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Fitch Rates Pemex's Certificados Bursatiles Issuances 'A-'

January 27, 2014

Fitch Ratings has rated the following Petroleos Mexicanos SA (Pemex) debt instruments with a Long-term local currency international rating of 'A-' and a National Long-term rating of 'AAA(mex)': --Additional Certificados Bursatiles of the second reopening of the 14th Certificados Bursatiles issuance with ticker PEMEX 13 of up to MXN12.5 billion with maturity on Feb. 28, 2019 , at variable rate; --Additional Certificados Bursatiles of the second reopening of the 15th Certificados Bursatiles issuance with ticker PEMEX 13-2 of up to MXN12.5 billion with maturity on Sept. 12, 2024 , at fixed rate. In addition, Fitch has assigned a National Long-term rating of 'AAA(mex)' to the following Pemex debt instrument: --16th Certificados Bursatiles issuance with ticker PEMEX 14U of up to MXN12.5 billion with a term up to 15 years, at fixed rate. The issuances will have a joint guarantee from Pemex-Exploracion y Produccion, Pemex-Refinacion , and Pemex-Gas y Petroquimica Basica in terms of the joint responsibility agreement and the corresponding designated Certificados. The total amount of the three issuances, which will be held in the form of communicating vessels, will not be able to exceed MXN12.5 billion at the time of the provisions. 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 percent of sales, or 122 percent of operating income, and contributions to the government from taxes have averaged 30 percent to 40 percent of government revenues, versus 33.7 percent 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 percent 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 percent in 2005 to 104 percent 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)'. More information: report_frame.cfm?rpt_id=715139 report_frame.cfm?rpt_id=682334 ((Comments on this story may be sent to ))

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