Petroleos Mexicanos (PEMEX) Credit Analyst: Jose Coballasi, Mexico City (52)

Transcription

1 Publication date: 15Jan2004 Reprinted from RatingsDirect Petroleos Mexicanos (PEMEX) Credit Analyst: Jose Coballasi, Mexico City (52) ISSUER CREDIT RATINGS Petroleos Mexicanos (PEMEX) Local currency United Mexican States Local currency Kot Insurance Co. Ltd. Local currency Pemex Project Funding Master Trust A/Stable/ BBB/Stable/ A/Stable/A2 BBB/Stable/A3 A/Stable/ BBB/Stable/ AFFIRMED RATINGS Petroleos Mexicanos (PEMEX) Sr unsecd debt BBB United Mexican States Sr unsecd debt Local currency A Sr unsecd debt BBB Banco Nacional de Comercio Exterior, S.N.C. (Bancomext) Sr unsecd debt NR Business Profile Above average Financial Policy Aggressive Maturity Schedule* (Mil. $ as of Dec. 31, 2002) Less than 1 year years 17, years 6,563 After 5 years 9,441 Total 39,887 *Considers all of PEMEX's contractual commitments. Collateralization Not significant. Nevertheless, under Mexican law, it is not possible to repossess PEMEX's assets. Bank Lines/Liquid Assets

2 Major Rating Factors Strengths: Extensive reserve base Constitutionally protected monopoly Low finding & development costs Adequate beforetax key financial measures Weaknesses: Around $1.2 billion available under committed credit facilities. Corporate credit rating history: Local Currency Commodity price volatility Heavy tax load Government influence in corporate decisionmaking Significant pension and health services liabilities Weak aftertax key financial measures Foreign Currency Feb. 7, 2002 A BBB July 17, 2000 BBB+ BB+ Mar. 13, 2000 BB+ Rationale On Oct. 14, 2003, Standard & Poor's Ratings Services affirmed its 'BBB' foreign currency corporate credit ratings on PEMEX and the PEMEX Project Funding Master Trust, and its 'A' local currency corporate credit rating on PEMEX. The ratings outlook remains stable. The ratings affirmation follows Standard & Poor's announcement that it has assigned its 'mxaaa' corporate credit rating under its Mexican national scale, the CaVal scale, to PEMEX. The ratings on PEMEX, the stateowned Mexican oil and gas company, and on the United Mexican States are equalized because of the government's ownership of the company, PEMEX's importance to the Mexican economy, the government's heavy dependence on oilrelated revenue, and the considerable government oversight of the company, particularly with respect to all fiscal aspects of management. In 2001, oil revenue accounted for about 33.5% of Mexico's publicsector revenue through taxes and dividends, and petroleum and derivatives accounted for about 13% of total adjusted exports (net of maquila imports), compared to 16% in Although PEMEX's debt is not guaranteed by the Mexican Government, Standard & Poor's anticipates that PEMEX's debt would receive "pari passu" treatment, as it has in previous restructurings of its external debt. PEMEX enjoys an aboveaverage business position, with commodity price volatility and government interference representing the primary risks to its business. This position is supported by the company's extensive proved developed and undeveloped reserve base of about 20.1 billion barrels of oil equivalent (boe; if determined in accordance with Rule 410(a) of Regulation SX of the Securities Act of 1933, which is the reporting standard of the U.S. SEC) and its constitutionally protected monopoly status in most aspects of the large Mexican oil and gas market, including exploration, production, refining, marketing, and certain petrochemicals. The ratings assigned to PEMEX also consider the company's heavy tax burden, weak aftertax key financial measures for its rating category, the important increase in its debt during past years, and its significant pension liabilities. Despite the strong volatility in oil prices, PEMEX is expected to maintain pretax financial indicators that are adequate for the rating. In 2002, the company posted EBITDA interest coverage and total debttoebitda ratios of 10.9x and 1.2x, respectively. PEMEX's strong EBITDA generation reflects its extensive proved reserves, low finding and development costs ($4.9 per boe), low production costs ($3.34 per boe), and proximity to the U.S. market. As such, the company's upstream operations are profitable under most pricing scenarios, although a high percentage of heavy crude oil in the company's production mix can exacerbate margin compression during periods of depressed pricing.

3 Nevertheless, because hydrocarbon extraction duties and other special taxes levied on PEMEX account for about 60% of revenues, financial performance after taxes is weak for the rating category as evidenced by the FFOtototal debt ratio of 25% posted in Between 1996 and 2002, PEMEX's total debt (including offbalancesheet liabilities) has increased to about $39 billion from $16 billion to finance its investments. In addition, the company faces pension liabilities that totaled $21 billion as of Dec. 31, Liquidity. PEMEX's liquidity is adequate. The company's strong EBITDA generation (about $20 billion in 2002) and its ample access to the domestic and international capital markets support its liquidity. The company has approximately $1.2 billion available under committed credit facilities. PEMEX faces contractual and commercial obligations that total about $ billion during the next three years, and its capital expenditure program for 2003 totals about $12.1 billion (including PIDIREGAS). Nevertheless, if necessary, the company's high proved developed reserve life of about 10 years provides the flexibility to briefly defer investment in exploration during periods of depressed pricing without an immediate impact on production rates. Outlook The stable outlook for PEMEX reflects that of the United Mexican States. Although some modifications to the company's tax regime are possible, Standard & Poor's does not expect a significant change in PEMEX's relationship with the government or any material reduction in the government's heavy involvement in the sector and in the company. Business Description PEMEX was established by a decree of the Mexican Congress passed on June 7, 1938, because of the nationalization of the foreignowned oil companies then operating in the United Mexican States. Petróleos Mexicanos, PEMEX Exploración y Producción, PEMEXRefinación, PEMEXGas y Petroquímica Básica, and PEMEXPetroquímica together comprise Mexico's state oil and gas company. Each is a decentralized public entity of Mexico's federal government and is a legal entity empowered to own property and carry on business in its own name. Under Mexican law, PEMEX is entrusted with the central planning and strategic management of Mexico's petroleum industry and is granted the exclusive authority to conduct all facets of exploration and production of hydrocarbons, as well as production and distribution of energy products, including petroleum products and basic petrochemicals. Following the amendment of the Regulatory Law in 1995, private sector companies have been permitted to participate in the storage, distribution, and transportation of natural gas, although exploration, production, and firsthand sales of this hydrocarbon remain the exclusive right of PEMEX. The company's senior management is largely governmentappointed. The president of Mexico directly appoints PEMEX's general director and six of the 11 members of the board of directors, including the chairman. The five remaining members of the board are selected by the influential Petroleum Workers' Union, which represents approximately 76% of PEMEX's employees. Business Profile PEMEX is the largest company in Mexico and is one of the largest oil companies in the world, with average daily production in 2002 of about million barrels of oil per day, 4,423 million cubic feet per day of natural gas, and 418 thousand barrels per day of natural gas liquids. As such, the company plays a key strategic role in the Mexican economy in terms of hard currency generation through its substantial crude oil exports, which reached approximately $13.2 billion, as well as its position as the singlelargest taxpayer in the country, representing an average of onethird of the government's revenues in the past decade. In contrast to other governments around the world that opened their oil sectors to private participation in recent years, including those of Venezuela, Argentina, and Brazil, Mexico has remained committed to excluding private capital from many aspects of the sector, particularly the upstream business. This policy is supported by the Mexican constitution, which reserves the country's mineral wealth for the state, as well as by a political climate that would make it difficult to reverse the policy. As a result, PEMEX has been obligated to fund, and assume the full risk of, costly upstream development programs without the benefit of foreign partners' lowercost capital and technical expertise. Additionally, isolation from competition has allowed the company to operate with inefficiencies that would be unsustainable in a freely competitive market. With the exception of a few areas such as petrochemicals and natural gas transportation and distribution, Standard & Poor's currently does not anticipate significant changes to regulations in Mexico's oil sector.

4 Exploration & Production. PEMEX's extensive proved developed and undeveloped reserve base of about 20.1 billion boe (if determined in accordance with Rule 410(a) of Regulation SX of the Securities Act of 1933, which is the reporting standard of the U.S. SEC) and combined oil, gas, and liquids production places the company among the largest oil companies in the world. Crude production is heavily concentrated, with the 13 largest fields responsible for 85% of oil production. The Cantarell complex (formed by the Akal, Chac, Kuts, and Nohoc fields) accounted for 59.1% of PEMEX's total crude oil production in 2002 and holds 52% of Mexico's total developed reserves. Heavy crude oil represented nearly 68% of PEMEX's total crude oil production in During the next several years, this percentage is expected to rise as the large investments made in the development of the company's critically important Cantarell complex, which produces the heavy and sour Maya grade of crude oil, translate into increased production from this facility, while other mature fields producing light oil decline naturally. Cantarell. The Cantarell complex accounted for 59% of total crude oil production in Between 2000 and 2003, PEMEX is expected to have invested around $13.5 billion in Cantarell. In 1997, PEMEX awarded a buildownoperate contract to a consortium formed by BOC Holdings, Linde, West Coast Energy, and ICA Flour Daniel. Under the contract, PEP has committed to buy from the consortium 1.2 billion cubic feet per day of nitrogen for 15 years. The nitrogen purchased by PEP will continue to be injected into Cantarell reservoirs, which should help maintain pressure during crude extraction. The aforementioned obligation treated as debt in Standard & Poor's analysis of PEMEX's total contractual obligations. Nevertheless, new projects aimed at increasing production of light crude oil were approved by congress in Other key projects are the development of the Burgos natural gas fields in Northern Mexico, the Strategic Gas Program to develop natural gas fields in southern Mexico, and the Delta del Grijalva program to develop and optimize a group of fields in Tabasco. Investments in the aforementioned projects should total around $22 billion by yearend The company benefits from a relatively high success rate for exploration and development (E&P) wells (50% and 88%, respectively, in 2002). The increased spending on E&P is evident in the number of drilling rigs and kilometers drilled in 2002 versus 2000.

5 Industry Sector: Oil & Gas Companies Rating history (LC) A /Stable/ BBB /Stable/ (LC) A /Stable/ BBB /Stable/ Table 1 Financial Statistics (LC) BBB+/Positive/ BB+/Positive/ (LC) BBB+/Stable/ BB/Positive/ (LC) BBB+/Stable/ BB/Stable/ (LC) BBB+/Positive/ BB/Positive/ (Mil. $) 2Q03 2Q Sales 24, , , , , , ,937.3 Net income from cont. oper. Funds from operations (FFO) Capital expenditures (1,091.8) (612.2) (1,494.0) 18, , , , , , , , , , , , , , , , , ,147.1 Total debt 27, , , , , , ,993.3 Common equity Oper. income/sales EBIT interest coverage (x) EBITDA interest coverage (x) Return on capital FFO/total debt Total debt/ebitda (x) Total debt/capital 8, , , , , , , Multiple Service Contracts. The program is intended to increase investments in the Burgos Basin to develop natural gas reserves. PEMEX views MSC as public work contracts based on unit prices, in which PEP has a right to all extracted hydrocarbons and works performed. Contractors only receive cash payments based on works performed and services rendered, which is intended to reduce PEMEX's costs by consolidating a number of different services rendered into a single contract. During 2003, the company awarded three contracts to Repsol YPF, a consortium formed by Petrobras, Teikoku Oil, and Grupo Diavaz, and a consortium formed by Technit and Industrial Perforadora de Campeche. Expected investments for this contract total around $3.7 billion. Standard & Poor's is evaluating the analytical treatment of the aforementioned contracts. The bulk of PEMEX's crude production consists of heavy crudes that require extra investments by the purchaser to refine. To secure a market for its heavy crude production, PEMEX, through PMI, has entered into a number of longterm Maya crude oil supply contracts with refiners, among them Chevron, Valero, and Exxon, which total 700,000 boe per day.

6 Refining & Marketing. The domestic markets in which PEMEX has a constitutionally guaranteed monopoly represent the majority of the company's sales. With a population of approximately 100 million and energy consumption per capita of only about onefifth that in the U.S., Mexico is considered an attractive market with substantial current demand plus the potential for longterm, rapid demand growth. PEMEX Refining owns and operates six refineries, which processed 1,245 thousand bodpd in The company also participates in a limited partnership with Shell Oil Co. in a refinery located in Deer Park, Texas. The company supplies 50% of the refinery's crude oil input and is entitled to 50% of its output. The facility's capacity is 340,000 boepd. Fuel oil, automotive gasoline, and diesels represent 87% of the company's refined product production. Its largest customer is the Federal Electricity Commission (who consumed approximately 80% of the company's fuel oil production under a supply contract under which PEMEX has agreed to supply a minimum of 270,000 barrels of fuel oil per day). The contract represented 7% of the company's total revenues in 2002 and can be terminated by either party upon six months' notice. The company is also the sole supplier to a network of 5,564 retail service stations in Mexico, of which 5,555 were privately owned and operated as franchises. The refinery upgrade program initiated by PEMEX in 1995 continues today. Investments in the first five contracts totaled around $3.2 billion. The Minatitlan project will be awarded in six bidding packages, of which three were published during The focus of the program is to increase its production of unleaded gasoline and diesel to supply domestic demand. In the medium term, the company expects that it will continue to import unleaded gasoline to satisfy domestic demand. During 2002, imports of unleaded gasoline represented around 16% of total domestic demand. Gas & Basic Petrochemicals. As of November 2003, PEMEX's natural gas production during the year averaged 4,488 million cubic feet per day. Pemex Gas & Basic Petrochemicals investment budget for 2003 totaled around $4 billion. The most important consumers of natural gas in Mexico are PEMEX's subsidiary entities (44%), electric utilities (30%), and industrial consumers (26%). Driven by an increased use of natural gas by Mexico's electric utilities and industrial users, demand for natural gas is experiencing doubledigit growth despite a weak economy. PEMEX's own production, which is mostly associated with the production of crude oil, is complimented by imports, mainly in Mexico's northern region. Petrochemicals. PEMEX's petrochemicals subsidiary has suffered in recent years from increased competition, declining demand, increasing costs, and underinvestment. The company operates six petrochemical complexes and four petrochemical units with an installed capacity of 11.6 million tons per year of various petrochemical products. The business unit's major project is known as Project Phoenix. PEMEX intends to be a minority partner in this $1.8 billion venture that will generate around 1 million tons of ethylene per year, which represents potential revenues of $330 million. PEMEX expects proposals from investors during the first half of Financial Policy: Aggressive Starting Dec. 31, 2003, PEMEX indicated that it will recognize the effects of inflation in accordance to Mexican GAAP. The aforementioned should reverse the negative equity shown by PEMEX under U.S. GAAP. Standard & Poor's considers that PEMEX's willingness to meet its financial obligations is determined by the Mexican government. The United Mexican States is the sole owner of the company, and it determines PEMEX's financial policy. PEMEX's budget is incorporated in the budget of the Mexican government, which is proposed by the Ministry of Finance and Public Credit and approved by the Mexican Congress. The Mexican Congress also approves the designation of certain projects as PIDIREGAS. In addition, the Chairman of the board of directors is the Ministry of Energy of Mexico, and the President of Mexico appoints the Director General and the majority of the board of directors. Dividends to the government historically have been significant, but predictable, as they are generally limited to payments of interest and principal owed to the government under the terms of the certificates of contribution "A" (CAPs). There are occasional variances in this policy. Nearly all of PEMEX's debt is dollardenominated, and to the extent that debt is incurred in other currencies, substantially all has been hedged through the use of swaps. Because most of the company's revenue is linked to or denominated in dollars, much of the exchange rate risk is naturally hedged. PEMEX does not

7 hedge against fluctuations in the price of oil or gas. It should be noted that revenues in excess of the price that has been set in the federal budget, $20.00 per boe for 2003 for the Mexican basket, are effectively appropriated by the government through the tax on excess revenues, but the impact of lower revenues is shouldered mostly by PEMEX. Financial Profile In Standard & Poor's opinion, PEMEX has the capacity to serve its debt. Despite the strong volatility in oil prices, the company is expected to maintain, before taxes, financial indicators that are adequate for the rating. In 2002, the company posted EBITDA interest coverage and total debttoebitda ratios of 10.9x and 1.2x, respectively. Considering the company's total contractual obligations and commercial commitments, in 2002, PEMEX posted a total debttoebitda ratio of 2.1x, which is still adequate. Nevertheless, the company's performance after taxes is weak for the rating category, as evidenced by the FFOtototal debt ratio of 25% posted in Considering the company's total contractual and commercial commitments, the FFOtototal debt ratio deteriorates to around 15%. PIDIREGAS PIDIREGAS is a financing scheme that treats certain longterm infrastructure projects as offbalancesheet items for budgetary purposes by the Mexican government. The designation of a project as a PIDIREGAS project is important given that its financing is immune from acrosstheboard budget cuts by the Mexican government. In 2003, 74% of PEMEX's $14 billion CAPEX program was designated as PIDIREGAS. While PIDIREGAS commitments are considered offbalancesheet items by the Mexican government, the corresponding expenditures and liabilities are include by PEMEX in its financial statements. Commitments under PIDIREGAS projects totaled $5.3 billion as of Dec. 31, Total Debt From 1997 through 2001, PEMEX invested heavily in longterm projects. As a result, there has been a substantial increase in the company's total debt. During the next few years, depending on how much of its internally generated funds PEMEX is allowed to retain, capital expenditures may substantially outstrip operating cash flow, requiring the company to continue to increase its debt burden. Alternative sources of financing have been used extensively by PEMEX during the past few years, such as the PEMEX Finance Ltd. program and offbalancesheet project financing for the refinery upgrades. The company's total contractual and other commercial obligations are listed in Table 2. Table 2 PEMEX Contractual Obligations and Other Commercial Commitments (Bil. $) Longterm debt Capital lease obligations 0.28 Notes payable to contractors 1.33 Sales of future accounts receivable 4.21 Minimum guaranteed dividends 3.50 Reposol equity swaps 0.29 PIDIREGAS commitments 5.38 Nitrogen supply contract 2.15 Total Source: PEMEX's Form 20F for the fiscal year ended Dec. 31, Pemex Project Funding Master Trust Pemex Project Funding Master Trust is a Delaware trust established by PEMEX, the state oil company of Mexico, with PEMEX as the sole beneficiary. All debt issued by the Pemex Master Trust benefits from the irrevocable and unconditional guarantee of PEMEX and its subsidiary entities, including Pemex Exploración y Producción, PemexRefinación, and PemexGas y Petroquímica Básica. CAPs PEMEX seldom pays extraordinary dividends to the federal government; however, it makes a regular dividend payment related to the CAPs. The CAPs arose as part of the Mexican Brady Plan in which $7.58 billion of PEMEX's external commercial bank debt was taken over by the federal government and consolidated with the government's debt to be restructured within that plan. Subsequently, the debt the

8 government assumed on behalf of PEMEX was capitalized in the form of the CAPs, and PEMEX agreed to pay a "minimum guaranteed dividend" to the government that was equal to the scheduled debt service on the capitalized debt. Although payments have generally been limited to the minimum guaranteed dividend, most of PEMEX's net income after taxes and duties between 1991 and 1997the company reported losses in 1998, 1999, and 2000was paid as dividends on the CAPs. In December 1997, PEMEX and the government agreed to a reduction of the CAPs in exchange for a cash payment to the government of $1.5 billion. The Mexican government agreed to a reduction in the minimum guaranteed dividend from PEMEX in 1998, 2001, and certain future years. From 2000 to 2006, PEMEX is scheduled to make a total of $4.619 billion in advance payments to the government pertaining to the principal amount of the CAPs and will pay minimum guaranteed dividends on the CAPs at the rate of three months' LIBOR plus 13/16% on the outstanding balance. The CAPs reflected in PEMEX's equity represent a fixed obligation of the company to the government of Mexico, regardless of PEMEX's financial performance in any given year. The "minimum guaranteed dividend" paid under this obligation is equal to the debt service (interest plus principal) on the capitalized debt, denominated in currencies other than pesos, that the government assumed in 1990 on behalf of PEMEX under the country's Brady Plan debt restructuring. Pemex Finance Ltd. Pemex Finance Ltd. is a limited liability company established to issue up to $7 billion in senior unsecured debt. The proceeds of such debt have been used to purchase current and future receivables generated from the sale of Maya crude oil produced and exported by PEMEX. Obligations of Pemex Finance, which are not guaranteed by PEMEX, are supported by the collection of these receivables. (See related research on Pemex Finance Ltd.) ThirdParty Project Financing PEMEX is in the process of upgrading each of its six refineries. To date, contracts for the work on four of the six upgrades have been awarded to three different consortia. Under the terms of these contracts, each consortium is responsible for securing financing for their respective projects. Upon completion and delivery of the projects, PEMEX becomes directly responsible for the outstanding obligations of the consortia. (See related research on Pemopro S.A. de C.V. and Conproca S.A. de C.V.) Equity Swaps PEMEX holds a 5% stake in RepsolYPF S.A. In 2000, the company entered into several swaps with J.P. Morgan and Chase Manhattan International for which it received $759 million. In 2004, the company announced a $1.4 billion 10year convertible bond backed by its Repsol shares. Nitrogen Supply Obligations The nitrogen supply obligations are related to the nitrogen supply contract for the Cantarell field.

9 Rating (Mil. $) Petróleos Mexicanos (Mexico) (LC) A /Stable/ BBB /Stable/ Amerada Hess Corp. BBB/Negative/A 2 Table 3 Peer Comparison Average of past three fiscal years ChevronTexaco Capital Co. ConocoPhillips AA/Stable/A1+ Exxon Mobil Corp. A/Stable/A2 AAA/Stable/A 1+ Marathon Oil Co. BBB+/Stable/ Murphy Oil Corp. A /Stable/ Shell Oil Co. AAA/Stable/A 1+ Sales 44, , , , , , , ,890.3 Net income from cont. oper. Funds from operations (FFO) Capital expenditures 10, , , , , , , , , , , , , , , , , , Net debt 24, , , , , , ,456.0 Adj. shareholders' equity Oper. income/sales EBIT interest coverage (x) EBITDA interest coverage (x) Return on avg. net adj. capital FFO/net debt Net debt/ebitda (x) Net debt/capital 11, , , , , , , This report was reproduced from Standard & Poor's RatingsDirect, the premier source of realtime, Webbased credit ratings and research from an organization that has been a leader in objective credit analysis for more than 140 years. To preview this dynamic online product, visit our RatingsDirect Web site at Published by Standard & Poor's, a Division of The McGrawHill Companies, Inc. Executive offices: 1221 Avenue of the Americas, New York, NY Editorial offices: 55 Water Street, New York, NY Subscriber services: (1) Copyright 2004 by The McGrawHill Companies, Inc. Reproduction in whole or in part prohibited except by permission. All rights reserved. Information has been obtained by Standard & Poor's from sources believed to be reliable. However, because of the possibility of human or mechanical error by our sources, Standard & Poor's or others, Standard & Poor's does not guarantee the accuracy, adequacy, or completeness of any information and is not responsible for any errors or omissions or the result obtained from the use of such information. Ratings are statements of opinion, not statements of fact or recommendations to buy, hold, or sell any securities.