Fitch Rates Pemex's CHF375 Million Issuance 'BBB+'
OREANDA-NEWS. Fitch Ratings has assigned a 'BBB+' Long-Term rating to Petroleos Mexicanos' (Pemex) CHF375 million senior unsecured debt issuance composed of:
--CHF 225 million due in 2018;
--CHF 150 million due in 2021.
The company expects to use the proceeds from the issuances to finance its investment program and working capital needs, and to refinance indebtedness. The debt issuance is guaranteed by: Pemex Exploracion y Produccion, Pemex Transformacion Industrial, Pemex Perforacion y Servicios, Pemex Logistica, and Pemex Cogeneracion y Servicios.
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 competitive pretax cost structure, national and export-oriented profile, sizable hydrocarbon reserves and its strong domestic market position. The ratings are constrained by Pemex's significant unfunded pension liabilities, 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 the Mexican central government's major sources of funds. During the past five years, Pemex's transfers to the government have averaged 49.0% of sales, or 126.0% of operating income. These contributions, through royalties, exploration, taxes and production duties have averaged 30% to 40% of government revenues. As a result, Pemex's balance sheet has weakened, which is illustrated by its negative equity balance sheet account since the end of 2009. Pemex's debt lacks an explicit guarantee from the government.
Oil Production Decline Stemmed
Currently at approximately 2.2 million barrels per day (bb/d), crude oil production has continued to marginally decline in recent years, although not at the same speed as it did during a precipitous fall in 2008 - 2009. Natural gas production excluding nitrogen has been relatively stable during recent years at approximately 5.5 billion cubic feet per day (bcf/d). Pemex has been able to stem production decline through more intensive use of technology in the Cantarell field, improvements in operations, and increased production from a diversified number of fields.
Fitch expects the company's production to continue declining over the next few years as a result of the significant capex cuts in exploration and development in order to counter the decline in oil prices while maintaining relatively high transfers to Mexico. The diversification of the oil production asset base, with Cantarell representing less than 15% of oil production, reduces the risk of large production declines in the future. The company's previous goal was to increase total crude production to three million bpd in the medium to long term, which in Fitch's view, has proven challenging. Pemex's current goal for 2016 is to have a crude production of approximately 2.1 million bpd.
Energy Reform; Long-Term Positive for Pemex
Although Pemex's credit ratings will continue to be highly linked to those of the sovereign, Mexican energy reforms would likely give the company financial flexibility through budgetary independence. Before the implementation of the energy reforms, the company's budgetary approval process from congress, coupled with a high tax burden, hindered the company's investment flexibility. Also, the company would benefit from being able to partner with oil and gas companies in order to share exploration risk.
The overall impact of the energy reforms for Pemex will be positive but gradual and the company will continue to face heavy tax burden in the medium term. The energy reforms would also benefit the company's capital structure after the recently announced estimated reduction on Pemex's pension liabilities of approximately USD11 billion, which the government is expected to match. At the end of 2015, the pension obligations amounted to approximately USD74.4 billion.
On Dec. 24, 2015, the government injected approximately USD2.9 billion in the form of non-tradable notes maturing in 2050. These notes will be exchanged in the upcoming months for a similar amount (MXN47 billion) of tradable notes in order to bolster the company's liquidity. Towards the end of 2015 the company reached an agreement to change its pension plan into a defined contribution from a defined benefits plan and increased the retirement age for unionized employees that have been with the company for less than 15 years and all non-unionized employees to 60 years of age and 30 years of service, from the previous 55 years of age and 25 years of service.
Negative Free Cash Flow Due to Taxes
Fitch expects the company to present negative free cash flow (FCF) over the foreseeable future, considering Fitch's price deck, as it continues implementing large transfers to the central government in the form of very high duties, royalties and taxes. The company's historical significant tax burden has limited its access to internally generated funds, forcing a growing reliance on external borrowings. At the end of 2015, Pemex's funds from operations, calculated by Fitch, were approximately negative USD2.5 billion and net operating cash flow was approximately positive USD2.3 billion, which compared with cash capital expenditures of USD14.9 billion, resulting in negative FCF of USD12.6 billion.
Adequate Pre-Tax Credit Metrics
As of the last twelve months ended March 31, 2016, Pemex's EBITDA (operating income plus depreciation plus other income) was approximately USD10.8 billion. Leverage as measured by total debt-to-EBITDA was 8.6x. Pemex cash flow metrics are weak due to the company's high cash transfers to the government in the form of taxes and production duties. As of March 31, 2016, total debt was USD93.3 billion and it could reach close to USD100 billion by yearend.
Fitch's key assumptions within the agency's ratings case for the issuer include:
--WTI crude prices average USD35 per bbl in 2016, increasing to USD65 per bbl by 2018 in the long term.
--The company continues to face difficulties increasing its production over the next four years.
--The Mexican government continues extending robust support for Pemex.
An upgrade of Pemex could result from an upgrade of the sovereign coupled with a 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.
Pemex has adequate liquidity of USD8.1 billion as of March 31, 2016. The company has committed revolving credit lines for USD4.5 billion and MXN23.5 billion; as of April 28, 2016, USD1.63 billion and MXN9.1 billion were available. The company's debt is well structured, with somewhat manageable short-term debt maturities. The company's liquidity is further bolstered by its pre-tax cash flow generation supportive by its competitive operational cost structure. Fitch estimates Pemex's operating cash cost to be less than USD24 per barrel of oil equivalent, including interest costs and full allocation of administrative expenses to the upstream business.
FULL LIST OF RATING ACTIONS
Fitch currently rates Pemex as follows:
--Long-Term IDR 'BBB+'; Outlook Stable;
--Long-term Local-Currency IDR 'A-'; Outlook Stable;
--National Long-Term Rating 'AAA(mex)'; Outlook Stable;
--National Short-Term Rating 'F1+(mex)';
--Notes outstanding in foreign currency 'BBB+';
--Notes outstanding in local currency 'A-';
--National scale debt issuances 'AAA(mex)';
--Short-Term Certificados Bursatiles Program 'F1+(mex)'.