BUENOS AIRES, Argentina--()--Fitch Ratings has assigned a 'BBB' rating to Petroleos Mexicanos' (Pemex) USD2 billion and USD100 million senior unsecured notes. The 3.50% notes will be due on Jan. 30, 2023. 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 strong domestic market position. The ratings are tempered by Pemex's significant adjusted debt levels, substantial tax burden, large capital investment requirements, negative equity (between 2009 and 2011) which was reversed following the adoption of IFRS in January 2012, and exposure to political interference risk.
A negative rating action could be triggered by a negative rating action on the sovereign's rating, the perception of a lower degree of linkage between Pemex and the sovereign, and/or a substantial deterioration in credit metrics. An upgrade of Pemex could result from the upgrade of the sovereign and a material reduction in Pemex's tax burden.
Strong Linkage to the Government
As a state-owned entity, Pemex's ratings are linked to the credit profile of Mexico (foreign and local currency Issuer Default Ratings of 'BBB' and 'BBB+', respectively, by Fitch). 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. Pemex contributions to the government through taxes have averaged 30% to 40% over the government's revenues.
As a result, Pemex's balance sheet has weakened and was reflected by a negative equity which was reversed in the first quarter of 2012 with IFRS adoption. Fitch does not expect any significant reduction in Pemex's heavy tax burden over the medium term. Despite pari passu treatment with sovereign debt in the past, Pemex's debt lacks an explicit guarantee.
Fitch does not anticipate any immediate change in the energy policy following the recent presidential elections. Although the newly elected president, Mr. Pena Nieto, has expressed interest in proposing energy sector reform, its timing and nature are yet uncertain. Energy sector reform that attracts private investment could help speed up the offshore waters development.
Strong Pre-tax Credit Metrics
During the LTM ended Sept. 30, 2012, Pemex's pro forma EBITDA (operating income plus depreciation plus other income) under IFRS accounting standards was approximately USD81.6 billion. Credit metrics were solid with an EBITDAP (EBIDTA before pension expenses)-to-fixed charges (interest plus pension expenses) at 9.1x. Leverage as measured by total debt-to-EBITDA was low at 0.7x and adjusted leverage was 1.4x.
Sizable Capex to Result in Negative Free Cash Flow
Fitch expects the company to present a negative free cash flow over the next two to three years, considering Fitch's price deck, as it continues to implement sizable capital investments to sustain and potentially increase current production volumes. Pemex's recent offshore deep-water discoveries may significantly increase its production and reserves volumes. However, its development might prove challenging as Pemex has limited expertise in deep-water oil and gas exploration and lacks expertise in deep-water production; it will also require significant capital investments.
For 2012, The Mexican Congress has approved capex for Pemex of approximately USD23 billion, which is above the USD14 billion - USD16 billion annual investment between 2009 and 2011.For the 12-month period ended September 2012, Pemex's pro forma funds from operations were approximately USD11.5 billion, which compared to a cash capex of USD15.1 billion, resulting in negative free cash flow of USD3.8 billion.
The company's historical significant tax burden, however, has limited its access to internally generated funds, forcing a growing reliance on external borrowings. As of September 2012, under IFRS, total debt was USD57.9 billion which doubles to USD126.2 billion when adjusting for the underfunded pension plan and other post-employment benefits (OPEBs). Positively, Pemex enjoys adequate liquidity of USD8.9 billion as of September 2012. The debt is well structured for the long term, with manageable debt maturities of USD6.3 billion in 2012, USD6.3 billion in 2013 and USD4.9 billion in 2014. Fitch expects the company will have no difficulties refinancing these debt maturities and will continue to access the financial markets to fund anticipated cash flow deficits.
Production Appears to Have Stabilized
Oil production appears to have stabilized at around 2.5 million barrels per day (bpd), after a precipitous fall in 2008-2009. This is mostly the result of a more intensive use of technology in the Cantarell field, improvements in the operations, and increased production from a diversified number of fields. The company's goal is to increase total crude production to three million bpd by 2018, which might prove challenging. 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 November 2012, it reported a total crude oil production of 2.5 million bpd, a 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 23% in 2005 to 101% in 2011.
Additional information is available at 'www.fitchratings.com'. The ratings above were solicited by, or on behalf of, the issuer, and therefore, Fitch has been compensated for the provision of the ratings.
Applicable Criteria and Related Research:
--'Corporate Rating Methodology', Aug. 8, 2012;
--'Rating Oil and Gas Exploration and Production Companies', April 5 2011.
Applicable Criteria and Related Research:
Corporate Rating Methodology