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Rating Action:

Moody's rates new PEMEX global notes Baa3; negative outlook

11 Sep 2019

New York, September 11, 2019 -- Moody's Investors Service ("Moody's") assigned a Baa3 senior unsecured rating to Petroleos Mexicanos' (PEMEX) proposed offering of new senior notes with 7, 10 and 30 year maturities. The company will use the proceeds of the notes to repay outstanding short term debt. The company's existing Baa3 ratings and negative outlook are unchanged. The notes will be jointly and severally guaranteed by the company's operating subsidiaries, Pemex Exploración y Producción, Pemex Transformación Industrial and Pemex Logística.

In addition, the Government of Mexico announced that it will make a $5 billion capital contribution to Pemex to fund the repayment of near-term maturities, to be executed through a cash tender offer for specific notes maturing in 2020-2023 as described in a separate announcement today. The company has also launched an exchange offer of new senior notes for nearer-term maturities to further extend its debt maturity profile, and an exchange offer for longer-dated maturities.

"The capital injection is line with our expectations for the government's support to PEMEX," commented Pete Speer, Moody's Senior Vice President. "The planned debt repayment and exchange offers will increase revolver borrowing availability and refinance some 2020 and 2021 debt maturities, improving PEMEX's liquidity position and debt maturity profile."

Assignments:

..Issuer: Petroleos Mexicanos

....Senior Unsecured Regular Bond/Debenture, Assigned Baa3

RATINGS RATIONALE

The Government of Mexico (A3 negative) providing an additional $5 billion capital contribution to PEMEX meets most of the remaining support Moody's was expecting for 2019. The capital injection will also help the company in its objective of avoiding increases in net debt, with the debt repayment offsetting the negative free cash flow accumulated in the first half of 2019. The new notes issuance, cash tender and exchange offers, if executed as proposed, will also reduce PEMEX's near-term debt maturities and improve its liquidity.

However, PEMEX's rating outlook remains negative, consistent with the negative outlook on the Government of Mexico's sovereign rating, given the importance of the sovereign's credit strength and ongoing support to PEMEX's Baa3 ratings. The negative outlook also considers the deterioration in the stand-alone credit profile of the company, driven by the continued decline in proved reserves and Moody's view that the amount of planned capital spending will still fall well short of replacing reserves in 2019 and 2020.

PEMEX's Baa3 ratings are based on its caa1 Baseline Credit Assessment (BCA, a measure of a company's standalone credit strength) which considers its high financial leverage and low interest coverage, heavy tax burden and resulting negative free cash flow, as well as its historically declining production and proved reserves caused by its inability to fund sufficient capital investment to replace reserves. PEMEX's intrinsic liquidity is still weak and the company remains reliant on government support until it can consistently generate free cash flow. The company still has a large scale proved reserves and production base. It benefits from holding a dominant role and integrated operations in the energy industry in Mexico; access to plentiful oil and gas resources that can be developed at a competitive cost; and position as a major crude oil exporter to the US.

PEMEX's Baa3 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 seven notches of uplift from the company's caa1 BCA. The latest $5 billion capital contribution is a further demonstration of the government's support for PEMEX. It also validates Moody's base assumption that the Mexican government will provide sufficient support to fund PEMEX's negative free cash flow in order to meet the government's and PEMEX's stated objective of avoiding any further significant increases in net debt at PEMEX from year end 2018 levels.

A downgrade of Mexico's A3 rating would likely result in a downgrade of PEMEX's rating. In order for Moody's to consider an affirmation of PEMEX's Baa3 rating following a sovereign downgrade to Baa1, the company's BCA would have to substantially improve. Factors that could drive a much higher BCA would be the ability of the company to 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. Material increases in net debt or worse than forecasted operating performance, reserves declines and decreases in reserves life are factors that could lead to a lower BCA.

An upgrade is unlikely given the negative outlook for Mexico's A3 rating and Moody's expectations for continued weak operating performance at PEMEX.

The methodologies used in these ratings 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.

Founded in 1938, PEMEX is Mexico's productive state-owned oil and gas enterprise. PEMEX remains 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 is exported to various countries, mainly to the US and Canada. In the twelve months ended June 30, 2019 the company produced an average of 1,641 thousand barrels of per day (bpd) of crude oil (excluding partners) and it had total proved reserves of 6.8 billion barrels of oil equivalent (boe) at December 31, 2018, with a reserve life of 7.7 years at 2018 production levels.

REGULATORY DISCLOSURES

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 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.

Peter Speer
Senior Vice President
Corporate Finance Group
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

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.
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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