Fitch Rates Pemex's USD4 Billion Notes 'BBB+'

Fitch Ratings has assigned a long-term international rating of 'BBB+' to the following debt instruments issued by Petroleos Mexicanos S.A.'s (PEMEX):

--USD500 million senior unsecured notes due Jan. 23, 2019;

--USD500 million reopening of senior unsecured notes due Jan. 18, 2024;

--USD3 billion senior unsecured bond due Jan. 23, 2045.

The debt issuances are guaranteed by PEMEX-Exploracion y Produccion, PEMEX-Refinacion, and PEMEX-Gas y Petroquimica Basica. The company expects to use the proceeds from the issuance to finance capital investments and refinancing needs as well as for general corporate purposes.

KEY RATING DRIVERS

Pemex's ratings reflect its close linkage to the government of Mexico and the company's fiscal importance to the sovereign. Pemex's ratings also reflect the company's solid pretax income, export-oriented profile, sizable hydrocarbon reserves and its strong domestic market position. The ratings are constrained by Pemex's significant adjusted debt levels, substantial tax burden, large capital investment requirements, negative equity and exposure to political interference risk.

Strong Linkage to the Government

Pemex is the nation's largest company and one of its major sources of funds. During the past five years, Pemex's transfers to the government have averaged 54% of sales, or 122% of operating income, and contributions to the government from taxes have averaged 30% to 40% of government revenues, versus 33.7% in 2012. As a result, Pemex's balance sheet has weakened, which was illustrated by a negative equity balance sheet account at the end of 2012. Despite pari passu treatment with sovereign debt in the past, Pemex's debt lacks an explicit guarantee.

Oil Production Has Stabilized

Oil production has 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 operations, and increased production from a diversified number of fields. The diversification of the oil production asset base, with Cantarell representing less than 20% of oil production, reduces the risk of large production declines in the future. The company's goal is to increase total crude production to three million bpd by 2018, which likely will prove challenging as the company's capital spending capacity is constrained by limited budgetary flexibility and a high tax burden.

Approved Energy Reform; Long-term Positive for Pemex

Although Pemex's credit ratings will continue to be highly linked to those of the sovereign, the reform would likely give the company financial flexibility through budgetary independence. Up to now, the company has had to obtain budgetary approval from congress on an annual basis, which, coupled with high tax burden, has hindered the company's investment flexibility. Also, the company would benefit by being able to partner with international oil and gas companies in order to share exploration risk. The overall impact on the reform for Pemex will be positive but gradual and the company will continue to face heavy tax burden.

Negative Free Cash Flow Due to Capex

Fitch expects the company to present negative free cash flow (FCF) 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. The company's historical significant tax burden has limited its access to internally generated funds, forcing a growing reliance on external borrowings. The entry of a new energy and tax reform should help mitigate Pemex tax burden freeing operating resources that could be used to increase investments. For the latest 12 months (LTM) ending September 2013, Pemex's funds from operations were approximately USD9.7 billion and cash from operations USD12.5 billion, which compared with cash capital expenditures of USD16.3 billion, resulting in negative FCF of USD3.8 billion.

Strong Pre-tax Credit Metrics

During the LTM ending Sept. 30, 2013, Pemex's EBITDA (operating income plus depreciation plus other income) was approximately USD73.7 billion. Credit metrics were solid with EBITDAP (EBITDA plus pension expenses)-to-fixed charges (interest plus pension expenses) at 6.3x. Leverage as measured by total debt-to-EBITDA was low at 0.8x and adjusted leverage was 1.9x.

As of September 2013, total debt was USD62.1 billion which more than doubles to USD165.6 billion when adjusting for the underfunded pension plan and other post-employment benefits. Positively, Pemex has adequate liquidity of USD8.8 billion as of September 2013, enhanced by committed revolving credit lines for USD2.5 billion and MXN10 billion. The debt is well structured, with manageable short-term debt maturities.

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 September 2013, it reported total crude oil production of 2.5 million bpd and a refining capacity of 1.69 million bpd. The company reported hydrocarbon proved reserves of 13.9 billion boe as of Jan. 1, 2013. Pemex's proved reserves life was 10 years and its reserve replacement rate has increased from 23% in 2005 to 104% in 2013.

RATING SENSITIVITIES

An upgrade of Pemex could result from an upgrade of the sovereign coupled with a continued strong operating and financial performance and/or a material reduction in Pemex's tax burden. Negative rating action could be triggered by a downgrade of the sovereign's rating, the perception of a lower degree of linkage between Pemex and the sovereign, and/or a substantial deterioration in Pemex's credit metrics.

Fitch currently rates Pemex as follows:

-- Long-term Issuer Default Rating (IDR) 'BBB+'; Outlook Stable;

-- Local currency long-term IDR 'A-'; Outlook Stable;

-- National long-term rating 'AAA(mex)'; Outlook Stable;

-- Notes outstanding in foreign currency 'BBB+';

-- Notes outstanding in local currency 'A-';

-- National scale debt issuances 'AAA(mex)'.

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

Applicable Criteria and Related Research:

--'Corporate Rating Methodology', Aug. 5, 2013;

--'Rating Oil and Gas Exploration and Production Companies', Aug. 9 2012.

Applicable Criteria and Related Research:

Corporate Rating Methodology: Including Short-Term Ratings and Parent and Subsidiary Linkage

http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=715139

Rating Oil and Gas Production Companies

http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=682334

Additional Disclosure

Solicitation Status

http://www.fitchratings.com/gws/en/disclosure/solicitation?pr_id=815464

ALL FITCH CREDIT RATINGS ARE SUBJECT TO CERTAIN LIMITATIONS AND DISCLAIMERS. PLEASE READ THESE LIMITATIONS AND DISCLAIMERS BY FOLLOWING THIS LINK: HTTP://FITCHRATINGS.COM/UNDERSTANDINGCREDITRATINGS. IN ADDITION, RATING DEFINITIONS AND THE TERMS OF USE OF SUCH RATINGS ARE AVAILABLE ON THE AGENCY'S PUBLIC WEBSITE 'WWW.FITCHRATINGS.COM'. PUBLISHED RATINGS, CRITERIA AND METHODOLOGIES ARE AVAILABLE FROM THIS SITE AT ALL TIMES. FITCH'S CODE OF CONDUCT, CONFIDENTIALITY, CONFLICTS OF INTEREST, AFFILIATE FIREWALL, COMPLIANCE AND OTHER RELEVANT POLICIES AND PROCEDURES ARE ALSO AVAILABLE FROM THE 'CODE OF CONDUCT' SECTION OF THIS SITE. FITCH MAY HAVE PROVIDED ANOTHER PERMISSIBLE SERVICE TO THE RATED ENTITY OR ITS RELATED THIRD PARTIES. DETAILS OF THIS SERVICE FOR RATINGS FOR WHICH THE LEAD ANALYST IS BASED IN AN EU-REGISTERED ENTITY CAN BE FOUND ON THE ENTITY SUMMARY PAGE FOR THIS ISSUER ON THE FITCH WEBSITE.

Fitch Ratings
Primary Analyst
Lucas Aristizabal, [phone]
Director
Fitch Ratings, Inc.
70 W. Madison Street
Chicago, IL 60602
or
Secondary Analyst
Alberto De Los Santos, [phone]
Associate Director
or
Committee Chairperson
Joe Bormann, CFA, [phone]
Managing Director
or
Media Relations:
Elizabeth Fogerty, [phone]
[e-mail]