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Fitch Expects to Rate Petroleos de Venezuela, S.A.'s USD5B Proposed Issuance 'B/RR4'

May 19, 2014

CHICAGO--(BUSINESS WIRE)-- Fitch Ratings expects to assign a 'B/RR4' rating to Petroleos de Venezuela, S.A.'s proposed USD5 billion senior unsecured issuance. The company expects to use the proceeds from the issuance to finance its investment program as well as for general corporate purposes.

KEY RATING DRIVERS

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.

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, and are evidenced by the extensive amount of transactions with its shareholder, government agencies and other related parties. These transactions have a significantly negative impact on PDVSA's financial position.

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 weakening capital structure, which is in line with many of its competitors. Over the past five years, PDVSA's total debt has increased to USD43 billion at year-end 2013 from approximately USD25 billion at the end of 2010. Meanwhile, EBITDA, adjusted for social expenditures, has remained relatively flat at about USD25 billion. This level of leverage is 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 USD17.7 billion as of the year end Dec. 31, 2013. Total financial debt as of Dec. 31, 2013 increased to USD43 billion, from USD40 billion in 2012. The leverage level is low for the rating category with a net debt to EBITDA ratio of 1.9x. Capex continues to be moderate, totaling USD94 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 3 million barrels per day (bpd) as of year-end Dec. 31, 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. 5, 2013);

--'Parent and Subsidiary Rating Linkage' (Aug. 5, 2013).

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

Parent and Subsidiary Rating Linkage Fitch's Approach to Rating Entities within a Corporate Group Structure

http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=714476

Additional Disclosure

Solicitation Status

http://www.fitchratings.com/gws/en/disclosure/solicitation?pr_id=830698

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

Senior Director

+1-312-368-3260

Fitch Ratings, Inc.

70 W. Madison Street

Chicago, IL 60602

or

Secondary Analyst

Xavier Olave

Associate Director

+1-212-612-7895

or

Committee Chairperson

Daniel R. Kastholm, CFA

Managing Director

+1-312-368-2070

or

Media Relations:

Elizabeth Fogerty, New York, +1 212-908-0526

Email: elizabeth.fogerty@fitchratings.com

Source: Fitch Ratings


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