Fitch Downgrades PDVSA's IDRs to 'B'; Outlook Negative

CHICAGO--()--Fitch Ratings has downgraded Petroleos de Venezuela, S.A.'s (PDVSA) foreign and local currency issuer default ratings (IDRs) to 'B' from 'B+', The Rating Outlook is Negative. Fitch has also downgraded approximately USD26.4 billion of senior unsecured debt outstanding to 'B/RR4' from 'B+/RR4'. Concurrently, Fitch has affirmed PDVSA's national long-term rating at 'AAA(ven)'.

The rating downgrade follows today's downgrade of the sovereign ratings of Venezuela to 'B' from 'B+' with a Negative Rating Outlook. The downgrade of the sovereign reflects heightened macroeconomic instability and delays in the implementation of policies to address rising inflation and distortions in the foreign exchange (FX) market and the deterioration in Venezuela's external accounts. The Negative Outlook signals that the lack of sustained and coherent policy adjustments could lead to further erosion in external buffers, macroeconomic and financial instability, and exacerbate the risk of social unrest given the high level of political polarization.

PDVSA's credit quality reflects the company's linkage to the government of Venezuela as a state-owned entity, combined with increased government control over business strategies and internal resources. This underscores the close link between the company's credit profile and that of the sovereign. PDVSA's ratings also consider the company's strong balance sheet, sizeable proven hydrocarbon reserves, and strategic interests in international downstream assets.

KEY RATING DRIVERS

Linkage to Sovereign: PDVSA's credit quality is inextricably linked to the Venezuelan government. It is a state-owned entity whose royalties and tax payments have historically represented more than 50% of the government's revenues, and it is of strategic importance to the economic and social policies of the country. In 2008, the government changed PDVSA's charter and mission statement to allow it to participate in industries that contribute to the country's social development, including healthcare, education, and agriculture.

Limited Transparency of Sovereign: The Venezuelan government displays limited transparency in the administration and use of government-managed funds, and in its fiscal operations. This factor poses challenges to accurately assess the stance of fiscal policy and the full financial strength of the sovereign. As a direct by-product of being a state-owned entity, PDVSA displays similar characteristics, which reinforces the linkage of its ratings to the sovereign.

Strong Stand-Alone Credit Profile: PDVSA continues to be an important player in the global energy sector. The company's competitive position is strong and supported by its sizeable reported proven hydrocarbon reserves, strategic interests in international downstream assets and private participation in upstream operations. The company also benefits from a strong, yet debilitating balance sheet, which is in line with many of its competitors. These strong credit attributes are consistent with a higher rating category, although sovereign-related risks offset the strength of the financial profile and constrain the rating to that of the sovereign.

Adequate Credit Metrics: PDVSA reported an EBITDA (after royalties and social expenditure, which include most oil bartering agreements) of approximately USD25.3 billion as of the LTM ending June 30, 2013. Total financial debt as of December 31, 2013 increased to USD43.3billion, from USD40.0 billion in 2012. The leverage level is low for the rating category with a net debt to EBITDA ratio of 1.3x. Capex continues to be moderate, totaling USD89.3 billion over the past five years, which has somewhat offset declining production levels from existing fields.

Large Hydrocarbon Reserves: PDVSA's reported hydrocarbon reserves continue to rank among the largest in the world, with proven hydrocarbon reserves of 332 billion barrels of oil equivalent (boe) as of year-end 2013. Proven developed hydrocarbon reserves were approximately 20 billion boe as of December 2012, which represents around a 15-year proven developed reserve life. Venezuela reported oil production of approximately 2.9 million barrels per day (bpd) during the LTM ended June 30, 2013. Various independent reports have estimated that production levels are lower than reported by the company, which adds to risk and is incorporated into the ratings.

RATING SENSITIVITIES

Catalysts for a downgrade include a downgrade to Venezuela's ratings, a substantial increase in leverage to finance capital expenditures or government spending and a sharp and extended commodity price downturn. Catalysts for an upgrade include an upgrade to Venezuela's sovereign rating and/or real independence from the government.

Additional information is available at 'www.fitchratings.com'.

Applicable Criteria and Related Research:

--'Corporate Rating Methodology' (Aug. 08, 2012).

Applicable Criteria and Related Research:

Corporate Rating Methodology - Effective 12 August 2011 to 8 August 2012

http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=647229

Additional Disclosure

Solicitation Status

http://www.fitchratings.com/gws/en/disclosure/solicitation?pr_id=824998

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Contacts

Fitch Ratings
Primary Analyst:
Lucas Aristizabal, +1-312-368-3260
Senior Director
Fitch Ratings, Inc.
70 W. Madison Street
Chicago, IL 60602
or
Secondary Analyst:
Xavier Olave, +1-212-612-7895
Associate Director
or
Committee Chairperson:
Daniel R. Kastholm, CFA, +1-312-368-2070
Managing Director
or
Media Relations:
Elizabeth Fogerty, New York, +1 212-908-0526
elizabeth.fogerty@fitchratings.com

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Contacts

Fitch Ratings
Primary Analyst:
Lucas Aristizabal, +1-312-368-3260
Senior Director
Fitch Ratings, Inc.
70 W. Madison Street
Chicago, IL 60602
or
Secondary Analyst:
Xavier Olave, +1-212-612-7895
Associate Director
or
Committee Chairperson:
Daniel R. Kastholm, CFA, +1-312-368-2070
Managing Director
or
Media Relations:
Elizabeth Fogerty, New York, +1 212-908-0526
elizabeth.fogerty@fitchratings.com