Fitch Ratings has assigned a 'BBB+' long-term rating to Petroleos
Mexicanos' (Pemex) USD4 billion bond issuance due 2023 and 2047. Pemex
expects to use the proceeds from the issuances to refinance upcoming
maturities, fund capex and general corporate purposes.
KEY RATING DRIVERS
Pemex's ratings reflect its close linkage to the government of Mexico
and the company's fiscal importance to the sovereign and strategic
importance to the country. Pemex's ratings also reflect the company's
competitive pre-tax cost structure, national and export-oriented
profile, sizable hydrocarbon reserves and its strong domestic market
position. The ratings are constrained by Pemex's substantial tax burden,
significant unfunded pension liabilities, large capital investment
requirements, negative equity and exposure to political interference
risk.
Strong Linkage to the Government
Pemex is the nation's largest company and one of the Mexican central
government's major sources of funds. During the past five years, Pemex's
transfers to the government have averaged 49% of sales, or 126% of
operating income. These contributions, through royalties, exploration
taxes and production duties have averaged between 27% and 37% of
government revenues. As a result, Pemex's balance sheet has weakened,
which is illustrated by its significant increase in debt and negative
equity balance sheet account since the end of 2009. Pemex's debt lacks
an explicit guarantee from the government.
Strategically Importance for Energy Security
Pemex's linkage to the sovereign also arises from the company's
strategic importance for the supply of liquid fuels to Mexico. A
financial distress situation at Pemex holds the potential to disrupt the
supply of liquid fuels in the entire country, which could have material
social and economic consequences for Mexico, as it is a fundamental
input into the production of almost all goods, as well as the mobility
of goods and labor. Although Mexico is a net exporter of crude oil, the
company relies on the imports of basic oil products, including dry gas,
petroleum products and petrochemicals in order to supply local demand.
Historically, the company was the only entity allowed by the
constitution to explore and produce crude. The industry was open to
private participation at the end of 2013 and so far there has been
modest interest in upstream investments. Interest in Pemex's downstream
businesses does not appear imminent, and over the short to medium term
the country will continue to rely on Pemex's operations for its domestic
liquid fuel supply. Mexico could see an increase of private
participation in the supply and distribution of liquid fuels after 2018,
when price regulations are expected to decrease materially or disappear
and fuel prices will be determined by a competitive market.
Symbolic Government Support
Mexico's support of Pemex has been evidenced in recent months by the
Ministry of Finance's public statements of support, as well as announced
modest capital injections and marginal tax reductions. This support has
been so far more symbolic than material, and Fitch expects the Mexican
government to execute more meaningful support actions when the company
needs them. In April of 2016, the Mexican government injected
approximately USD1.5 billion of new capital into Pemex. This action
follows the USD2.9 billion injected in the form of no-tradable
government securities during December 2015; USD2.7 billion of the notes
were exchanged for short-term tradable government securities and sold to
Mexican development banks in August 2016, and the proceeds will be used
to cover pension liabilities payments.
In addition to these actions, the Mexican government established a
USD6.5/boe average cost deduction floor for tax purposes, which could
represent MXN50 billion of tax savings for Pemex during 2016 if the
company's realization price averages USD25/bbl. The tax savings from
this reform will approach zero if realization price for Pemex is above
USD57/bbl. Pemex also received credit lines for an aggregate amount of
MXN15 billion from the country's development banks; Banco Nacional de
Obras y Servicios Publicos, S.N.C. (Banobras), Nacional Financiera,
S.N.C. (Nafinsa) and Banco Nacional de Comercio Exterior, S.N.C.
(Bancomext).
Weak Stand-Alone Credit Quality
Pemex's stand-alone credit quality is in line with a 'B-' Long-Term
Rating, should the company not be owned by the state and the government
were not to provide financial support should Pemex's require it. This
stand-alone view also assumes that the Mexican government continues
extracting a large amount of funds from Pemex in the form of taxes and
duties, resulting in feeble FFO. Pemex's stand-alone credit profile has
been weakened in recent years by the significant increase in debt the
company has issued primarily in order to cover its large transfers to
Mexico in the form of taxes, duties and royalties. Pemex's debt
trajectory could continue pressuring the company's stand-alone credit
quality, which could reach an unsustainable level, should the Mexican
government continue issuing debt at Pemex's level to transfer funds to
the central government. Pemex made transfer payments in the form of
taxes and royalties to the government equal to 1.3x its EBITDA during
2015. The company covered its 2015 negative FCF of USD13.8 billion
mostly with debt issuances; Pemex's debt trajectory indicates it could
surpass USD100 billion of debt by 2017.
As of the last 12 months ended June 30, 2016, Pemex's EBITDA (operating
income plus depreciation plus other income) was approximately USD15.6
billion after adjusting for asset impairments and pension liabilities'
associated gains while FFO for the same period was approximately USD1
billion. The significant difference results from the massive transfers
to the government. Pemex cash flow metrics are weak due to the company's
high cash transfers to the government in the form of taxes and
production duties. Leverage as measured by total debt-to-EBITDA was
6.6x. As of June 30, 2016, total debt was USD96.2 billion. Pemex's total
debt-to-proved reserves have grown to approximately USD10/boe as of June
2016 from USD6.3/boe as of yearend 2014. Pemex's leverage could reach an
unsustainable level over the next two to three years absent further
changes to reduce its tax burden.
Capex Cuts to Reduce Production
Fitch expects Pemex's production to continue declining over the next few
years as a result of the significant capex cuts in exploration and
development in order to counter the decline in oil prices while
maintaining relatively high transfers to Mexico. The diversification of
the oil production asset base, with Cantarell representing less than 15%
of oil production, reduces the risk of large production declines in the
future. The company's previous goal was to increase total crude
production to three million bpd in the medium to long term, which in
Fitch's view, has proven challenging. Pemex's current goal for 2016 is
to have a crude production of approximately 2.1 million bpd.
Currently at approximately 2.2 million barrels per day (bb/d), crude oil
production has continued to marginally decline in recent years. Natural
gas production excluding nitrogen has been relatively stable during
recent years at approximately 5.5 billion cubic feet per day (bcf/d).
Pemex was able to stem the steep production decline through more
intensive use of technology, improvements in operations and increased
production from a diversified number of fields.
KEY ASSUMPTIONS
Fitch's key assumptions within the agency's ratings case for the issuer
include:
--WTI crude prices average USD42 per bbl in 2016, increasing to USD65
per bbl by 2019;
--The company continues to face difficulties increasing its production
over the next four years;
--Pemex will receive support from the sovereign.
RATING SENSITIVITIES
Although not expected in the short term, an upgrade of Pemex could
result from an upgrade of the sovereign coupled with a strong operating
and financial performance and/or a material reduction in Pemex's tax
burden. Negative rating action could be triggered by a downgrade of the
sovereign's rating, the perception of a lower degree of linkage between
Pemex and the sovereign, and/or a substantial deterioration in Pemex's
credit metrics.
LIQUIDITY
Pemex has moderate liquidity of USD9.9 billion as of June 30, 2016. The
company has committed revolving credit lines for USD4.5 billion and
MXN23.5 billion; as of July 28, 2016, USD450 million. The company's debt
is well structured, with somewhat manageable short-term debt maturities.
The company's liquidity is further bolstered by its pre-tax cash flow
generation supportive by its competitive operational cost structure.
Fitch estimates Pemex's operating cash cost to be less than USD24 per
barrel of oil equivalent, including interest costs and full allocation
of administrative expenses to the upstream business.
FULL LIST OF RATING ACTIONS
Fitch currently rates Pemex as follows:
--Long-Term IDR 'BBB+'; Outlook Stable;
--Long-Term Local-Currency IDR 'BBB+'; Outlook Stable;
--National Long-Term Rating 'AAA(mex)'; Outlook Stable;
--National Short-Term Rating 'F1+(mex)';
--Notes outstanding in foreign currency 'BBB+';
--Notes outstanding in local currency 'BBB+';
--National scale debt issuances 'AAA(mex)';
--Short-Term Certificados Bursatiles Program 'F1+(mex)'.
Date of Relevant Rating Committee: June 30, 2016
Additional information is available at 'www.fitchratings.com'.
Applicable Criteria
Corporate Rating Methodology - Including Short-Term Ratings and Parent
and Subsidiary Linkage (pub. 17 Aug 2015)
https://www.fitchratings.com/site/re/869362
Additional Disclosures
Solicitation Status
https://www.fitchratings.com/gws/en/disclosure/solicitation?pr_id=1012128
Endorsement Policy
https://www.fitchratings.com/jsp/creditdesk/PolicyRegulation.faces?context=2&detail=31
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