CORPORATES

ISSUER IN-DEPTH
24 July 2018
Petroleos Mexicanos
New energy agenda implies short-and medium-term risks for
Mexico’s national oil company
» Mexico’s new energy agenda and its focus on fuel self-sufficiency raises
RATINGS
uncertainties about whether PEMEX can continue to take advantage of favorable
Petroleos Mexicanos
Long-Term Rating Baa3
oil prices and solid investment appetite from foreign companies. The energy agenda
Type LT Issuer Rating - Fgn of the incoming Lopez Obrador administration poses three particular risks for Mexico’s
Curr national oil company: controlling fuel prices, requiring capital spending on building or
Outlook Stable
upgrading refineries, and delaying oil and gas auctions.
Source: Moody's Investors Service » The construction of new refineries represents the greatest financial risk to PEMEX
KEY METRICS:
if the national oil company is responsible for their construction and ownership.
Petroleos Mexicanos The incoming government seeks to end Mexico’s reliance on imported fuel, but PEMEX
3/31/2018 today does not have the resources to build one or two new refineries, or to upgrade its
12/31/2016 12/31/2017 (L)
existing facilities significantly. If the refinery plans take effect, which is not at all certain
Avg. Daily 2,950 2,662 2,547
Production today, it would weaken PEMEX’s credit metrics if it financed such an investment with
(Mboe/d) debt, while also diverting funding the company badly needs to spend to help increase oil
Proved 8,383 7,525 7,525
Reserves and gas production.
(Mmboe)
Ref EBIT/ -10.3 -13.3 -6.3 » Government adjustments to fuel prices pose another risk to PEMEX’s finances.
throughput Crude prices increased by about 50% during the 12 months through July 2018, while the
($/bbl)
Debt/Total 163.7% 185.7% 176.8%
weak peso has made fuel production even more expensive for PEMEX, which buys crude
Capital in US dollars, whether imported or produced in Mexico. The new administration could
continue to adjust taxes to help keep fuel prices relatively stable, but keeping fuel prices
Source: Moody's Investors Service
below production costs, or a delay or halt to government fuel subsidies, would imply
further credit risks for PEMEX.

Analyst Contacts » It is unclear whether PEMEX will continue forming associations with other oil
companies for much-needed capital or technology. The incoming administration
Nymia Almeida +52.55.1253.5707
Senior Vice President has said it plans to review all contracts that foreign companies have signed since
nymia.almeida@moodys.com 2015 to explore and produce oil and natural gas in Mexico, and while cancellations
Marianna Waltz, CFA +55.11.3043.7309 appear unlikely, the review process could stifle PEMEX’s production and profitability by
MD-Corporate Finance postponing new oil auctions indefinitely. Meanwhile, PEMEX has a heavy upcoming debt-
marianna.waltz@moodys.com maturity burden, with about $14 billion in cash and fully-available committed credit
facilities to address some $19 billion in debt coming due during 2018-20. Any change
in the federal government’s ability and willingness to support PEMEX financially if ever
necessary would heighten PEMEX’s intrinsic credit risk.
 MOODY'S INVESTORS SERVICE CORPORATES

Emphasis on fuel self-sufficiency implies credit risks for national oil company
Mexico’s (A3 stable) new energy agenda, which focuses on fuel self-sufficiency, raises uncertainties about whether Petroleos Mexicanos
(PEMEX, Baa3/Aa3.mx stable) can continue to take advantage of favorable oil prices and solid investment appetite from foreign
companies. The energy agenda of the incoming Lopez Obrador administration poses three particular risks for Mexico’s national oil
company: controlling fuel prices, requiring capital spending on building or upgrading refineries, and delaying oil and gas auctions.

PEMEX’s operations and credit quality have slowly improved since 2016, after making significant adjustments to its operating expenses
and capital spending. The company began making associations with private oil and gas companies since 2016, after Mexico’s energy
sector opened to foreign investment for the first time since the 1930s. Market prices for fuels have improved since early 2017, helping
increase PEMEX’s operating profit, reduce its tax burden, and diminish the rate of its debt increases (see Exhibit 1).

Exhibit 1
PEMEX’s profit picks up with higher oil prices and savings, while rate of debt increases diminishes
Operating profit Capital investments Taxes New debt (net)
$60.0

$50.0

$40.0
$ (billions)

$30.0

$20.0

$10.0

$0.0

-$10.0
2014 2015 2016 2017 2018E 2019E

Note: All figures and ratios are calculated using Moody’s estimates and standard adjustments. Forecasts are Moody’s opinion and do not represent the view of the issuer.
Source: Moody’s Financial Metrics™; Moody’s Investors Service (estimates)

But the new administration of President-elect Andres Manuel Lopez Obrador, who takes office in December 2018, is proposing changes
to Mexico’s energy policy. After the July 1 presidential election, the incoming president’s future finance ministry has announced that
fuel prices would increase at inflation rate, and the future energy ministry has signaled that fuel prices would decline within three years.
The new administration also says Mexico will build one big refinery, or two smaller ones, and PEMEX would upgrade or reconfigure its
six existing refineries, increasing fuel production to reach 100% of domestic demand within three years.

Refinery proposals imply biggest capital burden for PEMEX

The construction of new refineries represents the greatest financial risk to PEMEX, assuming that the national oil company would
be responsible for their construction and ownership. Apparently, the new administration plans to build either two refineries with a
production capacity of 300,000 barrels/day each, or one refinery twice this size for a total of $6 billion. However, cost overruns are
common in the refining industry and new refineries can end up costing multiples of what was initially planned. In Latin America, Brazil
was the most recent country to build a new refinery, RNEST, completed in 2014 with a capacity of 115,000 barrels/day at a total cost
many times the first estimate. The construction took eight years, and Petrobras (Ba2 stable) had originally expected the project to have
a refining capacity of 240,000 barrels/day. In turn, in late 2015 Ecopetrol (Baa3 stable) completed the upgrade and modernization of
its REFICAR refinery for twice the cost and time originally expected.

Total global refining capacity increased by more than 10% during 2007-17 to 98.1 million barrels/day, largely because of growth in the
Middle East and China. Refining capacity in the Middle East is growing mainly to sell fuel to Europe, which has reduced its own refining
capacity by 10% during that period, while China has been building new refineries because its current capacity is insufficient to cope
with its double-digit annual demand growth. In the Americas, the US increased its refining capacity by 5.5% to 18.6 million barrels/day
during 2007-17, but has not built any new refineries since 1973. Ecuador has been trying to build a new 300,000 barrel/day refinery

This publication does not announce a credit rating action. For any credit ratings referenced in this publication, please see the ratings tab on the issuer/entity page on
www.moodys.com for the most updated credit rating action information and rating history.

2 24 July 2018 Petroleos Mexicanos: New energy agenda implies short-and medium-term risks for Mexico’s national oil company
 MOODY'S INVESTORS SERVICE CORPORATES

since 2008, but has lacked sufficient access to funding or investor interest to do so. Peru has expanded its refining capacity by 13% in
the period to 253,000 barrels/day, but has done so without building new refineries.

Since 2016, higher oil prices and spending controls have helped reduce PEMEX’s debt/EBITDA and raise its retained cash flow/debt,
ratios that would remain steady in the next couple of years amid current energy policies (see Exhibit 2). But PEMEX today does
not have the cash or free cash flow to take on the construction of new refineries, and if the company decided to finance such an
investment with debt or shift capital from exploration and production (E&P) to refining, its credit metrics would weaken.

Exhibit 2
PEMEX’s leverage and cash flow have improved due to spending controls and better crude prices
Debt/EBITDA RCF/net debt
25.0x 4.0%

3% 3.5%

20.0x 3.0%
2.5%
2.0%
Debt/EBITDA

15.0x

RCF/debt
1.5%
1.0%
10.0x
0.5%
0.0%
6.3x
5.0x -0.5%
-1.0%
0.0x -1.5%
2014 2015 2016 2017 2018E 2019E

Note: All figures and ratios are calculated using Moody’s estimates and standard adjustments. Forecasts are Moody’s opinion and do not represent the view of the issuer.
Source: Moody’s Financial Metrics™; Moody’s Investors Service (estimates)

PEMEX is the largest borrower of all rated oil companies in the world. The company had more than $106 billion in reported debt as of
March 2018, and with pension liabilities of nearly $64 billion, among other adjustments, its adjusted debt/EBITDA was high at over 6x.
Even if Brent prices persist at their July 2018 levels of around $75/barrel, and PEMEX’s cash generation increases from crude exports,
the company is still under pressure to raise capital spending on E&P, because oil and natural gas production has been decreasing since
2004. The company’s returns on investment have improved with higher oil prices, but its returns still remain below breakeven levels
(see Exhibit 3).

Exhibit 3
PEMEX’s oil and gas production has dropped and its all-in production costs remain above breakeven levels
Annual production LFCR
1,400 3.00x
2.65x
2.50x
1,200
1,253
barrels of oil equivalent (millions)

1,159 2.00x

Leveraged full-cycle ratio

1,000 1,080
1.50x
971 954 954
800 1.00x
0.86x 0.86x 0.50x
600
-0.20x 0.00x
400 -0.33x
-0.50x
-0.91x
200
-1.00x

- -1.50x
2014 2015 2016 2017 2018E 2019E

Note: Leveraged full-cycle ratio (LFCR) is defined as the ratio of cash a company generates in excess of its cost of replacing reserves. A 1.0x ratio indicates breakeven E&P cost; a ratio below
1.0x indicates production at a loss.
Source: Moody’s Financial Metrics™; Moody’s Investors Service (estimates)

Environmental and community opposition sometimes halt or significantly delay projects related to hydrocarbon projects or other
extractive industries. However, if any refinery plans refinery plans related to refining of crude go forward, the new government
administration could seek to join forces with the private sector to fund construction of new refineries or upgrading existing ones,

3 24 July 2018 Petroleos Mexicanos: New energy agenda implies short-and medium-term risks for Mexico’s national oil company
 MOODY'S INVESTORS SERVICE CORPORATES

although such projects would likely draw only limited interest from investors or other oil companies. Global fuel supply today already
exceeds demand, and preferences for renewable energy sources continue to rise on a long-term basis, while PEMEX’s margins for the
fuel segment remain negative (see Exhibit 4).

Exhibit 4
PEMEX likely to keep profiting from E&P activity, with refining losses likely to continue
E&P operating profit Refining operating profit
$60.0 $54.9

$50.0

$40.0
$26.9
$30.0
USD billions

$20.0 $14.8 $14.8

$10.3
$10.0

$0.0 -$5.9

-$10.0 -$4.3 -$3.5 -$3.7 -$3.5 -$3.5

-$7.5
-$20.0
2014 2015 2016 2017 2018E 2019E

Note: All figures and ratios are calculated using Moody’s estimates and standard adjustments. Forecasts are Moody’s opinion and do not represent the view of the issuer.
Source: Moody’s Financial Metrics™; Moody’s Investors Service (estimates)

In terms of reconfiguring existing refineries, which could take around four years, the new government has not yet specified its target
capacity utilization rate for PEMEX, nor how much capital would be necessary to reach that target. In the first quarter of 2018, PEMEX’s
refineries operated at just 37% capacity (see Exhibit 5) and produced only 27% of local demand of gasoline and diesel. If PEMEX
managed to reach an 85%-90% refining capacity utilization rate, and increased the share of gasoline and diesel of total petroleum
products to at least 70% from 50% today, we estimate that its fuel production would cover 90% of Mexico’s gasoline and diesel
demand.

Exhibit 5
PEMEX’s output of petroleum products has dropped in recent years
Distillation capacity Demand Production Utilization rate
1,800 66% 70%
58% 60%
1,600
1,640 1,627 1,627 60%
1,602 1,602 1,582
1,400 1,510
Barrels per day (thousands)

1,427 1,446 1,408 50%

1,200

Utilization rate
48% 37%
1,000 1,114 40%
977 959
800 30%
786
600
603 20%
400
10%
200

- 0%
2015 2016 2017 Q1 2017 Q1 2018

Source: PEMEX financial statements

Low oil prices, operating inefficiencies—especially in the refining business—and a high tax burden, at about 70% of EBITDA, all limit
PEMEX’s investment capacity. The company’s capital spending has been declining since 2015 (see Exhibit 6), although its investment
in E&P has remained consistent at about 75% of its total capital outlay. PEMEX’s limited capital available for investment means that a
reduction in spending on E&P to allow for higher spending in refining would risk weakening its crude production.

4 24 July 2018 Petroleos Mexicanos: New energy agenda implies short-and medium-term risks for Mexico’s national oil company
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Exhibit 6
Capital spending in E&P ticks higher but oil and gas production remains below pre-2015 levels
Annual production Capital spending
1,400 $13.1 $14.0
$11.7
1,200 $12.0
1,253
Barrels of oil equiivalent (millions)

1,159
1,000 1,080 $10.0
971 954 954

USD billions
800 $8.0
$5.8 $5.8
600 $6.0
$3.8 $3.6
400 $4.0

200 $2.0

- $0.0
2014 2015 2016 2017 2018E 2019E

Source: Moody’s Financial Metrics™; Moody’s Investors Service (estimates)

In addition, if PEMEX built one or two new refineries to add 600,000 barrels/day to its existing 1,627,000 barrels/day refining capacity,
it would have to direct another 525,000 barrels/day of crude to its refining system to produce petroleum products at the increased
capacity level, assuming an 85-90% utilization rate for the added capacity, which is ideal from a profitability perspective. PEMEX
directed 652,000 barrels/day crude towards refined products in the first quarter of 2018, so a capacity increase of this magnitude
would effectively reduce its export volumes by about half, to below 640,000 barrels/day.

In another scenario, PEMEX could add new refining capacity while also reconfiguring or upgrading existing capacity to increase
throughput. Assuming a refining utilization rate of 85%-90% and stable crude production, PEMEX would then become a net buyer
of crude (see Exhibit 7) and a net exporter of fuel. Because PEMEX generates operating losses by selling fuel, Mexico becoming fully
self-sufficient in fuel would weaken the company’s credit metrics. If PEMEX were to triple its refining throughput, its annual operating
profit from E&P and refining would drop to about $3.7 billion from about $11.1 billion today, assuming no change in revenue from E&P,
since its sales are based on international prices. Today, PEMEX refineries’ crude input is 70% light crude and 30% heavy oil. The actual
crude import/export balance will depend on Mexico’s oil production balance, which in 2018 has been about 57% heavy, up from 50%
in 2015, as well as on PEMEX’s future refining system’s configuration and crude input.

Exhibit 7
If PEMEX increases refining capacity and utilization rate, it would need to buy crude from third parties
Local demand (for refining) Exports/imports
2,500.0

2,000.0 Total
production Total
Barrels per day (thousands)

production Total Total 1,948.6 Total

2,266.8 Total
2,153.5 production production production
1,500.0 production
2,018.0 1,890.0 1,890.0
1,948.0

1,000.0 1,172.0 1,194.0 1,174.0 1,238.0

1,094.8 1,097.0
959.5 921.0
774.0
500.0 652.0

-58.6
(500.0)
2015 2016 2017 Q1 2017 Q1 2018 Fuel self-sufficiency scenario

Note: Negative number indicates imports.

Source: PEMEX; Moody’s Investors Service (estimates)

From a country perspective, if Mexico continues with the opening of the oil and gas industry to private and foreign investment, it could
somewhat offset lower exports of crude from PEMEX with higher exports from private companies, although it takes at least four years
before E&P investments start generating results.

5 24 July 2018 Petroleos Mexicanos: New energy agenda implies short-and medium-term risks for Mexico’s national oil company
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Changes in fuel prices pose further risk for PEMEX

The second risk in order of magnitude would be fuel prices increasing in line with inflation, or even declining within three years. Crude
prices increased by about 50% during the 12 months through June 2018, and the significant fluctuations in the Mexican peso affect the
cost of crude, which PEMEX’s refining business segment buys and accounts for in US dollars, as per accounting rules.

Taxes represent at least 30% of fuel prices at the pump today, and the new administration could continue to adjust taxes to help keep
fuel prices relatively stable. But it is uncertain how controlled fuel prices, which could fall below production costs, would affect PEMEX.
In the past, PEMEX was able to pay taxes to the government net of fuel subsidies, but extended delays in any government efforts to
compensate the company for losses would heighten PEMEX’s working capital burden, and probably its total debt load as well.

New energy agenda could weigh on foreign partnerships

PEMEX’s ability to continue to enter into associations with other oil companies that can provide much-needed capital or technology to
increase production in mature fields or develop deepwater fields implies a third risk.

As a candidate, President-elect Lopez Obrador has said he intends to review all contracts that foreign companies have signed since
2015 to explore and produce oil and natural gas in Mexico’s onshore and offshore oil fields, whether in partnership with PEMEX or
not, in order to ensure that there had been no wrongdoing in the contracts. Because the contracts are public and the supporting
auctions have been transparent, it appears unlikely that the new administration would find anything that would justify canceling the
agreements. Even so, the review process could postpone any new oil auctions indefinitely, stifling PEMEX’s production, profitability and
already weak credit metrics.

Meanwhile, PEMEX has a heavy upcoming debt maturity burden. As of March 2018, PEMEX faced $10.6 billion in total debt due in
2018-19, an amount the company could still cover with $14 billion in cash on hand and a revolving credit facility. However, between
March 2018 and late 2020, close to 20% of the company’s existing debt is set to mature, equivalent to $19 billion (see Exhibit 8).

Exhibit 8
PEMEX maturities remain high, expanding again especially after 2020
As of March 31, 2018
Cash Short-term investments Debt maturities
$16.0
$14.1
$14.0

$12.0

$10.0 $8.0
$ (billions)

$8.0

$6.0
$10.5 $10.1
$4.0 $8.3
$7.5
$6.1
$2.0
$3.1
$0.0
Cash and short-term 2018 2019 2020 2021 2022
investments

Note: Cash and short-term investments also include $8 billion in committed revolver facilities.
Source: PEMEX; Banco de Mexico (USD/MXN exchange rate)

Although PEMEX has improved its liquidity and maintained access to the capital markets in recent years, that access depends on the
company’s implicit financial support from Mexico’s government if ever necessary. It is still early to know how recent announcements
about energy policy will affect PEMEX’s credit risk, but within the next several quarters any changes in national energy priorities, and
the probability of certain proposals taking effect, will become more apparent, along with any credit implications for PEMEX’s business,
capital spending plans and funding requirements. Today Mexico’s federal government is strongly able and willing to support PEMEX
financially if ever necessary. Any change in that ability or willingness, or some other increase in PEMEX’s intrinsic credit risk, would likely
have negative implications for the national oil company’s credit rating.

6 24 July 2018 Petroleos Mexicanos: New energy agenda implies short-and medium-term risks for Mexico’s national oil company
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Appendix: Key financial metrics for PEMEX

Exhibit 9
Key financial metrics for PEMEX, 2014-18
LTM
Dec-14 Dec-15 Dec-16 Dec-17 (Mar-18)

Average daily production (boe/day, thousands) 3,432.4 3,174.0 2,950.8 2,661.6 2,647.1
Total proved reserves (boe/day, thousands) 12,101.8 9,412.0 8,383.0 7,525.8 7,525.8
Crude distillation capacity (bbl/day, thousands) 1,602.0 1,640.0 1,602.0 1,627.0 1,627.0
Downstream EBIT / total throughput barrels ($/bbl) -$17.7 -$11.0 -$10.3 -$13.3 -$6.3
EBIT / interest expense 6.5x -0.4x 1.4x 2.1x 2.4x
RCF / net debt 3% -1% -1% 3% 4%
Debt / book capitalization 142% 195% 164% 186% 177%
EBIT / average book capitalization -3% 13% 19% 21%

Note: All figures and ratios are calculated using Moody’s estimates and standard adjustments. Forecasts are Moody’s opinion and do not represent the view of the issuer.
Source: Moody’s Financial Metrics™

7 24 July 2018 Petroleos Mexicanos: New energy agenda implies short-and medium-term risks for Mexico’s national oil company
 MOODY'S INVESTORS SERVICE CORPORATES

Moody’s related publications

Rating actions

» Moody’s affirms PEMEX’s Aa3.mx/Baa3 national and global scale ratings; changes outlook to stable, April 12, 2018

Credit opinion

» Petroleos Mexicanos: Update following rating stabilization, April 13, 2018

Sector comment

» Oil and Gas - Global: Positive trend in rating actions continues in 2018 as industry recovers, July 6, 2018

» Oil and Gas - Global: Oil prices up, but will remain range-bound through 2019, March 13, 2018

» Oil and Gas - Latin America: Mexico’s latest energy auction indicates strong interest from overseas companies, February 28, 2018

Sector in-depth reports

» Cross-Sector Mexico: Financial volatility, oil sector risks will likely increase following Lopez Obrador election, July 2, 2018

» Oil and Gas - Global: National oil companies adopt tighter spending strategies as oil prices recuperate, May 17, 2018

» Corporate Liquidity Mexico: Risk remains low despite international trade negotiation and election uncertainty, May 7, 2018

» Cross-Sector Mexico: Reduced NAFTA risk, successful reforms and expected policy continuity improve outlook, April 19, 2018

» Oil and Gas Industry - Global: Global oil refining faces weakening demand, tighter regulation due to carbon transition, February 20,
2018

» Sovereigns - Latin America: Contentious political climate ahead of 2018 elections increases policy uncertainty, February 1, 2018

» Oil and Gas Industry - Global: Oil industry will focus on disciplined spending and M&A opportunities in 2018, January 2, 2018

Outlooks:

» Oil and Gas Industry - Latin America: EBITDA will grow at solid pace through 2019, but capital investment still limited, May 22,
2017

» Oil & Gas, Steel & Base Metals, and Pulp & Paper - Latin America: 2018 Outlook stable as commodity prices hold steady (slides),
December 13, 2017

» Oil and Gas Industry – Global: 2018 Outlook increasingly positive as prices persist in modest range (slides), December 7, 2017

» Non-Financial Corporates - Latin America: 2018 Outlook stable overall as economic activity picks up (slides), December 5, 2017

» Integrated Oil and Gas Global: Outlook turns stable amid expectations of slower EBITDA growth in 2018, September 25, 2017

Rating methodologies:

» Government-Related Issuers, June 2018

» Global Integrated Oil & Gas Industry, October 2016

To access any of these reports, click on the entry above.Note that these references are current as of the date of publication of this
report and that more recent reports may be available. All research may not be available to all clients.

8 24 July 2018 Petroleos Mexicanos: New energy agenda implies short-and medium-term risks for Mexico’s national oil company
 MOODY'S INVESTORS SERVICE CORPORATES

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9 24 July 2018 Petroleos Mexicanos: New energy agenda implies short-and medium-term risks for Mexico’s national oil company
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10 24 July 2018 Petroleos Mexicanos: New energy agenda implies short-and medium-term risks for Mexico’s national oil company