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Moody's Considering Pemex Ratings Upgrade

A subsidiary of Moody's Investors Service Inc. is considering upgrading the rating of Mexico's state-owned petroleum company, Petroleos Mexicanos (Pemex), following the Mexican government's decision to reform its energy policies.

Meanwhile, the director of the company’s exploration and production (E&P) division resigned on Friday; a deputy was appointed to take his place.

Moody's de Mexico S.A. De C.V. said Thursday that Pemex's foreign currency and global local currency ratings could be upgraded from “Baa1.” The move follows Moody's upgrade of the Mexican government's bond rating from “Baa1” to “A3” on Wednesday.

Moody's is also considering upgrading Pemex's senior unsecured medium-term note program from “(P)Baa1,” the company’s senior unsecured regular bond/debenture from “Baa1,” and its issuer rating from “Baa1.”

"Mexico's energy reform holds out prospects for the most far-ranging changes we have seen to date, benefiting both Mexico's and Pemex's growth profiles in the medium to longer term," said Tom Coleman, Moody’s senior vice president. "We view the reform as credit positive for Pemex, but we are also going to look at our underlying assumptions about government support and default correlation with Pemex; the company's fundamental performance and importantly, results of the pending secondary legislation."

Last August, President Enrique Pena Nieto unveiled an energy reform plan to Mexico's Congress of the Union, including a proposal to open the nation's energy industry to private investment. The reforms were designed to increase oil and gas production, decrease electricity costs and boost the country's competitiveness. Congress approved the reforms in December, and they were swiftly enacted by a majority of Mexico's state legislatures (see Daily GPI, Dec. 12, 2013; Aug. 14, 2013).

Congress was given 120 days to present secondary legislation to enact the implantation framework, the analysts said. Unlike a constitutional amendment, the legislation would only require a simple majority by lawmakers to pass.

"While Pemex's ratings are likely to remain closely linked to the government's ratings, Moody's will look at whether the underlying assumptions of very high levels of implied government support and default correlation with Pemex will change as a result of the reforms," the agency said.

Moody's said it will review Pemex's underlying baseline credit assessment rating of “Ba1,” taking into consideration the company's future reserves and production growth profile, investment strategy, capital spending levels, highly leveraged capital structure and tax burden.

"Moody's will also look for the outcome of the secondary legislation, which could be debated and voted on as early as March 2014, and consider whether the energy and fiscal reforms will measurably reduce Pemex's tax burden, support increased capital spending and more internal funding in the medium-term, and attract more outside investment to the energy sector in Mexico," the agency said. "These conditions will be necessary to reduce Pemex's dependence on debt funding, improve its elevated leverage profile and promote production growth in the medium-to-longer term."

In a report released last Tuesday, Fitch Ratings also waxed positive on Mexico's energy reforms, describing them good news for both Pemex and the Mexican government (see Daily GPI, Feb. 6).

According to reports, Carlos Morales resigned as the head of Pemex’s E&P division after a decade at the post. Gustavo Hernandez was appointed to the position on an interim basis. A spokesman for the company told Reuters that Morales had resigned for “personal reasons.”

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