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Rating Action:

Moody's downgrades PEMEX's ratings to Baa3/Aa3.mx; negative outlook.

 The document has been translated in other languages

Global Credit Research - 31 Mar 2016

Mexico, March 31, 2016 -- Moody's de Mexico ("Moody's") downgraded Petroleos Mexicanos' (PEMEX) long term national scale and global scale ratings as well as ratings based on PEMEX's guarantee to Baa3/Aa3.mx from Baa1/Aaa.mx. Simultaneously, Moody's confirmed the short term national scale MX-1 rating for Pemex. These rating actions follow Moody's Investors Service ("MIS") rating action of downgrading PEMEX's baseline credit assessment (BCA), which reflects its standalone credit strength, to b3 from ba3, and downgrading its global foreign currency and local currency ratings, as well as ratings based on PEMEX's guarantee, to Baa3 from Baa1, on March 31, 2016. The actions were prompted by MIS view that the company's current weak credit metrics will worsen as it continues to fund capital expenditures from external sources. The outlook on all ratings is negative. This concludes the review for downgrade initiated on January 21, 2016.

Downgrades:

..Issuer: Fideicomiso No. F/163 de Pemex

....Gtd Senior Unsecured Medium-Term Note Program, Downgraded to (P)Baa3 / Aa3.mx from (P)Baa1 / Aaa.mx

....Gtd Senior Unsecured Regular Bond/Debenture, Downgraded to Baa3 / Aa3.mx from Baa1 / Aaa.mx

..Issuer: Petroleos Mexicanos

....Gtd Senior Unsecured Medium-Term Note Program, Downgraded to (P)Baa3 / Aa3.mx from (P)Baa1 / Aaa.mx

....Senior Unsecured Regular Bond/Debenture, Downgraded to Baa3 / Aa3.mx from Baa1 / Aaa.mx

....Gtd Senior Unsecured Regular Bond/Debenture, Downgraded to Baa3 / Aa3.mx from Baa1 / Aaa.mx

Outlook Actions:

..Issuer: Fideicomiso No. F/163 de Pemex

....Outlook, Remains Negative

Confirmations:

..Issuer: Petroleos Mexicanos

....Commercial Paper, Confirmed at MX-1

RATINGS RATIONALE

"Moody's believes that PEMEX's credit metrics will worsen as oil prices remain low, production continues to drop, taxes remain high, and the company must adjust down capital spending to meet its budgetary targets," said Nymia Almeida, a VP-Sr. Credit Officer at Moody's Investors Service.

In 2016 through 2018, Moody's estimates that PEMEX's production will decline at an average of 5% annually as a consequence of limited ability to make investments that would be needed to stabilize production. Low oil prices and a high tax burden will remain the main factors underlying negative free cash flow. Although production could benefit from investments funded through joint ventures or farm-out arrangements, these will occur only gradually since they are based on a new energy law, which needs to be tested, and on a specific tax law, still being drafted by the Ministry of Finance.

PEMEX's recently-appointed senior management is mandated to significantly improve the company's operating performance and credit profile in the short to medium term. These ambitious targets will be challenged by the company's large size and complex operating and labor structures as well as the weak industry fundamentals.

PEMEX's Baa3/Aa3.mx/MX-1 ratings reflect Moody's joint-default analysis, which includes the agency's assumptions that there is i) a very high likelihood of extraordinary support from the government of Mexico (A3 negative) 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 recent verbal statements of government support for the company. Moody's believes that it is important to the government to facilitate continued access to the capital markets by PEMEX given the company's role in generating hard foreign currency through oil exports and in paying large annual amounts in duties and royalties, which currently represent about 12% of the government's annual budget. Moody's believes that government support might come in a variety of ways, including additional supportive statements to inspire investor confidence for market access, temporary tax relief, and cash transfers, which have occurred in the past in the form of subscription to participation certificates.

PEMEX's ratings consider the company's sizable proved hydrocarbon reserves, which in 2014 amounted to 12,380 million boe, equivalent to 9.6 years of life; oil production averaging 2,267 mbd in 2015; a dominant role and integrated operations in the energy industry in Mexico; and its position as a major crude oil exporter to the US. However, the company's standalone credit assessment and its ratings are increasingly affected by a heavy tax burden, weak cash flow, and high financial leverage. PEMEX's ratings also consider challenges related to production, which has been falling in the last several years due to the natural decline of certain fields and a lower quality of crude oil as well as the company's limited ability to invest efficiently .

PEMEX's liquidity is tight. Management's goal is to hold at least USD 4.5 billion in cash at all times. However, as of December 2015, debt maturing in 2016 amounted to USD 11.7 billion. In addition, during the year, Moody's expects the company to spend about USD 4.5 billion for interest and USD 12.5 billion for capital expenditures. PEMEX has recently demonstrated repeated access to domestic and international markets, raising funds in Mexican Pesos, US dollars, Australian dollars, Euros, Japanese yen, and British pounds. So far in 2016, the company has tapped both global and local capital markets as well certain banking credit lines raising about USD 9 billion, suring the first quarter after the government expressed verbal support, at the beginning of the year. The company may also choose to sell non-strategic assets or use Fibra E (Mexican MLP-type of financial instruments) to raise funds to reduce debt financing needs. However, Moody's believes that some funding alternatives will continue to be difficult to execute due to the relatively short experience under the new energy law.

The negative outlook for PEMEX's ratings reflects Moody's expectation that the company's credit profile may deteriorate more substantially than the degree of weakening that is incorporated in the current b3 BCA. However, the outlook could be revised to stable if the company manages to reverse the current trend of increasing leverage and shows indications that it can improve its operating and financial profile.

A further material increase in financial leverage beyond current expectations, significant deterioration in production, or liquidity concerns could result in a reduction of PEMEX's BCA and a downgrade of its 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.

An upgrade of PEMEX's ratings is unlikely over the near term as is indicated by the negative outlook. For an upgrade to be considered, the company would need to significantly reduce its leverage and improve its operating profile, cash flow, and liquidity. Simultaneously, Moody's would have to 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 baseline credit assessment.

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 Ratings Methodologies 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' rating is between 01/01/2010 and 12/31/2015 (source: Petroleos Mexicanos).

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".

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 for Petroleos Mexicanos was 3/16/2016.

The date of the last Credit Rating Action for Fideicomiso No. F/163 de Pemex was 11/24/2015.

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 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.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 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

Steven Wood
MD - Corporate Finance
Corporate Finance Group
JOURNALISTS: 212-553-0376
SUBSCRIBERS: 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: 001-888-779-5833
SUBSCRIBERS:52-55-1253-5700

Moody's downgrades PEMEX's ratings to Baa3/Aa3.mx; negative outlook.
No Related Data.
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