BUENOS AIRES, Argentina--()--Fitch Ratings has assigned a 'BBB' rating to Petroleos Mexicanos' (Pemex) USD1.75 billion 5.50% proposed notes issuance due June 27, 2044. The notes are guaranteed by Pemex-Exploracion y Produccion, Pemex-Refinacion and Pemex-Gas y Petroquimica Basica. Proceeds from the notes are expected to be used for capital expenditures and refinancing needs.
Pemex's ratings reflect its linkage to the government of Mexico and the company's fiscal importance to the sovereign. The ratings also reflect the company's solid pretax income, export-oriented profile, sizable hydrocarbon reserves and its domestic market position. The ratings are tempered by Pemex's significant adjusted debt levels, historical negative net worth position that was reversed following the adoption of IFRS in January 2012, substantial tax burden, large capital investment requirements, and exposure to political interference risk.
As a state-owned entity, Pemex's ratings are linked to the credit profile of Mexico, which foreign and local currency Issuer Default Ratings are 'BBB' and 'BBB+', respectively. Pemex is the nation's largest company and one of its major sources of funds. Over the past five years, its transfers to the government have averaged 55% over sales or 125% of operating income. As a result, Pemex's balance sheet has weakened and was reflected by a negative net worth which was reversed in the first quarter of 2012 with IFRS adoption. Despite pari passu treatment with sovereign debt in the past, Pemex's debt lacks an explicit guarantee.
For the 12 month period ended March 2012, Pemex reported an EBITDA under IFRS accounting standards of approximately USD80.3 billion. Under Mexican GAAP, in 2011 Pemex reported an EBITDA (operating income plus depreciation plus other income) of approximately USD69.6 billion compared to USD57.9 billion in 2010. This reflects higher realization crude oil prices (USD101 average per barrel in 2011, USD72 in 2010 and USD57 in 2009) that compensated the negative margin of the refining segment. Funds from operations amounted to USD13.6 billion as transfers to the government also increased. The exerted capital expenditures, considering maintenance and growth, at December 2011, were USD21.5 billion from which USD14.1 billion represented cash flow; resulting in a negative free cash flow of USD2.6 billion.
Pemex is expected to continue implementing sizable capital investments in an attempt to sustain and potentially increase current production volumes. The company's historical significant tax burden, however, has limited access to internally generated funds, forcing a growing reliance on external borrowings. As of March 2012, under IFRS, total debt was $57.9 billion and leverage (total debt / EBITDA) was 0.7 times (x) similar to the ratio in 2008 under local GAAP. Adjusting for the underfunded pension plan and other post-employment benefit (OPEB) debt practically doubled under local GAAP to USD108.2 billion and adjusted leverage as measured by debt to EBITDAP (EBITDA + pension cost) increased to 1.5x compared to 1.0x in 2008.
After a precipitous fall in oil production in 2008-2009, production appears to be stabilizing falling by only 1.4% in 2011 and falling 1% in 2010. This is mostly the result of a more intensive use of technology in Cantarell field and increased drilling activities mostly in Chicontepec, another strategic oil field. The company's goal is to increase total crude production to 3 million barrels per day (bpd) by 2018 from the current 2.58 million bpd. However, Fitch notes that this might prove challenging considering past difficulties to stabilize current production volumes. Moreover, the company's capital spending capacity is constrained by limited budgetary flexibility and high level of tax burden.
Pemex, Mexico's state oil and gas company, is the nation's largest company and ranks among the world's largest vertically integrated petroleum enterprises. As of December 2011, it reported a production of 3.7 million boe per day, refining capacity of 1.5 million bpd, and hydrocarbon reserves of 13.8 billion boe. Pemex's reserves life was 10 years and its reserve replacement rate has increased from 26% in 2005 to 101% in 2011.
Additional information is available at 'www.fitchratings.com'. The ratings above were unsolicited and have been provided by Fitch as a service to investors.
Available Criteria and Related Research:
--'Corporate Rating Methodology', dated Aug. 12, 2011;
--'Rating Oil and Gas Exploration and Production Companies', dated April 5, 2011;
--'Parent and Subsidiary Rating Linkage', dated Aug. 12, 2011.
Applicable Criteria and Related Research:
Corporate Rating Methodology
Rating Oil and Gas Exploration and Production Companies
Parent and Subsidiary Rating Linkage