Research Update: PEMEX Stand-Alone Credit Profile Revised To 'bb' From 'bb+' On Revised Oil Price Assumptions; Ratings Affirmed Primary Credit Analyst: Marcela Duenas, Mexico City (52) 55-5081-4437; marcela.duenas@standardandpoors.com Secondary Contact: Fabiola Ortiz, Mexico City (52) 55-5081-4449; fabiola.ortiz@standardandpoors.com Table Of Contents Overview Rating Action Rationale Outlook Ratings Score Snapshot Related Criteria And Research Ratings List WWW.STANDARDANDPOORS.COM/RATINGSDIRECT JANUARY 29, 2016 1
Research Update: PEMEX Stand-Alone Credit Profile Revised To 'bb' From 'bb+' On Revised Oil Price Assumptions; Ratings Affirmed Overview Following the downward revision of our oil and natural gas price deck assumptions, we believe PEMEX's credit metrics will weaken in 2016 in comparison with our previous forecasts. We have revised the stand-alone credit profile (SACP) on Mexico-based oil and gas company to 'bb' from 'bb+' and the comparable rating analysis to "neutral" from "positive." We expect that PEMEX will continue to maintain a critical role and its integral link with the Mexican government. We're affirming our 'BBB+' foreign currency and 'A' local currency global scale and 'mxaaa/mxa-1+' national scale corporate credit and debt ratings on PEMEX. We're also affirming our 'BBB+' foreign currency and 'A' local currency global scale ratings on PEMEX's subsidiaries. The stable outlook on the company mirrors that on the sovereign. Rating Action On Jan. 29, 2016, Standard & Poor's Ratings Services affirmed its 'BBB+' foreign currency and 'A' local currency global scale and 'mxaaa/mxa-1+' national scale corporate credit and debt ratings on Petroleos Mexicanos (PEMEX). Furthermore, we affirmed our 'BBB+' foreign currency and 'A' local currency global scale corporate credit ratings on its subsidiaries, P.M.I. Trading Ltd., PMI Norteamerica S.A., and Mex Gas Supply, S.L. In addition, we revised our SACP on PEMEX to 'bb' from 'bb+' as a result of our revision of our comparable rating analysis (CRA) on the company to "neutral" from "positive." Rationale The SACP revision reflects that PEMEX's credit metrics will likely be weaker in the next 12 months than we previously expected because of lower hydrocarbon price assumptions (see "S&P Lowers Its Hydrocarbon Price Deck Assumptions On Market Oversupply; Recovery Price Deck Assumptions Also Lowered," published on Jan. 12, 2016). While we acknowledge that PEMEX is implementing several cost cutting measures WWW.STANDARDANDPOORS.COM/RATINGSDIRECT JANUARY 29, 2016 2
and revising its capex, we believe those measures wouldn't be sufficient to offset pressure from weaker commodity prices. The effect of the revised oil prices resulted in PEMEX's debt to EBITDA of 3.5x-4.0x and funds from operations (FFO) to debt of 5.0%-5.5%. We continue to believe there is an almost certain likelihood that the government of Mexico will provide PEMEX with timely and sufficient extraordinary support in the case of financial distress. In accordance with our criteria, we base our rating approach on our view that PEMEX plays a critical role because it provides about 30% of Mexico's public-sector revenues through taxes and duties, and it has integral link to the government, given the latter's full ownership of the company. The ratings on PMI Trading, PMI NASA, and Mex Gas Supply, S.L. mirror those on PEMEX, given that we view them as core subsidiaries and that they would benefit indirectly from the Mexican government's potential extraordinary support to PEMEX. PEMEX's SACP incorporates the company's solid position in the global oil market, average crude production of 2,267 million barrels per day as of December 2015, as well as its 1P reserves of 9.6 years. The SACP also incorporates the company's all-in extracting cost of $23 per barrel and production cost of around $10 per barrel, which maintain the exploration and production operations profitable in most fields even at current prices. The offsetting factor is our view that the company remains exposed to the cyclicality of both oil upstream and downstream industries. Our assessment on PEMEX's aggressive financial risk profile incorporates debt to EBITDA of 3.5x-4.0x and FFO to debt of 5.0%-5.5%. These metrics take into consideration the company's pension liabilities as debt. As a result, our adjustments significantly affect PEMEX's debt, interest expenses, EBITDA, and FFO. It also takes into account the substantial share of the company's revenues that government takes. On Nov. 11, 2015, PEMEX reached an agreement with its labor union related to pension obligations, which will result in savings on the pension liability of about $10 billion and in a recapitalization of the same amount from the Mexican government. This significant injection underscores the government's ongoing support to PEMEX, which will bolster its liquidity position. Our base-case scenario for 2016 and 2017 assumes: A crude oil production decline of 3% for 2016 and 1% in 2017, mainly due to natural decline of fields; Our price assumption for WTI crude oil at $40 per oil barrel (bbl) for 2016 and $45/bbl in 2017 minus applicable discounts for the company; Decline in revenues of about 9.5% in 2016 and 1% in 2017 as a result of our assumption that oil prices will remained pressured due to the oversupply and a contraction on the demand; Capital expenditures of $9.5 billion for 2016 and $10 billion for 2017, mainly for upstream and to a minor extent for downstream operations; WWW.STANDARDANDPOORS.COM/RATINGSDIRECT JANUARY 29, 2016 3
No significant impact on financial metrics due to exchange rate fluctuations because PEMEX's dollar-indexed sales provide a natural hedge. Under these assumptions, we expect the following main credit metrics for the next two years: Total net adjusted debt to EBITDA in the 3.5x-4.0x range; FFO to debt of about 5%; and A shortfall in free operating cash flow for our projected scenario. Liquidity We assess PEMEX's liquidity as adequate because we expect its sources to exceed uses by at least 1.20x during the next 12 months. Principal liquidity Ssources: Cash and liquid investments of $6.5 billion as of September 2015 Undrawn bank lines of $1.3 billion Working capital inflows of $5 billion CHF 600 million ($596 million) issued in December 2015 Ongoing recapitalization of $10 billion as a result of negotiations with the labor union's pension obligations Principal Liquidity Uses: Short-term debt maturities of $11.7 billion for the next 12 months A shortfall of $800 million in FFO for the next 12 months Maintenance capex of $6 billion for the next 12 months In addition, our analysis also incorporates qualitative factors, such as the company's strong relationship with banks, high standing on capital markets and generally prudent risk management mitigate its negative sources minus uses (A-B) ratio. We expect PEMEX will retain its very good access to the bank and debt capital markets given its relationship with the government Outlook The stable outlook on PEMEX and on its subsidiaries reflects that of Mexico. We don't expect the company's relationship with the government to change significantly in the next two-three years stemming from our assessment of almost certain likelihood of government support. Thus, the ratings on PEMEX and on its subsidiaries would continue correlate with that on the sovereign. Downside scenario A downgrade could occur if we change our assessment on government support to PEMEX and/or in the event of a sovereign downgrade, which would directly impact ratings on the company and on its subsidiaries. WWW.STANDARDANDPOORS.COM/RATINGSDIRECT JANUARY 29, 2016 4
Upside scenario Since the sovereign rating limits that of PEMEX, an upgrade on it would be driven by an upgrade on Mexico. Ratings Score Snapshot Global Scale Local currency: A/Stable/-- Foreign currency: BBB+/Stable/-- Business risk: Satisfactory Country risk: Moderately High Industry risk: Intermediate Competitive position: Satisfactory Financial risk: Aggressive Cash flow/leverage: Aggressive Anchor: bb Modifiers Diversification/Portfolio effect: Neutral (no impact) Capital structure: Neutral (no impact) Liquidity: Adequate (no impact) Financial policy: Neutral (no impact) Management and governance: Strong (no impact) Comparable rating analysis: Neutral (no impact) Stand-alone credit profile: bb Likelihood of government support: Almost certain Related Criteria And Research Related Criteria Standard & Poor's National And Regional Scale Mapping Tables, Jan. 19, 2016 Methodology And Assumptions: Liquidity Descriptors For Global Corporate Issuers, Dec. 16, 2014 Criteria: National And Regional Scale Credit Ratings, Sept. 22, 2014 Key Credit Factors: For The Oil And Gas Exploration And Production Industry, Dec. 12, 2013 Corporate Methodology, Nov. 19, 2013 Corporate Methodology: Ratios and Adjustments, Nov. 19, 2013 Group Rating Methodology, Nov. 19, 2013 Stand-Alone Credit Profiles: One Component of a Rating, Oct. 1, 2010 WWW.STANDARDANDPOORS.COM/RATINGSDIRECT JANUARY 29, 2016 5
Ratings List Ratings Affirmed Petroleos Mexicanos Foreign Currency Local Currency CaVal (Mexico) National Scale Senior Unsecured Senior Unsecured Senior Unsecured MEX GAS SUPPLY S.L. P.M.I. Trading Ltd. Foreign Currency Local Currency PMI Norteamerica S.A. de C.V. Foreign Currency Local Currency BBB+/Stable/-- A/Stable/-- mxaaa/stable/mxa-1+ A BBB+ mxaaa BBB+/Stable/-- A/Stable/-- BBB+/Stable/-- A/Stable/-- Certain terms used in this report, particularly certain adjectives used to express our view on rating relevant factors, have specific meanings ascribed to them in our criteria, and should therefore be read in conjunction with such criteria. Please see Ratings Criteria at www.standardandpoors.com for further information. Complete ratings information is available to subscribers of RatingsDirect at www.globalcreditportal.com and at www.spcapitaliq.com. All ratings affected by this rating action can be found on Standard & Poor's public Web site at www.standardandpoors.com. Use the Ratings search box located in the left column. WWW.STANDARDANDPOORS.COM/RATINGSDIRECT JANUARY 29, 2016 6
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