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Moody's downgrades PEMEX, citing slipping production, low prices

Concluding its review of PetroleosMexicanos' long-term national-scale and global-scale ratings, Moody'sdowngraded the Mexican state-run oil and gas giant from Baa1/Aaa.mx to Baa3/Aa3.mx.

Moody's outlook on all ratings of Petroleos Mexicanos, or PEMEX,is negative, according to a March 31 statement from the rating agency.

Moody's also confirmed the short-term national-scale MX-1 ratingfor the company.

The PEMEX downgrade was attributed to weak credit metrics thatare expected to worsen as PEMEX continues to fund capital expenditures from externalsources. Low oil prices and a continued decline in production, paired with persistenthigh taxes, are expected to act as an albatross around PEMEX's credit metrics untilcapital spending is adjusted down to meet budgetary targets, Moody's said.

The agency estimated an average decline of 5% annually in PEMEX'sproduction because of a lack of investments that would result in stabilizing production.The main factors contributing to PEMEX's negative free cash flow include "persistentlow oil prices and a high tax burden," Moody's said.

Moody's also downgraded PEMEX's baseline credit assessment fromba3 to b3 and its global foreign currency and local currency ratings, as well asratings based on PEMEX's guarantee, to Baa3 from Baa1.

Moody's reasoned that the Mexican government is likely to supportPEMEX to avoid default, noting a "very high default correlation between PEMEXand the government." Moody's does not anticipate an upgrade in PEMEX's ratingsin the near term.

Moody's also said that while it expects PEMEX's credit profilecould deteriorate further, the outlook could be bumped up to stable if the companyreverses its habit of increasing leverage and starts to show signs of improvingits operating profile, cash flow and liquidity.