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INVESTMENT
Fitch Ratings affirms

Pemex’s IDRs at BB-

Fitch Ratings has affirmed the Long-Term For-
eign and Local Currency Issuer Default Ratings
(IDRs) of Petroleos Mexicanos (Pemex) at BB-.
The Rating Outlook is Stable. The rating action
applies to approximately $80bn of international
notes outstanding.
Pemex’s ratings reflect moderate linkage to
Mexico’s (BBB-/Stable) credit quality coupled
with a weak Standalone Credit Profile (SCP),
which Fitch Ratings believe is commensurate
with a ccc-. The SCP reflects Pemex’s elevated Contributions to Mexico averaged about 11.6% differential between Pemex and Mexico’s ratings.
and raising leverage levels, limited financial of government revenue between 2015 to 2019, The Mexican government has strong incentives
flexibility, high tax burden and high investment although they declined to around 4.9% in 2020 to support Pemex, given the socio-political and
needs to maintain production and replenish due to lower oil prices, but reverted up to 8.4% in financial consequences of a default for the coun-
reserves. 2021. Transfers from Pemex to the government try. It is Mexico’s largest company and one of the
Fitch estimates Pemex’s FCF will average remain high, relative to the company’s cash government’s major sources of funds, with mate-
approximately negative $11bn per year from flows, as transfers were approximately 25% of rial contributions to government revenues.
2023 through 2025, as the company seeks to sales during the past three years, or about 80%- Strategic Importance for Energy Security:
increase capex to revert the historical pro- 100% of adjusted EBITDA in 2019 and 2021. The The sovereign linkage stems from the company’s
duction decline rate. We believe the company government lowered the cash taxes in 2021 to strategic importance in supplying liquid fuels to
will continue to need significant government 40%, which represented nearly 60% of EBITDA Mexico. A financial crisis at Pemex could poten-
support in the near term. The moderate link- in 2022 and 2023. The company’s balance sheet tially disrupt the country’s liquid fuel supply.
age between Pemex’s ratings and those of the remains weakened, and its debt lacks an explicit Mexico is a net importer of liquid fuels due to
sovereign reflects the delay and uncertainty of guarantee from the Mexican government. low refinery utilisation rates. The country relies
significant support from the government due Weak Government Support: Mexico has on Pemex for almost all of its supply of gasoline
to Pemex’s financial difficulties resulting from demonstrated weak support for Pemex through and diesel, about 52.5% of which is from imports.
high taxes. Pemex’s Stable Rating Outlook mir- delayed implementation of measures to alleviate Financial distress at Pemex could also have very
rors Mexico’s sovereign Outlook. the company’s credit quality deterioration. This severe financial consequences for the Mexican
Key Rating Drivers, Weak Underlying weak support assessment also reflects high lev- government and other government-related enti-
Credit Quality: Pemex’s SCP is aligned with a els of transfers from Pemex to the government. ties, especially regarding access to funding.
ccc- credit profile, were it not state-owned and Fitch believes the government might continue to Continued Upstream Underinvestment:
receiving government support. The company’s provide meaningful support if necessary. Fitch expects production and reserves to remain
high tax burden, even after the decrease in the Total government support for Pemex was stable over the rating horizon, should Pemex
government profit sharing scheme to 40% from about $15.4bn in 2020 in the form of tax cred- continue increasing exploration and produc-
54%, and limited financial flexibility to navigate its and capital injections, of which more than tion (E&P) capex, while reducing lifting, find-
lower oil prices continues to erode its SCP. The $3.5bn per year was earmarked for liability ing and development (F&D) costs. We estimate
SCP reflects Pemex’s elevated leverage and low management. This support includes a previ- projected capex will likely be insufficient to sus-
cash flow from operations, which limits sup- ously announced tax reduction of 7% in 2020 tainably replenish 100% of reserves without fur-
port for sustainable upstream capex that could and a further 4% relief in 2021. Net transfers ther reducing F&D costs, as the company would
deliver consistent stable production and 100% from Pemex to the government amounted to require annual E&P capex of about $12bn to
reserve-replacement ratios in the long term. about $13.5bn after tax credits in 2021. Mexico replenish 100% of 1P reserves on a sustainable
Pemex preliminarily reported Fitch-defined announced further tax credits for 2022, lowering basis. This is based on a F&D and acquisition
lease-adjusted EBITDA, before net pension cash tax obligations to 40% from 54% in 2021. cost estimate of $13.00/boe and annual produc-
expenses, of approximately $23.3bn in year- Fitch expects this level to remain through the tion of 900mn boe/year.
end 2021, and FFO of around $4.3bn, up from rating horizon, averaging $17bn per annum. Pemex’s crude oil production stabilised in
$7.6bn and negative $4.5bn, respectively in 2020. Moderate Government Linkage: We expect the past 24 months at about 1.7mn barrels per
Total financial debt amounted to about $110.0bn the government will ensure Pemex maintains day (bpd) after decades of continued declines.
down slightly from $113bn in 2020, translating sufficient liquidity to service debt, despite the Fitch assumes total production may remain
into total debt/EBITDA of approximately 4.7x. moderate rating linkage, which supports the stable over the rating horizon as the company’s
The SCP reflects the company’s low liquidity material rating uplift from the SCP. Fitch assesses increase in capex may only be sufficient to offset
position, with only $3.7bn of cash on hand, as of government support for Pemex as weak and gov- production declines from mature fields. Pemex’s
December 2021. ernment incentives sub-factors as moderate. We production from new fields increased by around
Transfers Weaken SCP: Pemex’s weak view Mexico’s ownership and control of Pemex 322,000 bpd as of December 2021, which helped
underlying credit quality is primarily the result as very strong. offset declines in production from mature fields.
of excessive distributions to the government. This assessment results in a three-notching Fitch Ratings, March 24 2022

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