company will be able to replace reserves at a
rate equal or close to 100% in 2020-21 given weak cash generation
and limited access to capital.
The rapid and widening spread of the coronavirus outbreak, deteriorating
global economic outlook, falling oil prices, and asset price
declines, are creating a severe and extensive credit shock across
many sectors, regions and markets. The combined credit effects
of these developments are unprecedented. The oil and gas sector
has been one of the sectors most significantly affected by the shock given
its sensitivity to consumer demand and sentiment. More specifically,
the weaknesses in PEMEX's credit profile has left it vulnerable
to shifts in market sentiment in these unprecedented operating conditions
and PEMEX remains vulnerable to the outbreak continuing to spread.
We regard the coronavirus outbreak as a social risk under our ESG framework,
given the substantial implications for public health and safety.
PEMEX's Ba2 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 caa2 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.
The government has most recently announced a reduction in PEMEX's taxes
by $2.6 billion in 2020 and Moody's base assumption is that
the Mexican government will provide support to help fund PEMEX's negative
free cash flow. The company will have to increase debt in 2020
in order to invest to meet the government's and PEMEX's revised objective
of maintaining production stable from 2019 levels.
PEMEX has weak liquidity and is highly dependent on government support.
At December 31, 2019, PEMEX had $3.2 billion
of cash and currently has $8.9 billion in unused committed
revolving credit facilities to address over $8 billion in debt
maturities in 2020-21 besides negative free cash flow of over $9
billion in the period, as estimated by Moody's.
The negative rating outlook on PEMEX's Ba2 ratings coincides with
the negative outlook on Mexico's Baa1 rating given the importance of the
sovereign's credit strength and ongoing support to PEMEX's ratings.
Mexico's negative outlook reflects the risk that economic and fiscal strength
deteriorate beyond what is captured in a Baa1 rating due to the continuing
absence of policies that can effectively address the country's economic
challenges and Pemex's continued financial and operating problems.
For further information, including factors that could drive Mexico's
rating up or down, refer to the rating action press release:
https://www.moodys.com/research/Moodys-downgrades-Mexicos-ratings-to-Baa1-maintains-negative-outlook--PR_422013
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. In order for Moody's to consider an affirmation
of PEMEX's Ba2 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 strengthen its liquidity
position and ideally internally fund sufficient capital reinvestment to
fully replace reserves and deliver modest production growth, and
generate free cash flow for debt reduction. Because PEMEX's ratings
are highly dependent on 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.
A lowering of the BCA could also lead to a downgrade 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
declines and decreases in reserves life.
An upgrade is unlikely 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
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, 2019 the company
produced an average of 1,703 thousand barrels of per day of crude
oil (excluding partners).
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.
For ratings issued on a program, series, category/class of
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same series, category/class of debt, security or pursuant
to a program for which the ratings are derived exclusively from existing
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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
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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
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For any affected securities or rated entities receiving direct credit
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and whose ratings may change as a result of this credit rating action,
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if applicable to jurisdiction: Ancillary Services, Disclosure
to rated entity, Disclosure from rated entity.
The ratings have been disclosed to the rated entity or its designated
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for Designating and Assigning Unsolicited Credit Ratings available on
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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_1133569.
At least one ESG consideration was material to the credit rating action(s)
announced and described above.
The Global Scale Credit Rating on this Credit Rating Announcement was
issued by one of Moody's affiliates outside the EU and is endorsed
by Moody's Deutschland GmbH, An der Welle 5, Frankfurt
am Main 60322, Germany, in accordance with Art.4 paragraph
3 of the Regulation (EC) No 1060/2009 on Credit Rating Agencies.
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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: 0 800 891 2518
Client Service: 1 212 553 1653
Releasing Office:
Moody's Investors Service, Inc.
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