Petroleos Mexicanos (Pemex)
Fitch Rates PEMEX's EUR3.15 Billion Issuance 'BBB+'
04 JUN 2018 4:56 PM ET
Fitch Ratings-Chicago-04 June 2018: Fitch Ratings has assigned a long-term rating of 'BBB+' to Petroleos Mexicanos' (PEMEX) senior unsecured debt four tranches issuance of EUR3.15 billion due between 2022 and 2029. The company expects to use the proceeds from these issuances to refinance upcoming maturities and to fund capital investments.
PEMEX's ratings reflect the government of Mexico's high incentives to support the company as a result of the very strong socio-political and financial consequences a financial distress would have for the country. 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. Mexico is a net importer of hydrocarbons, and PEMEX relies on the import of basic oil products, including dry gas, petroleum products and petrochemicals to supply local demand. Furthermore, a financial distress situation at PEMEX may have implications for the ability of either the government or other Government Related Entities (GREs) within the country to raise financing in the future.
KEY RATING DRIVERS
Strong Government Linkage: PEMEX is Mexico's largest company and one of the central government's major sources of funds, historically contributing between 25% to 30% of government revenue through various royalties and taxes. PEMEX's transfers to the Mexican federal government averaged approximately MXN850 billion per year between 2011 and 2014. During the past two years, although PEMEX's contributions to the government have decreased to approximately MXN435 billion on average per year, or approximately 10% to 15% of government revenues, transfers remain high in relation to the company's cash flow generation. During the past five years, transfers to the government averaged 45% of sales, or 83% of adjusted EBITDA. As a result, the company's balance sheet has steadily weakened, with a significant increase in debt and negative equity since year-end 2009; its current debt lacks an explicit guarantee from the Mexican government.
Strategic Importance for Energy Security: Linkage to the sovereign arises from the company's strategic importance in the supply of liquid fuels to Mexico. A financial crisis at the oil company would potentially disrupt Mexico's liquid fuel supply, which could have material social and economic consequences for the country. Liquid fuel supply is a fundamental input into the production of almost all goods as well as the mobility of goods and labor in Mexico.
Implicit Government Support: Mexico's implicit support to PEMEX is evidenced by the Ministry of Finance's public statements of support, modest capital injections and marginal tax reductions. This support so far has been moderate, especially when compared to the level of transfers from the company to the government. Fitch expects the government to execute more meaningful supportive actions when needed. In 2016, the government injected MXN73.5 billion into PEMEX, of which MXN47 billion was used to fund pensions. The company also received MXN15 billion of credit lines from national development banks and MXN137 billion of government issued promissory notes to fund pension cost for the upcoming years.
Weak Credit Quality: PEMEX's stand-alone credit quality would be in line with a Long-Term Issuer Default Rating (IDR) of 'B-' if it were not owned by the state and if the government were not providing financial support. This stand-alone view assumes the government will continue to extract large amounts of funds from PEMEX in the form of taxes, duties and royalties, resulting in weak FFO. The company's stand-alone credit profile weakened in recent years by the significant increase in debt issued primarily to cover large transfers to the government.
Weak Post-tax Credit Metrics: Although PEMEX reports moderately solid pre-tax credit metrics, its post-tax credit protection metrics are weak and commensurate with a speculative grade stand-alone rating as a result of high transfers to the federal government. As of year-end 2017, PEMEX's reported a Fitch calculated FFO adjusted leverage of 21x. Fitch expects FFO leverage to recover moderately under its price deck assumptions to approximately 10x over the next three years, yet this leverage level is still considered highly speculative-grade. PEMEX's leverage as measured by total debt-to-proved reserves (1P) is also weak at approximately USD13 of debt to one 1P barrel (bbl) of reserved. This leverage metric could surpass USD15/bbl in the short term, a level Fitch considers commensurate with an unsustainable stand-alone credit quality. This weakening in leverage could occur either as a result of increasing financial debt to maintain high transfers to the federal government or from continued low capital investments to replenish reserves. Replenishment of PEMEX's reserves could improve as a result of recent and future reserves' farm-outs and exploration joint ventures.
Capex Cuts Reduce Production: Fitch expects production and hydrocarbon reserves to continue declining over the next few years. This is the result of significant exploration and development capex cuts in order to counter declining oil prices. Diversification of the oil production asset base, with the Cantarell field representing close to 10% of oil production, reduces the risk of large production declines. Still, Fitch estimates production could decline 5% per year going forward. PEMEX expects 2018 crude production to average 1.9 mmbbl/d. PEMEX's future production declines could be offset from production increases coming from farm-outs, new joint ventures and lowering of taxes for select fields, which was the case for a production field called Ek-Balam. PEMEX would need further farm-outs, joint ventures, tax reductions and higher investment levels than those reported thus far in order for the production decline trend to reverse.
