PEMEX Stand-Alone Credit Profile Revised To 'bb+' From 'bbb-' On Weaker Financial Metrics; Ratings Affirmed

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1 Research Update: PEMEX Stand-Alone Credit Profile Revised To 'bb+' From 'bbb-' On Weaker Financial Metrics; Ratings Affirmed Primary Credit Analyst: Marcela Duenas, Mexico City (52) ; Secondary Contact: Fabiola Ortiz, Mexico City (52) ; Table Of Contents Overview Rating Action Rationale Outlook Ratings Score Snapshot Related Criteria And Research Ratings List SEPTEMBER 10,

2 Research Update: PEMEX Stand-Alone Credit Profile Revised To 'bb+' From 'bbb-' On Weaker Financial Metrics; Overview Weak commodity prices have pressured PEMEX's cash flow and credit metrics more than expected. We are revising our assessment of the company's financial risk profile to "aggressive" from "significant". We have revised the anchor to 'bb' from 'bbb-', the comparable rating analysis to "positive" from "neutral", and, the SACP to 'bb+' from 'bbb-' We expect that PEMEX will continue to maintain a critical role and its integral link with the Mexican government. We are affirming our 'BBB+' foreign currency and 'A' local currency global scale and 'mxaaa/mxa-1+' national scale corporate credit and debt ratings on PEMEX. We are also affirming our 'BBB+' foreign currency and 'A' local currency global scale ratings on its subsidiaries. The stable outlook mirrors that on the sovereign. Rating Action On Sept. 10, 2015 Standard & Poor's Ratings Services affirmed its 'BBB+' foreign currency and 'A' local currency global scale and 'mxaaa/mxa-1+' national scale corporate credit and debt ratings on Petroleos Mexicanos (PEMEX). In addition, we affirmed our 'BBB+' foreign currency and 'A' local currency global scale corporate credit ratings on its subsidiaries, P.M.I. Trading Ltd., PMI Norteamerica S.A. de C.V., and Mex Gas Supply, S.L. We revised our assessment of the company's financial risk profile to "aggressive" from "significant", our anchor score to 'bb' from 'bbb-', our comparable rating analysis (CRA) to "positive" from "neutral", and the stand-alone credit profile (SACP) to 'bb+' from 'bbb-'. Rationale We base our revision of the financial risk profile on the weakness of the company's financial metrics during the current oil price volatility environment. It also reflects our expectation that adjusted debt to EBITDA will be in the 3.0x to 3.5x area over the next couple of years and that funds from operations (FFO) to debt will be in the 10% to 15% area. We also revised our comparable rating analysis to positive from neutral based SEPTEMBER 10,

3 on our view that company's debt to EBITDA ratio compares favorably with its international peers' and our view of PEMEX's leading position in the country's oil and gas sector. The ratings on PEMEX reflect our opinion that there is an "almost certain" likelihood that the Mexican government would provide timely and sufficient extraordinary support to PEMEX in the event of financial distress. The rating on PEMEX will continue to mirror that of the sovereign, assuming no changes in our current assessment of the company's role and link with the Mexican government. Our expectation of an "almost certain" likelihood of extraordinary government support is based on the following: PEMEX's "critical" role as the leading oil exploration and production (E&P) company operating in Mexico--it provides about 30% of Mexico's public-sector revenues through taxes and duties; and Its "integral" link with the government, given its full ownership of the company. The ratings on PMI Trading, PMI NASA, and Mex Gas Supply, S.L. mirror those on PEMEX, given that we view them as core subsidiaries and that they would benefit indirectly from the Mexican government's potential extraordinary support to PEMEX. PEMEX's SACP incorporates the company's leading position in Mexico's large national oil and gas market, its competitive full-cycle cost profile, its extensive oil and gas reserve base, and its important role in Mexico's energy sector. It also incorporates the company's weak after-tax financial performance, aggressive capital expenditures (capex) program, and our expectation that the company will post total adjusted debt to EBITDA in the 3.0x to 3.5x area in the next two years. PEMEX's total average crude oil production from Jan. 1, 2015 to June 30, 2015 was 2,262 million barrels per day (Mbd), a 8.8% drop from the same period in The decline in production was mainly due to a decrease in extra-light, light, and heavy crude oil as a result of a natural decline of the fields, an increase in the fractional water flow of wells, and the incident in its Abkatun processing platform, where an explosion occurred, affecting 238,000 barrels of oil production. We believe that the tangible effects on production from the Energy Reform will not be seen in the short term, given the current low oil prices and the delays on farm-out approval process. The company's after-tax financial performance reflects the weight of its large unfunded pension obligations and a substantial share of revenues that the government takes. Although the government announced a potential assumption of a portion of PEMEX's pension liabilities, subject to the certain conditions, the company's finances would continue to be in line with our current financial risk profile assessment. Also, we continue to expect that taxes will remain a SEPTEMBER 10,

4 significant burden on the company's finances. Our credit metrics take into consideration the company's pension liabilities as debt. Therefore, our imputed adjustments significantly affect our assessment of the company's debt, interest expenses, EBITDA, and funds from operations(ffo). This yields an increase in our calculation of company's debt and EBITDA generation well above what the company reported on its audited financial statements as of December These figures can significantly change if the applicable discount rate changes over time based on actuarial independent valuations, as occurred in the last three years, when the discount rate on plan asset was 6.98%, 8.45% and 6.90% in 2012, 2013 and 2014, respectively. However, due to the company's low production cost--at about $20 per barrel compared with our oil price deck at $50 per barrel, investment in the exploration and production (E&P) segment remained profitable for most of PEMEX's fields. Our base-case scenario for 2015 and 2016 assumes: A crude oil production decline of 6% and 3% in 2015 and 2016, respectively given the natural decline of fields and the impact on production related to the Abkatun field. We are not considering any increase in production as a result of farm-outs. A Standard & Poor's oil price (WTI) assumption of $50 per barrel for 2015, and $60 for We expect a decrease in revenues of 29% for 2015 following our assessment that oil prices will remain pressured due to an oversupply in the market. And 0.3% for 2016, given the slight recover in oil prices. Capex at around $15.5 billion per year (excluding maintenance capex) primarily related to the E&P segment. We believe that the company will continue to tap local and international financial markets. We are forecasting an exchange rate of $17 in the next two years; we believe it will not have a material effect on the company, given its natural hedge. Under these assumptions, we expect the following main credit metrics for the next two years: Reported EBITDA margins of 30% in the next two years; Total net adjusted debt to EBITDA in the 3.0x-3.5x range; Funds from operations (FFO) to debt in the 10%-15% range. FFO measures are impacted by the company's tax regime because PEMEX transfers 100% of its profits to the government in the form of taxes and duties. Liquidity We assess the company's liquidity as "adequate." We expect sources to exceed uses by 1.20x for the next months. PEMEX's liquidity SEPTEMBER 10,

5 Principal Liquidity Sources: Cash and short-term investments of $2.9 billion as of June 30, 2015; Projected FFO of about $10.2 billion during the next 12 months; Working capital inflows of about $3.5 billion during the next 12 months; and About $3.1 billion available under PEMEX's committed credit lines. Principal Liquidity Uses: About $7.1 billion in short-term debt maturities as of June 30, 2015; and Annual capex of about $7 billion, as we believe that the company will be able to adjust its capex as required. Our liquidity analysis also incorporates qualitative factors, including our view that the company has the capacity to withstand high-impact, low-probability events based on its sound banking relationships and strong access to capital markets, as seen in the company's very frequent debt issuances, mitigating the negative sources minus uses (A-B). Outlook The stable outlook on PEMEX and its subsidiaries mirrors the sovereign outlook. Given our assessment of the "almost certain" likelihood of government support, the ratings on PEMEX and its subsidiaries would continue to follow those on the sovereign. Downside scenario A downgrade could occur if we change our current assessment on company's government support, and/or a downgrade on the sovereign ratings. Upside scenario An upgrade would depend on a sovereign upgrade, despite improvements in the company's SACP, because the sovereign rating limits the rating on PEMEX. Ratings Score Snapshot Corporate Credit Rating Global Scale Local currency: A/Stable/-- Foreign currency: BBB+/Stable/-- Business risk: Satisfactory Country risk: Moderately High Industry risk: Intermediate Competitive position: Satisfactory SEPTEMBER 10,

6 Financial risk: Aggressive Cash flow/leverage: Aggressive Anchor: bb Modifiers Diversification/Portfolio effect: Neutral (no impact) Capital structure: Neutral (no impact) Liquidity: Adequate (no impact) Financial policy: Neutral (no impact) Management and governance: Strong (no impact) Comparable rating analysis: Positive(+1 notch) Stand-alone credit profile: bb+ Likelihood of government support: Almost certain Related Criteria And Research Related Criteria Rating Government-Related Entities: Methodology And Assumptions, March 25, 2015 Methodology And Assumptions: Liquidity Descriptors For Global Corporate Issuers, Dec. 16, 2014 General Criteria: National And Regional Scale Credit Ratings, Sept. 22, 2014 General Criteria: Standard & Poor's National And Regional Scale Mapping Tables, Sept. 30, 2014, Nov. 19, 2013 General Criteria: Group Rating Methodology, Nov. 19, 2013 General Criteria: Methodology For Crude Oil And Natural Gas Price Assumptions For Corporates And Sovereigns, Nov. 19, 2013 General Criteria: Methodology: Industry Risk, Nov. 19, 2013 Key Credit Factors For The Oil And Gas Exploration And Production Industry, Dec. 12, 2013 Corporate Methodology: Ratios And Adjustments, Nov. 19, 2013 Corporate Methodology, Nov. 19, 2013 General Criteria: Methodology: Management And Governance Credit Factors For Corporate Entities And Insurers, Nov. 13, 2012 Stand-Alone Credit Profiles: One Component Of A Rating, Oct. 1, 2010 Ratings List Petroleos Mexicanos Corporate Credit Rating Foreign Currency Local Currency BBB+/Stable/-- A/Stable/-- SEPTEMBER 10,

7 CaVal (Mexico) National Scale MEX GAS SUPPLY S.L. P.M.I. Trading Ltd. PMI Norteamerica S.A. de C.V. Corporate Credit Rating Foreign Currency Local Currency Petroleos Mexicanos Senior Unsecured Global Scale Local Currency Foreign Currency CaVal (Mexico) National Scale Short-Term Debt CaVal (Mexico) National Scale mxaaa/stable/mxa-1+ BBB+/Stable/-- A/Stable/-- A BBB+ mxaaa mxa-1+ Complete ratings information is available to subscribers of RatingsDirect at and at All ratings affected by this rating action can be found on Standard & Poor's public Web site at Use the Ratings search box located in the left column. SEPTEMBER 10,

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