Petróleos Mexicanos HR AAA HR+1 · subsection (i), (iii) and (v) of the US Securities Exchange Act of 1934. Twitter: @HRRATINGS Petróleos Mexicanos State-owned Enterprise HR AAA

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*HR Ratings LLC. (HR Ratings), is a HR Ratings de México, S.A. de C.V. subsidiary, a Credit Rating Agency registered by the Securities and Exchange Commission (SEC) of the United States as an NRSRO for this type of rating. HR Ratings’ recognition as an NRSRO is limited to the ones described in section 3 (a) (62) (A) and (B) subsection (i), (iii) and (v) of the US Securities Exchange Act of 1934.

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Petróleos Mexicanos State-owned Productive Enterprise

HR AAA HR+1

Corporate April 1, 2020

Rating Pemex LT local scale HR AAA Pemex ST local scale HR+1 PEMEX 11U HR AAA PEMEX 11-3 HR AAA PEMEX 12U HR AAA PEMEX 13-2 HR AAA PEMEX 14 HR AAA PEMEX 14U HR AAA PEMEX 14-2 HR AAA PEMEX 15U HR AAA PEMEX 19 HR AAA Outlook Stable Pemex LT Global HR BBB+ (G) PEMEX 14-2 (G) HR BBB+ (G) PEMEX 15U (G) HR BBB+ (G) 2.500% Notes 2021 HR BBB+ (G) 3.750% Notes 2024 HR BBB+ (G) 4.875% Notes 2028 HR BBB+ (G) 3.750% Notes 2025 HR BBB+ (G) 6.500% Notes 2027 HR BBB+ (G) 6.750% Notes 2047 HR BBB+ (G) 5.350% Notes 2028 HR BBB+ (G) 6.350% Notes 2048 HR BBB+ (G) 2023 Notes HR BBB+ (G) 2025 Notes HR BBB+ (G) 2029 Notes HR BBB+ (G) 2022 Notes HR BBB+ (G) 6.49% Notes 2027 HR BBB+ (G) 6.84% Notes 2030 HR BBB+ (G) 7.69% Bonds 2050 HR BBB+ (G) 6.00% Notes 2029 HR BBB+ (G) PEMEX 2,250M EUR HR BBB+ (G) Outlook Negative

Contacts

José Luis Cano Executive Director Corporates / ABS [email protected]

Luis Miranda Sr. Executive Director Corporates/ABS [email protected]

Hadíe Escobar Analista de Corporativos [email protected]

HR Ratings ratifies local scale ratings in HR AAA, with Stable Outlook, and HR+1, and downgrades global scale ratings from HR A- (G) to HR BBB+ (G) with Negative Outlook for Pemex and 28 issues

The ratification of the ratings and outlooks for Pemex is based on the de facto sovereign status of its debt, due to the support received from the federal government through actions and capital contributions, and also because of the relevance of the State-owned Productive Enterprise as a major generator of revenue for the country. The current Sovereign Debt rating for Mexico is HR BBB+ (G) with Negative Outlook, following its latest rating action on April 1st, 2020, which was based on the expected decline in global growth and the recession of the Mexican economy due to COVID-19, macroeconomic fundamentals for 2019 below our expectations, the drop in oil prices and lower tax revenue. The federal government supported Pemex in 2019 with capital injections totaling P$25.0 thousands of millions (mm) and a monetization of promissory notes for labor liabilities totaling P$35.0mm. Additionally, last September the SHCP (Department of the Federal Treasury) made a capital contribution in the amount of US$5.0 (approximately P$96.0mm), which Pemex used to pay down its debt denominated in US$ maturing between 2020 and 2023, and the tax benefit was extended in the payment of fees on oil production, based on the May 2019 decree. As a result of these supports, Pemex’s debt has remained at similar levels to last year, even with the low production of crude and financial results. For 2020, the federal government is planning additional support in the amount of P$66.3mm and to reduce the tax burden of Pemex, strategy that is designed to increase the liquidity of the State-owned Productive Enterprise by providing additional resources to make the investments necessary to increase their levels of reserves, their capacity for crude production and refining in the short and medium term. It is important to note that, in part, the current rating and outlook may be revised in the short term, depending, among other factors, on the capacity of Pemex to stop and revert the reductions in crude production.

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Historic Performance / Comparative vs. Projections

• Healthy debt structure, handling of liquidity and capital injections. Thanks to the supports from the federal government (capital injections totaling P$25.0mm and US$5.0mm, plus the monetization of the promissory notes for labor liabilities totaling P$35.0mm), in the LTM1 at 4Q19, Pemex maintained its debt at -4.8% compared with the previous year, and -15.1% versus our base scenario, maintaining also a debt structure in keeping with its business model, with 87.6% at long term (vs. 90.8% LTM at 4Q18), reducing the pressures on liquidity.

• Stability in the generation of Adjusted Cash Flow. Reporting P$341.9mm, the AFCF generated by Pemex LTM at 4Q19 was 48.0% and 2.4% higher than our base scenario and the previous year. As a result, our principal metrics were relatively stable, with a DSCR of 1.1x and Net Debt to AFCF of 5.6 years (vs. 1.4x and 6.0 years LTM at 4Q18). This is primarily explained by a reduced tax burden and lower capital requirements, vendors and clients, countered by a drop in the Adjusted EBITDA and delays in payments of Excise Tax by the federal government.

• Reduced Adjusted EBITDA2. The Adjusted EBITDA LTM at 4Q19 fell 38.5% and 29.8%, versus the previous year and base scenario, due to a contraction in exports and domestic sales, as a consequence of lower crude production, reduced volumes sold because of the temporary effects of the strategy to combat the theft of fuels implemented together with the federal government in 1Q19, lower prices for Mexican Mix, and higher maintenance costs, partially compensated by a lower tax burden, reduced costs of refined imports for resale, lower international oil prices and stabilization of the crude process in the SNR3.

• Lower production of hydrocarbons and exports. As a result of the natural decline of mature fields and the presence of fractional flow of water and oil-water contact at some shallow water fields, the volume of crude production, excluding condensates, LTM at 4Q19 was 6.4% and 7.2% lower than our stressed scenario and previous year, respectively, (1,701Mbd vs. 1,817Mbd in the stressed scenario and 1,833Mbd LTM at 4Q18), negatively impacting the volume of exports, which was 6.8% lower than the LTM at 4Q18 (1,104Mbd LTM at 4Q19 vs. 1,184Mbd LTM at 4Q18).

Expectations for Future Periods

• Continued supports from the federal government. Our rating assumes the government will continue supporting the company through injections of capital and policies, like the reduced tax burden, through changes to the tax structure, actions that would contribute to improving the financial and operating results of Pemex. To date, the federal government has expressed its intention to continue funding the requirements of the State-owned Productive Enterprise through injections of capital in 2020, 2021 and 2022 totaling P$141.0mm.

• Crude production and replenishment of reserves. The principal element that supports the strategy of the current administration is the reversal of the downward trend in crude production, therefore our estimates consider a gradual growth in the per day production levels, taking into account the investments observed and the work

1 LTM = last twelve months. 2 Adjusted EBITDA = Earnings before interest, taxes, depreciation and amortization net of pensions and impairment to properties. 3 National Oil Refining System (SNR, due to its Spanish acronym)

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Pemex has done to develop new fields, however we believe the pressure to replenish reserves will remain strong.

• Price estimates. The price of Mexican Mix for Export has experienced a downward trend, with average prices of US$55.6 per barrel LTM at 4Q19. Future periods will be impacted by a sharp drop in demand due to weak global economic indicators and COVID-19, the breaking of the agreements between OPEC and Russia, geopolitical conflicts in the Middle East and Latin America, added to the increased production in the United States. As a result, our estimates consider that the per barrel price for Mexican Mix could close 2020 at around US$32.0, maintaining the average at below US$48.0 per barrel in the coming years.

• Debt levels. Taking into account the production levels and prices for Mexican Mix observed, and the economic slowdown expected in the country, negatively impacting the domestic demand for refined products, we estimate that the State-owned Productive Enterprise may not achieve its short term goal of not increasing its net debt in 2020 and 2021, even with the federal support proposed for Pemex.

• National Oil Refining System. The processing of crude under the National Oil Refining System continues to experience lower levels than the previous year, -3.2%, and a level of usage of the primary capacity of 34.3% (vs. 40.6% in 2018), however, we expect Pemex will seek to reactivate its six refineries to capacity in a short time. This carries the risk that the refining margin will not improve if Pemex is unable to reduce the unscheduled stoppages, increase its refinery usage rates and upgrade their facilities to produce more profitable refined products.

Additional factors considered

• 2019-2023 Business Plan. Pemex presented its business plan in July 2019, containing important changes in terms of our analysis for the previous year with higher levels of direct investment, by Pemex and the federal government, a reduced tax burden, greater investment in the production of refined products to reduce dependence on imports, and the participation of private investment through service contracts. The most relevant point in the plan is to revert the downward trend in crude production to reach 2.7MMbd in 2024.

Factors that could affect the rating

• Sovereign Debt. Any change, positive or negative, to the sovereign rating for Mexico, and its outlook, would be reflected directly in the global rating for Pemex, as HR Ratings considers the Pemex debt to have a de facto guarantee from the federal government.

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Corporates April 1, 2020

Relevant Events Business Plan The Pemex Business plan presented recently and published in the Official Federal Gazette on July 12, 2019, sets the strategic path the State-owned Productive Enterprise will follow between 2019 and 2023. The Plan sets as a priority, recovering the productive capacity of Pemex, and with this, revert its financial impairment. The main strategies, objectives and goals of the Business Plan are presented following.

One of the main focus points of the Business Plan is that Pemex achieve the goals set for crude production, which as noted in the table above, consider an average annual growth of 10.3%, in contrast to the 7.2% downward trend observed LTM at 4Q19, with an average production by Pemex and partners, excluding condensates, of 1,701Mbd (vs. 1,833Mbd LTM at 4Q18). To reverse the negative trend observed, Pemex plans to invest P$333mm in 2020 and an average of P$372mm between 2021 and 2023, levels that are far higher than the P$189mm invested in 2018. Despite the drop observed, Pemex plans to achieve its volume goals by accelerating the exploitation and development of recently discovered deposits. To do this, Pemex is currently developing 22 new fields, a figure higher than the 19 fields developed between 2010 and 2015, and the null investment in developing fields between 2016 and 2018. The Business Plan also considers drilling more than 300 wells in 2019, however only 58 wells in development were added LTM at 4Q19, to close 4Q19 with 201 wells, compared with the 55 and 143 fields developed in 2017 and 2018, respectively. Another important element to consider from the Business Plan is the production of refined products. The Plan set as a goal an average 643Mbd by 2019 close. Even with the stabilization of operations at the Minatitlan and Salamanca refineries, the average crude

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processed through the National Oil Refining System (SNR, due to its Spanish acronym) was 557Mbd at 4Q19 close, 13.4% below the goal set. We believe that for Pemex to achieve the goals set, they will need to significantly reduce the unscheduled stoppages, perform proper maintenance on the refineries to achieve the maximum capacity possible, reconfigure the refineries to adapt them to the crude that Pemex is producing today, and complete the Dos Bocas Refinery on time. The volume for the Dos Bocas Refinery is one of the 2023 goals, as shown in the table above. Lastly, the Business Plan considers zero new debt, in real terms, over the next three years, and a gradual reduction of the debt starting in 2022. The Plan also considers that, starting 2021, Pemex will report surplus financial balances in its government accounting. To achieve these goals, we believe that Pemex will need continued supports from the federal government (through injections of capital and/or reduced tax burdens), significant growth in its crude production and reserves, increased processing of refined products through the SNR (and the consequent reduction of imports) and the implementation of operating and financial efficiencies at each of its business units. From the results observed, we cannot confirm that the goals set for Pemex will be fully achievable. However, given the importance of the Business Plan for the federal government and Pemex management, we believe they will use every element at their disposal to achieve these goals. In this regard, we have considered the assumptions and objectives laid out in the Plan as a guide for our scenarios.

Federal supports and managing liabilities The recent actions the federal government has taken to strengthen the finances of Pemex confirm the opinion of HR Ratings that the oil debt has the same level of risk as the sovereign. On the one hand, Pemex was allocated a larger budget in the 2019 economic package, which will be used for physical investment, in contrast to the cuts experienced under the previous administration. On the other, the federal government implemented a package of additional supports to improve the financial balance of the State-owned Productive Enterprise and reduce the pressure on liquidity. This is complemented with the recent placements of debt by Pemex in international markets, through Notes and Bonds for a total US$7.5mm on an average weighted term of 18 years. These resources were used primarily to reduce the outstanding balance on the short-term revolving lines of credit. Table 2 shows the type of support allocated to Pemex by amount and line. Taking into consideration these details, HR Ratings considers that the relationship between Pemex and the federal government has become more evident under the current administration and, by consequence, the evolution of the Pemex rating, therefore the performance of both ratings and future revisions will be based on the fulfillment of the fiscal goals for the federal public sector. Additionally, HR Ratings will monitor the effectiveness of the use of the supports detailed.

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Results: Observed vs. Forecasted Thinking of Pemex as an independent entity, or a Corporate entity, the HR Ratings methodology outlines an analysis based on financial projections under a base scenario and a stressed scenario. The scenarios presented in the table following are based on the strategies and Business Plan the entity defined last year, covering the period projected from 3Q18 to 4Q20. A comparative is offered following between the results observed and projected for the last 12 months at 4Q19.

The financial results of Pemex as an independent entity continue to show a marked decline in operations and financial results. However, the reduced tax burden has allowed Pemex to maintain relative stability in terms of the previous year and our scenarios, with a debt service coverage ratio (DSCR) of 1.1x in the last 12 months at 4Q19, based on

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our calculation of the Adjusted Cash Flow, and also a Net Debt to AFCF of 5.6 years. Although Pemex has refinanced its debt to maintain a long-term structure (90.8% of the debt has a maturity of more than one year), without the supports from the federal government, through lower tax payments, Pemex’s liquidity would continue to be pressured, with an operating flow before taxes 26.3% lower than the previous year and -4.5% compared with the base scenario. A lower generation of operating flow before taxes has resulted in a drop in the EBITDA, due, primarily, to a heavy tax burden and a constant reduction in crude production and reserves, together with the inefficiencies observed at the refineries, despite efforts to stabilize. The results were also negatively impacted by a slower than expected recovery of the international crude prices. Added to this are the increased capital requirements due to the greater accounts receivable, because of delays in Excise Tax payments by the federal government at the end of 2018 and a slower turnover of inventories as a result of a reduction in the volumes of gasoline sold, given the temporary effects of the strategy to combat the theft of fuels implemented together with the federal government in 1Q19, which also negatively impacted domestic sales. This was partially compensated by a positive result in clients, due to lower exports than expected and inventories, because of lower production, and imports of refined products. The Excise Tax or special tax on production, recorded in the miscellaneous debtors account in the short-term assets, corresponds to the reconciliation between the tax rates on domestic sales of automotive fuels, gasoline and diesel, which Pemex collects on behalf of the federal government, and the tariffs on the importation of these fuels. In 2018, the outstanding balance in this account increased 126.4% with P$53.4mm (vs. P$23.6mm in 2017) and for LTM at 4Q19, Pemex reports a balance of P$68.0mm in this account. Production in January 2019, with a volume of 1,643Mbd (including partners and condensates), was the lowest Pemex has experienced in the last 20 years. In the last twelve months at 4Q19, the volume of production with partners was 1,701Mbd, 6.4% and 7.2% below our stressed scenario and the previous year, respectively, (1,817Mbd in the stressed scenario and 1,833Mbd LTM at 4Q18), impacting also the volume of exports, which was 6.8% less than at 4Q18 (1,104Mbd at 4Q19 vs. 1,184Mbd at 4Q18). This negative trend has been due, primarily, to the natural decline of mature fields, as well as the presence of fractional flow of water at some deposits in the South region and the Northeast and Southwest ocean regions. However, the production of hydrocarbons reverted the downward trend in 2Q19, thanks to early production from new fields, optimizations and major and minor repairs at wells and a quicker return to service for wells with pumping problems, resulting in increased production at the Xanab, Ku, Maloob, Zaap and Ayatsil fields, and also in the Southwest ocean region at the Yaxche and Onel fields, at the Ixachi, Bedel and Gasífero fields in the North region, and at the Yagual, Rabasa, Guaricho, Puerto Ceiba, Teotleco and Samaria fields in the South region; stabilizing production during the second half of 2019 at 1,694Mbd, compared with the average 1,674Mbd during the first half of the year. With new management, the implementation of their strategy, lower domestic sales due to a drop in gasoline and diesel prices, combined with reduced volumes of the sale of these fuels due to the loss of market share with the entry of new competitors; lower volumes sold due to the temporary effects of the strategy implemented together with the federal government in 1Q19 (to combat fuel theft) lower crude production and exports and the

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negative impact of unproductive wells4, variance in inventories and conservation and maintenance costs (partially compensated by higher prices for Mexican Mix than the previous year, although lower than our estimate) all contributed to a 38.5% and 29.% decrease in the Adjusted EBITDA in the last twelve months at 4Q19, compared with the previous year and our base scenario, respectively. The low operating results were countered by a reduced tax burden for Pemex and a stabilization of crude processing through the SNR, not provided for in the projections, which resulted in a margin of 30.3%, 36.0% below the previous year, but close to our estimate of 31.6% for the base scenario. The AFCF generated by Pemex reached P$341.9mm for the last twelve months at 4Q19, 2.4% and 47.8% higher than the previous year and our estimate in the base scenario, respectively, showing stability in our principal metrics with a DSCR of 1.1x and a Net Debt to AFCF of 5.6 years, compared with 1.4x and 6.0 years at 4Q18, and the estimate of 0.7x and 9.7 years in the base scenario. The principal factors that explain this relative stability are the reduced tax burden and lower capital requirements, for inventories and clients, countered by a drop in the Adjusted EBITDA and delays in the Excise Tax payments from the federal government. To continue, Pemex has maintained its debt at levels similar to previous year, reporting a 3.9% reduction in the Net Debt, compared with 4Q18, and 14.0% below our previous base scenario. We also observe that Pemex has maintained its debt structure in keeping with its business model, with 87.6% of the total debt at long term (vs. 90.8% at 4Q18), lowering the pressures on liquidity. This was achieved, primarily, through injections of capital from the federal government totaling P$25.0mm and US$5.0mm in 2019, P$35.0mm for the monetization of the promissory notes for labor liabilities, refinancing the debt, and renewing their lines of credit.

Analysis

Pemex results under government accounting As mentioned, the principal factor that supports our assessment of the credit quality of Pemex is the HR Ratings rating for Mexico’s Sovereign Debt, given the relationship between these ratings. We believe that the recent actions of the federal government to support Pemex validate our assumption that Pemex’s debt should be considered debt of the federal government. The section summarizes the Pemex results under government accounting, while in the other sections we analyze Pemex based on its corporate accounting. In the last twelve months at December 2019 (LTM 4Q19), Pemex reported a primary and financial surplus of P$142.2mm and P$26.4mm, principally as a result of lower payment of government fees and tendering. Isolating the effect of 4Q19, the first nine months of 2019 reported a financial deficit of P$9.6mm, which, thanks to the contributions of the federal government, was more than covered with cash, reducing the debt by P$30.9mm, as noted in the table below. It should be mentioned that prior to the US$5.0mm contribution made by the federal government in September 2019, the financial deficit had reached P$94.2mm, cumulative at August 2019, which was covered by P$54.6mm in

4 These expenditures had no impact on the 2019 cash flow as they were disbursed in previous years.

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cash and P$39.5mm in debt 5 (vs. P$37.8mm in 2018), while Pemex maintained its strategy of zero new debt in real terms with a 4.5% increase (increase in keeping with inflation). Even though the deficit of P$94.2mm was substantially greater than the P$57.2mm observed during the same period in 2018, the amount of financing through new debt was lower in 2019, as the available cash in 2018 only financed P$19.4mm.

5 The analysis in this section was based on government accounting and not corporate accounting, as in the rest of this report. The deficit shown is mostly based on cash flow accounting and includes all investment expenses, unlike corporate accounting, which includes only the virtual depreciation charges in the net earnings, instead of the total investment in plant and equipment.

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The taxes paid to the government are one of the factors that most impacts the viability of Pemex. In 2019, Pemex reported pre-tax profit of P$457.5mm, 2.8% lower than the P$470.6mm for 2018. As result, thanks to a reduced tax burden (P$431.1mm in 2019 vs. P$532.2mm in 2018), the surplus was higher (a post-tax surplus P$81.7mm higher than for 2018, compared with a lower pre-tax profit in the amount of P$13.1mm). There was a significant reduction in taxes in absolute terms, which was partly a reflection of the drop in the State-owned Productive Enterprise’s sales of goods and services, and in relative terms, there was also a rollback in the tax burden of Pemex, representing 53.3% of sales in 2019 (in government accounting taxes are reported on sales of goods and services) compared with 57.6% for 2018. In terms of nominal pesos, the pre-tax revenue declined 2.8% and the taxes decreased on a greater scale, at 19.0%. This downward trend was compounded recently, with taxes representing 48.7% of the sales of goods and services from July to December 2019 (vs. 59.5% from July to December 2018 and the 65.4% observed during the first half of 2019), with a surplus in pre-tax profit of P$25.5mm on average from July to December 2019, compared with the deficits of P$37.0mm and P$39.0mm from July to December 2018 and the first half of 2019, respectively, thanks to the supports from the federal government. This is the start of an effect of the federal supports for Pemex at the beginning of the current administration, which published a decree in May 2019, to increase the percentage of costs, expenses and investments that Pemex could deduct in the calculation of the Shared Profits to a maximum production of 250,000 barrels per day of crude and condensates, permitting deductions up to 40% of the annual value of the hydrocarbons extracted onshore and 35% in shallow water (under the assignments structure), in contrast to the limit of 12.5% for deductions as established in the Hydrocarbon Revenue Law (Ley de Ingresos sobre Hidrocarburos). This means that Pemex can use part of the 2018 cumulative balance pending deduction, which totaled P$875mm (including remnants from the previous structure), meaning during the period 2015 to 2018, Pemex only deducted 48% of their costs for the calculation of the shared profits. Pemex has benefited from a more favorable tax framework in the past, migrating the assignments for the Ek-Balam field to a shared production contract, which is now bearing fruit, even though this represents only 2% of Pemex’s total production (approx. 34,000 barrels per day). However, thanks to the reform of the Hydrocarbon Revenue Law, the rate for the shared profits is reduced from 65% to 58% for 2020 and to 54% as of 2021 and Pemex can directly reduce the payment of the shared profits also for assignments. The federal government is planning to give Pemex P$66.3mm in support, which has already been included in the fiscal policy guidelines for 2020 and was considered in the annual budget presented to Congress on September 8. The resources assigned to Pemex are divided into P$41.3mm earmarked for the construction of the new refinery (Dos Bocas) and P$5.0mm as an equity injection6. Additionally, the National Infrastructure Fund is considering an additional contribution of P$20.0mm for Pemex.

Reserves and Production Volume Crude production continued to decline over LTM at 4Q19, reporting a drop of -7.2%, after reaching average levels of 1,701Mbd (vs. 1,833Mbd at 4Q18), principally due to greater

6 Source: Criterios Generales de la Política Económica 2020 (2020 General Economic Policy Criteria), pages 90 and 92. We have no assurance that the P$96.0bn mentioned on the first page does not represent an advance on the P$66.3bn panned for next year.

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impact on the production of light and super light crude, which dropped 14.8% and 31.3%, respectively, while heavy and extra heavy crude reported a slight decrease of 1.2%. Although the drop in crude production was halted as of June 2019, with an average volume of 1,692Mbd in June and increasing to 1,730Mbd in September, we are still not seeing a trend that would assure us that the previous trend has been fully reverted as the cumulative volume at September 2019, 1,697Mbd, remains at 9.0% below the volume of 1,865Mbd observed at September 2018, and under the 1,707Mbd established in the Business Plan and the 1,847Mbd included in the economic package and the revenue law for 2019. Additionally, the supply of natural gas decreased 3.4% due to lower production of natural gas associated with crude, as a result of the natural decline of mature fields and the water-oil contact at some fields, while the non-associated natural gas was mostly used for oil producing fields. The most relevant factor in the drop in production is the natural decline of some mature fields and the increase of fractional flow of water at some shallow water deposits, like Cantarell, which continued to decline 1.6%, and the advance of the water-oil contact at some fields, including Xanab, whose production of light and super light crude dropped to 46Mbd at 4Q19 vs. 101Mbd at 4Q18. Xanab is in the southwest ocean region, where the drop was 19.5%. The rest of the fields in the South (because or an increase of fractional flow of water) and the Northeast regions also reported 3.3% lower crude production compared with the previous year. In contrast, there was growth in the production of extra heavy crude at the Ayatsil field, and at some shallow water fields in the southwest region and the North and South blocks, which together contributed to an increase of approximately 125Mbd at 4Q19. In 2019, the focus of Pemex’s activities with partners was exploration and production, concentrating on farm-outs in the Cardenas-Mora and Ogarrio zone, in onshore fields and in exploration in shallow waters and onshore in the Southeast Basins, added to the participation in different rounds with partners that, in 2018, contributed with an average 21Mbd and 16Mbd in 2019. The participation of private interests is expected to continue, but through service contracts, expecting these to aid in increasing the volume of production at mature fields in the medium and long term, assuming Pemex, in their Business Plan, that the volume produced by partners in 2018 will be doubled by 2022. The evolution of the crude production is shown following, segmented by the operational regions.

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The recently presented Pemex Business Plan seeks to accelerate the exploitation and development of newly discovered deposits. On this strategy presented in 2019, 22 new fields will be developed, in contrast to the 19 fields that were developed between 2010 and 2015, and the null investment in developing fields in the period 2016-2018. The State-owned Productive Enterprise expects to reach production of 70Mbd at these fields by the end of this year, and 320Mbd in 2021. To support the strategy to stabilize crude production, Pemex is increasing development at exploitation fields with more than 300 wells in 2019, compared with the 55 and 143 fields developed in 2017 and 2018, respectively. Although Pemex increased the number of completed wells for development and exploration by 38.3%, to reach 57 development wells and 8 exploration in 4Q19 (vs. 28 development and 6 exploration in 4Q18), the company closed 2019 with 224 wells, 25.3% below the goal of 300 wells set in the Business Plan. We estimate that Pemex will need to continue investing in infrastructure in order to achieve the most important goal set in their Business Plan, reverting the negative trend in production experienced over the last 14 years or more, to then increase and stabilize production to reach a total production (including partners) of 2,816Mbd by the end of the current administration in 2024.

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Graph 2 shows the strategic evolution of Pemex, comparing the number of wells in operation and the average prices for Mexican Mix. It is noted that, with the downward trend in prices, the previous administration opted to reduce the number of wells to focus operations on those that would bring profit margins according to the levels expected. Although the trend in international prices for Mexican mix in the short / medium term is declining, we believe that, with the federal supports planned, primarily in terms of reducing the tax burden, Pemex could allocate more resources to exploration and extraction at wells with a greater level of expected production, but without straying from the profitability goal set in the Business Plan. It should be noted that, following their growth plan, Pemex has decided to reactivate various wells that do not require resources from the programmable expenditure; optimizing their financial self-sufficiency in terms of operating working capital requirements. The net average number of wells in operation (crude and non-associated gas) reported a 0.1% decrease in 4Q19, closing at 7,460 (vs. 7,466 wells at 4Q18); which is explained by the closure of wells in the Burgos basin (non-associated gas). Removing the effect of the closures, the average wells in operation increased by 20 wells from 2018 to 2019, in keeping with the strategy to stabilize and increase crude production. As presented by the current administration, the focus will be to accelerate the development of onshore and shallow water fields, therefore we would expect the investment in infrastructure, and by consequence the number of wells in operation, to be fast-tracked over the next three years, with the federal supports expected. Although the new Pemex Business Plan does not offer any major change in the strategy since the beginning of the current administration, it does open up an additional risk, the replenishment of reserves. This risk factor increases and becomes more important with the strategy presented, accelerating the exploitation of reserves classified as probable and possible, which could put the feasibility of the Pemex Business Plan at risk in the long term. Given this, we believe the State-owned Productive Enterprise will need to allocate a portion of its investment budget to production and exploration activities, which could pressure Pemex’s finances, added to the risk that the supports Pemex is receiving

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from the federal government, through taxes, may not be sufficient to achieve the production goals and to replenish reserves. As presented in table 5, the proved reserves7, probable reserves8 and possible reserves9 taken as a whole (3P reserves) continued the downward trend observed since 2013, calculated at 20,453 millions of barrels of crude equivalent (MMboe) at January 1, 2019, a 3.0% decrease compared with the reserves the previous year (21,089 MMboe at January 1, 2018) and a reserve/production ratio of 22.1 years, a slight improvement over the 21.0 years at 2018. However, it is important to note this was mainly due to lower production during the year. The reserves with the greatest decrease were the proved reserves at 8.9%, calculated at 7,010 MMboe (vs. 7,695 MMboe at 2018), with an estimated replenishment rate of 26.0%, the lowest reserve/production ratio observed historically at 7.6 years of production (vs. 7.7 years in 2018).

To reduce the risk of a greater drop in reserves, Pemex has included a series of actions in its Business Plan focused on increasing the replenishment and recovery of reserves in order to ensure the sustainability of the Business Plan and the viability of Pemex in the long term. The main actions that Pemex sets out in its Business Plan to increase the incorporation of 3P reserves by approximately 1,500 MMboe, annual average, include:

• Increase explorations in onshore basins, shallow waters and areas near fields in production.

• Improve the assessment process for new discoveries to reduce deviations in the exploitation plans and programs for new fields.

• Increase exploration opportunities at plays10 and border areas.

7 Proved reserves: The estimated amount of recoverable oil and gas at known fields, under current economic and operational conditions. Source: Pemex glossary. 8 Probable reserves: Estimate of the oil and/or gas reserves based on penetrated structures but requiring more advanced confirmation to be able to classify as proved reserves. Source: Pemex glossary. 9 Possible reserves: Estimate of oil or gas reserves based on geological or engineering data, in areas no drilled or no proved. Source: Pemex glossary. 10 Group of productive fields or prospects that are geologically related, with similar characteristics as reservoir and generating rock, load processes and type of hydrocarbons; this being the unit for economic assessment.

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In the short term, activities will focus on exploratory drilling in shallow waters, following a strategy of exploration around existing poles of development and in construction in the Southeast and Salina del Istmo basins. Additionally, the continuation of studies in the Veracruz basin, where the recently discovered Ixachi onshore field is located, and exploration in the area near the Bedel, Gasifero and Eltreinta oil producing fields and in Tampico-Misantla basin. In the medium and long term, the strategy includes assessment of the Pre-Salino play in the south of the Gulf of Mexico and new, relatively unexplored stratigraphic levels in the rest of the exploratory areas. Also, the exploratory activity in shallow waters will focus on areas of light oil along the coast of Tabasco, where Pemex has made important discoveries in recent years. It should be noted that the new Business Plan and the current administration seek to focus exploration in shallow waters and onshore areas, in contrast to the Plan of the previous administration, where more than 40% of the exploration investment was allocated to deep waters. We believe the goal set by Pemex and the current federal government to increase the 3P reserves at an annual average of 1,500 MMboe in 2019 and 2024 is operationally feasible, based on the fact that on January 1, 2019, Pemex reported conventional prospects of 15,700 MMboe. However, of the total conventional prospects estimated in the exploration areas, Pemex reports that 90% require exploratory studies to make them drillable prospects, therefore we believe the reserve replenishment plan still carries a high uncertainty factor. This will depend heavily on the necessary economic resources being allocated to exploration, though these resources could be limited, as the priorities of the recently presented Business Plan are extraction and production, and to a lesser extent, exploration to replenish reserves.

From the information provided by Pemex in their Business Plan, the volume of reserve replenishment projected for the coming years, and taking into consideration an estimated average exploration cost per barrel in 2019, and only inflationary growth rates, it is estimated that US$3.1 billion will be needed in average annual investment for exploration, which according to our estimates, could represent 16% of the total investment required for exploration and production and 14% of the total average annual investment of Pemex from 2019 to 2026. According to our estimates, the Pemex Business Plan will require additional investment to that presented by the State-owned Productive Enterprise on July 16, to achieve the production level set and replenish the 1P reserves to bring them back to 10 years. Additionally, we believe it is essential, for the Pemex Business Plan to work, that Pemex has enough reserves to achieve the volume of crude production expected. If these volumes are not achieved, even with the federal supports expected during the years projected, the crude the national oil refining system needs could be limited in covering domestic demand and for export. This would result in lower revenue or higher costs for imports of refined products, which could pressure Pemex’s liquidity, leading to a higher level of debt and less taxes for the federal government. Although the Pemex Business Plan and the current federal government estimate a recovery of reserves in the coming years, they also anticipate that production will continue to grow. Taking into consideration the figures presented in the Business Plan, the replenishment levels will exceed 100% starting 2020 (not seen since 2013), presenting their highest level in 2021 to then decline as shown in table 6.

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As mentioned, the Plan expects to revert the downward trend in the reserves and production, which have reported historically low levels. To achieve this, the current federal government is considering supporting Pemex for three years with injections of capital and changes to the tax structure for different fields, expecting Pemex to become a generator of revenue and cash flow for the federal government as of 2023. This strategy could pressure the replenishment of reserves and the long-term viability of the Business Plan presented, as noted with the level of years reserve and the total 3P reserves, which do not return to the levels observed before the drop in international oil prices. Additionally, the Pemex Business Plan states that to achieve the goal of incorporating reserves, they will need to increase the drilling of exploratory wells, seeking to increase the 19 completed wells in 2018 to 50 in 2019, 60 in 2020, and between 80 and 110 wells from 2021 to 2024. The scenario presented in the Business Plan is based on increased investment and support from the federal government to reactivate production and revert the negative trend observed, given which, our scenarios (as discussed in the section Analysis of Scenarios) took into consideration the trend observed and expected in the international prices for crude and natural gas, the trend seen in the volume of crude production, and the restrictions set by the federal government in terms of the Pemex primary and financial balance, therefore our scenarios are more conservative than those presented by Pemex, seeking to align the analysis of the State-owned Productive Enterprise with the assessment of the sovereign rating for Mexico, given the correlation and dependence seen between these ratings.

International Prices for Mexican Mix The export price for Mexican Mix reported a downward trend in 2019, after a period of growth and stabilization during most of 2018, with a drop of 9.4% and an average of US$55.6 per barrel (pb) (vs. US$61.4 pb in 2018 and US$61.9 pb estimated in our base scenario), following the trend seen in the West Texas Intermediate (WTI) price, which reduced its average price by 12.2% to US$57.0 pb in 2019 (vs. US$64.9 pb in 2018), because of lower demand and stockpiling of international inventories due to a deceleration of productive activity worldwide and the increased supply of North American crudes.

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In terms of demand, a global deceleration of industrial activity is expected, as well as stockpiling. For reference, this is the first year, since 2011, that the annual growth in the demand for crude is less than 1.0 million (m) barrels per day (bpd). Also, China (one of the largest consumers of oil) has been reducing its imports of crude from the United States since the beginning of the year, announcing in August a 5% tariff on US crude oil imports, added to the fact that at the start of this year, China significantly reduced its demand due to the deceleration of its economy because of COVID-19. As a result, according to information from the US Energy Information Administration (EIA), international crude prices are expected to continue their downward trend in the coming years because of lower demand. In terms of supply, crude production in the United States, which in 2019 reached historic highs with approximately 12.3MMbd (vs. 9.4MMbd in 2017), continues an upward trend, breaking the 12.0MMbd barrier in April 2019, estimating production will reach 13.3MMbd in 2020. The sharp growth in supply has not been compensated by the actions taken by the Organization of Petroleum Exporting Countries (OPEC) to maintain a regulatory policy on crude production to stabilize prices through supply levels, strategy that has encountered obstacles recently, when Russia broke its OPEC agreements. We believe the price for Mexican Mix (which contains a high percentage of heavy crude), will continue to drop, as noted in the graph following, which, because of the COVID-19 pandemic, could reach levels below US$49 per barrel and even below the prices observed in 2016, due to the probable global recession that is approaching as a consequence of COVID-19, the expected increases in the supply of US crude, the restrictions set by the International Maritime Organization (IMO) which took effect at the beginning of 2020, and the level of sulfur permitted for ocean transport fuels, which, we assume, will negatively impact the demand for heavy crude and favor the light crudes.

Under their hedge strategy, the Pemex Board of Directors authorized, starting 2017, an annual program with the objective of reducing the impacts of fluctuations in the price of

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Mexican Mix for export. An oil hedge was contracted in 2018 for the 2019 fiscal year, covering 320Mbd (approximately 19.0% of the average per day production of crude for that year), at a cost of US$149.6m. Also, an oil hedge was implemented in 2019 for the 2020 fiscal year, covering 243Mbd (nearly 22.4% of the target exports of crude projected for 2020) at a cost of US$178.3m. These hedges cover the fluctuation of the price of Mexican Mix against drops below that established in the Federal Revenue Law (Ley de Ingresos de la Federación), which estimated for 2019 levels of US$55 per barrel (vs. US$61.7 average observed per barrel in 2018 and US$57.6 in the first nine months of 2019). For reference, the federal government set a price of P$49.0 (sic) per barrel for 2020 in its Pre-Criteria.

Financial Results at 4Q19 Pemex reported a decrease in net sales LTM at 4Q19 of 16.5% to P$1.403mm (vs. P$1.681mm in 2018), driven mainly by a 17.5% drop in domestic sales, given that the incorporation of the cost of storage and logistics into the price of refined products may not counter the drop in the volume of internal sales, principally as a result of the economic deceleration in the country. Added to the lower internal sales is the 15.3% decrease in export sales, due to the drop in international crude prices, which fell from US$61.4 per barrel LTM at 4Q18 to US$55.6 per barrel LTM at 4Q19, because of the slowdown of industrial activity worldwide and the accelerated growth of the crude supply, primarily from the United States. It should be noted that the price observed was slightly higher than the US$55.0 pb established in the Federal Revenue Budget. Also, Pemex’s revenue was negatively impacted by a 7.2% decline in crude production LTM at 4Q19, with average production levels of 1,701Mbd (vs. 1,833Mbd LTM at 4Q18). The principal operating results for Pemex are shown as follows.

Internal or domestic sales represented 57.6% of Pemex’s total net sales in 2019 (vs. 58.3% in 2018), due to a decline in domestic demand for refined products, as seen in

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graph 4, lower prices of the principal refined products following the drop in international crude prices, (which together with the fluctuations in the exchange rate defines the gasoline prices in Mexico) and, to a lesser extent, the increased competition, considering that private interests were permitted to enter the market in 2018, which opened up gasoline and diesel prices. We believe that the drop in internal demand is a consequence of the deceleration the country is undergoing, and the problem of distribution experienced during the first quarter of the year. Vehicle fuels are one of the principal products distributed domestically, which the State-owned Productive Enterprise sells through different business models.

Graph 5 also shows the downward trend that internal production of oil products has maintained, as a result of the inefficiencies in the National Oil Refining System, with unscheduled stoppages and long periods of maintenance, resulting in the refineries reporting 35% usage of their capacity, requiring that the internal demand be covered with imports. Meanwhile, the growth observed in the international prices for Mexican Mix, primarily during the second half of 2018, drove Pemex to allocate a greater volume of crude production to exports, which were more profitable. However, the new Pemex management has set the goal of replacing imports of refined products with domestic production, which we see gradually starting to occur with the reactivation of the Madero refinery in 4Q19 and the stabilization of operations at the Minatitlan plant, which jointly represent 34.3% of the installed capacity of the national oil refining system, therefore the volume of crude production earmarked for export decreased to an average 3.2% LTM at 4Q19 (vs. 40.6% LTM at 4Q18). We start to see a drop in the percentage of imports during 2019, in terms of their proportion of the total internal demand for oil products, decreasing to an average 60.9% in 2019 (vs. 66.6% in 2018), which is largely a reflection of the distribution problems experienced in 1Q19, as result of the temporary effects of the strategy to combat fuel thefts, which led to a stockpiling of inventories which Pemex used to cover part of the

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internal demand; added to the stabilization of operations at the Minatitlan and Salamanca refineries and the startup of the processing plants at the Madero refinery (which jointly represent 34.2% of the installed capacity of the National Oil Refining System), reaching a usage of 34.0% of the primary distillation capacity at 4Q19, with a volume of 557.1Mbd between the six refineries (vs. 504.9Mbd capacity at 4Q18), level that continues to fall but is above the 30.8% and 34.1% seen at 4Q18 and 1Q19, respectively. We believe the production of the National Oil Refining System will need to stabilize and increase its usage capacity, eliminate unscheduled stoppages and make the Mexican refineries more efficient, for this trend to become sustainable.

Operating Results The Adjusted EBITDA11 experienced an LTM 25.9% decrease reporting P$363.5mm at 2019 close (vs. P$590.9mm at 2018 close), presenting LTM at 4Q19 results that continue the negative trend since 4Q18. The Adjusted EBITDA for 4Q18 declined 10.4% year-over-year. This drop was augmented due to the 21.9% reduction in the Adjusted EBITDA during the first 9 months of 2019, compared with the same period in 2018. The decrease observed in the Adjusted EBITDA in 2019 was driven by the 6.8% drop in the volume of crude exported, with an average 1,103Mbd during 2019 (vs. 1,184Mbd in 2018). The drop in the volume of exports was a direct consequence of the lower crude production in 4Q18. Additionally, net sales dropped 14.9% during the first 9 months of 2019, due to the 7.6% lower price for Mexican Mix for export and 17.3% lower domestic sales, as a result of the distribution problem in 1Q19 as a consequence of the strategy against fuel theft, and the drop-in production levels. These effects combined led to sales in the last twelve months at 4Q19 falling 16.5%, as noted in table 8, which shows the operational evolution of the State-owned Productive Enterprise.

11 Adjusted EBITDA = (Total Sales + Excise Tax) – Operating Costs and Expenses (Excluding Depreciation and Deterioration) – Pensions and Impairment of properties.

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The effective costs (which eliminate virtual accounting movements and the losses or gains for Deterioration —reverse— for wells, pipelines, properties, plant and equipment), had a weighted negative impact on the Adjusted EBITDA by 50.5%, which dropped 43.8%

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in 2019 to P$332.4mm (vs. P$590.9mm in 2018), as noted in table 9. The costs that had the greatest impact on the Adjusted EBITDA were those associated with the development and exploration of fields with the greatest growth, which was primarily a result of the costs required to reactivate the productive fields and for maintenance and adjustments to the National Oil Refining System to increase domestic production of refined products in the short term, in order to maximize revenues from domestic sales and production. Meanwhile, the costs for Government Fees and Taxes on Extraction and Exploration, which are directly related to international crude prices, and the increase in operations or volume of crude production, reported a 4.6% nominal and 0.7% weighted decrease in 2019. It is important to note that the growth occurred primarily in 4Q19, where taxes increased 44.1%, in keeping with the 30.5% increase in the export price for Mexican Mix during the same period. We start to see a reduction in Pemex’s tax burden during the first 9 months of 2019, reflecting the federal supports and a 7.4% lower price for Mexican Mix, resulting in a 23.4% decrease in the cost associated with taxes, compared with the first nine months of 2018.

These factors led to an Adjusted EBITDA margin of 23.7% in 2019 (vs. 35.2% in 2018), which is in keeping with Pemex’s strategy to achieve a positive financial balance by the end of this year, which was the condition set by the Federal Treasury for the US$5.000mm contribution, used to reduce the leverage on the financial cost of the State-owned Productive Enterprise.

Adjusted Free Cash Flow (AFCF) The AFCF estimated by HR Ratings for Pemex improved to revert the negative trend, achieving a growth of 2.4% in 2019 with P$341.9mm (vs. P$333.9mm in 2018). As shown in the graph following, this has resulted from a lower generation of EBITDA, driven

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primarily by a constant reduction in per day production of crude and reserves, together with the inefficiencies observed in the refineries, despite efforts to stabilize. The results were also negatively impacted by a slower than expected recovery of the international crude prices. This is added to the increased capital requirements for higher accounts receivable due to delays in the Excise Tax payments by the federal government at the end of 2018, higher employee benefits payable (for both actuarial adjustment and payment of defined benefits) and a slower turnover of inventories, as a result of the lack of gasoline experienced during 1Q19, which also negatively impacted domestic sales. This was partially compensated by a positive result in clients, due to the lower exports and inventories from improved turnover given the stability achieved in the domestic supply.

The working capital shows a change in trend, in terms of financing with vendors, with the company strengthening its strategic relationships during the LTM at 4Q19 for the supply of its principal inputs through term payments, with a factoring program, which has allowed Pemex to continue to refinance with its vendors. It should be noted that the calculation of the AFCF includes a special adjustment for an estimate of the level of additional taxes the federal government charges Pemex, compared with any other company in Mexico, to consider a more standardized metric in terms of a corporation.

Debt Profile There was a 4.8% reduction in the total debt at 4Q19, in the amount of P$99.1mm, for a total outstanding balance of P$1.983tn (vs. P$2.082tn at 4Q18). This decrease was impacted by the fluctuation of the peso-dollar exchange rate, as Pemex holds 67.4% of its debt in dollars and 21.5% in other currencies, at 2019 close. This fluctuation in the exchange rate had a negative impact of approximately P$81.9mm, therefore, eliminating the effect of the exchange rate, the total debt was reduced by P$17.2mm. This decrease is seen clearly on comparing the total debt in US$, where we observe a total debt at 4Q19

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of US$105.2mm compared with US$105.8mm at 4Q18, a decrease of US$0.5mm (approximately P$10.5mm). This decrease was due primarily to the supports received from the federal government, noting the US$5.0mm received last September (approximately P$97.1mm). Pemex is expected to maintain its debt, in constant pesos, through the next three years at the same levels as observed, which we estimate the State-owned Productive Enterprise will be able to achieve with the supports received and expected to receive from the federal government, through both direct contributions and changes to Pemex’s tax structure.

In terms of the maturities Pemex has scheduled for the coming years, we note that the company has maintained its debt structure where 90.8% of the total has long-term maturity at 2019 close (vs. 100.0% in 2018), reporting some financial obligations of about P$370mm in 2020 and 2021, which should not present a significant risk to liquidity, given the average cash reported in the last three years of over P$100mm and bank lines of credit for up to US$7.8mm and P$37.0mm. We believe this was the result of the refinancing and prepayment made on the debt in September 2019, refinancing and paying off the total 2019 debt and a portion of the debt maturing in 2020, 2021, 2022 and 2023, extending the maturity on this debt. The refinancing strategy was structured in three segments: 1. Early amortization of debt for US$5.1mm (approximately P$97.1mm), with resources

from a capitalization by the federal government, buying back a portion of the bonds maturing between 2020 and 2023.

2. Release of a US$7.5mm note in the international markets, with three tranches under the Medium-term Promissory Note program:

• US$1.25mm maturing 2027 with 6.49% interest rate

• US$3.25mm maturing 2030 with 6.84% interest rate

• US$3.0mm maturing 2050 with 7.69% interest rate 3. Debt exchange, to soften the intermediation and long portion of the maturity profile

curve, exchanging US$3.7mm in bonds maturing between 2022 and 2025, and US$3.9mm in bonds maturing between 2041 and 2046. To do this, Pemex issued bonds with the following maturities:

• US$1.1mm maturing 2027 with 6.49% coupon



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In addition to the transaction above, on January 21, 2020 Petróleos Mexicanos announced an operation to place and refinance debt. The operation was structured in three parts:

1. US$5.0mm placed on the international capital markets in two tranches, under the

medium-term promissory note program:

• US$2.5mm maturing January 2031 with 5.95% coupon

• US$2.5mm maturing January 2060 with 6.95% coupon

2. US$62m debt buyback on the bonds maturing 2020.

3. Debt exchange for new references at 11 and 40 years, exchanging US$1.3mm in bonds maturing 2021 to 2026 for a new 11-year note and US$1.3mm in bonds maturing 2044 to 2048 for a new 40-year note.

The following graph shows the amortization schedule according to the current debt structure at 4Q19.

Incorporating the cash and cash equivalents, the Pemex net debt at 4Q19 decreased 3.9% over the fourth quarter the previous year, with P$1.923tn (vs. P$2.000tn at 4Q18), results that were influenced by a directive given by the current federal government to not take on new debt, in real terms, over the next three years. It is relevant to note that the cash and cash equivalents were 26.0% below the previous year, which we believe was the result of the operation to manage liabilities conducted by Pemex during 3Q19 and 4Q19. Our scenarios assume the debt levels observed will be maintained given the reduced financial requirements to cover the financial obligations. These results, together with the AFCF, maintained our principal analysis metrics within the range for the previous year, reaching a debt service coverage ratio or DSCR with cash of 1.1x in 2019 (vs. 1.4x

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at 2018 close), and also a Years Payment on Net Debt to AFCF ratio of 5.6 years for the same period (vs. 6.0 years in 2018).

Hedging Financial Instruments

As part of the hedge strategies to cover the volatility in oil prices, the exchange rate and interest rates, Pemex has developed a regulatory framework on financial risk management, comprised of policies and guidelines to regulate the use of derivatives. The hedge or coverage plan states that Pemex will cover, primarily, its exposure to foreign currencies other than the dollar and variable interest rates associated with its debt, plus the natural coverage from hydrocarbon sales at dollar prices. Additionally, the open positions on the volume of crude and natural gas are related to the analysis of the Pemex revenue and expenditure structure, to identify the principal risk factors related to oil prices, taking into account that, according to the current tax structure, part of this risk is transferred to the Mexican government. Taken as a whole, the fair value was approximately P$1.372mm at 4Q19.

Pemex’s strategy to mitigate risk in contracting derivatives, permits only counterparty operations with financial institutions holding a minimum BBB- credit rating, global scale and maintains a diversified portfolio of counterparties. Pemex’s exposure to the fluctuations in the exchange rate is mainly associated with its debt, which represented 93.0% of the Pemex monetary liability position at 4Q19. The portion of the debt in dollars, which represents more than 77% of the debt not denominated in pesos or UDIs, is covered by Pemex revenue. A significant amount of this (approximately 43% of the total revenue) comes from exports of crude and other oil products, the prices for which are set and paid in dollars. Additionally, the revenue from domestic sales of gasoline, diesel, natural gas and derivatives, liquefied gas and petrochemicals are indexed in dollars. Meanwhile, all the debt placed in foreign currencies other than the dollar is covered through derivatives, with swaps (to convert to dollars) or through other hedges, to mitigate the exposure to risk associated with exchange rates. Regarding the risk of fluctuations in the reference interest rate, Pemex has, on occasion, contracted interest rate hedges for strategic reasons or to compensate the flows

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expected. At 4Q19, approximately 14.1% of the outstanding balance on the debt at variable interest is covered through interest rate swaps.

An oil hedge for the 2020 fiscal year was implemented in 2019 as part of the Annual Oil Hedge Program, covering 243Mbd, at a cost of US$178.3m. This coverage represents 14.1% of the average per day production observed (1,726Mbd) so far in 2020 (January and February), equal to 49 days of production.

Scenarios Analysis

Under the corresponding methodology, HR Ratings conducted an analysis of the results reported by the State-owned Productive Enterprise and the expected scenarios for the periods projected, from 2020 to 2024, using base and stressed estimates. The analysis also includes an assessment of our principal metrics related to the strength of the ability to pay financial obligations. A comparative is offered following, with the principal assumptions and results expected under both scenarios.

Prices and Production Under a base scenario, the price for Mexican Mix would be expected to hold at an average US$52.0 per barrel for 2021 and 2022, and US$53.0 per barrel for 2023 and 2024, after exceeding the initial estimates of US$49.0 per barrel for 2020, but lower than the US$57.1 per barrel average observed during the first nine months of 2019 and the projection of US$55.8 per barrel for the rest of the year. This would mean under this scenario that the estimate for the export price of crude would reach an average US$51.0 per barrel for the periods projected, lower than the average US$62.0 per barrel projected in our previous review.

These estimates are related to the base reference prices of the West Texas Intermediate (WTI). It is therefore estimated that international crude prices could continue to decline in the coming years due to lower demand, as a result of the deceleration of industrial activity worldwide and stockpiling of inventories, and reduced imports of US crude to China (one of the largest consumers of oil).

Added to the above is the expectation that crude production in the United States will continue an upward trend, estimating 12.4MMbd at 2019 close and 13.3MMbd in 2020. It should be noted that this sharp growth in the supply has not been compensated by

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actions taken by the OPEC and Russia, which have set a regulatory policy on crude production to stabilize prices through supply levels. Our stressed scenario took into consideration that the supply of crude from the United States would represent levels above the drop in markets like Venezuela and Iran; leading to a downward trend in prices to approximately US$46.3 per barrel for the years projected, slightly lower than the average U$$47.7 per barrel observed between 2016 and 2018.

In terms of production, the base scenario estimates the State-owned Productive Enterprise will report average levels of 2,129Mbd in crude production for 2020-2024 (vs. 1,707Mbd observed in 2019) after maintaining continuity in the strategy to increase production at wells, driven by the federal supports and the change to Pemex’s tax structure. The principal fields that currently present the greatest potential for growth in production include Ayatsil, Balam and Sihil, among others, and also the expected production at new fields, Xikin, Ixachi and Esah, for both crude and gas in shallow waters and onshore. Additionally, the continuity of the 2019-2024 Business Plan is maintained through strategic relationships with private interests via service contracts to reactivate production at mature fields, and also the exploitation of the 22 onshore and shallow water fields that Pemex will start to produce starting October this year. In contrast, under a scenario with adverse conditions, production could be limited with average levels estimated at 1,782Mbd for 2020-2024, primarily related to a delay in the exploitation of the 22 fields presented in the Pemex Business Plan and the impossibility of reverting the downward trend in the production volumes observed in recent years.

The principal operational assumptions in terms of production and price estimated by HR Ratings for 2020-2024 follows.

Total Sales and EBITDA Margin The total sales for Pemex under a base scenario estimate an average growth of 4.0% for 2020-2024, considering figures of P$1.167tn for 2020, P$1.345tn for 2021, P$1.465tn for 2022, P$1.521tn for 2023, and P$1.652tn for 2024, principally related to the volume of crude estimated to cover the import replacement strategy and the consequent reduction in exports. This is in keeping with the strategy of the current federal government to reactivate the national oil refining system and reduce the dependence on imports to cover

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the internal demand for crude. However, the low levels of profitability observed for the refineries carry high operating costs.

Pemex has invested in the reactivation and stabilization of its refineries, and the startup of a new refinery in the Dos Bocas region. This is in keeping with the company’s strategy to gradually replace imports of refined products with domestic production. Additionally, as mentioned, the comprehensive service contracts are expected to continue, dividing the investment and operating risk among private interests, to reactivate and increase production at the mature fields assigned to Pemex. Lastly, gas production has maintained a downward trend in the last year, which is estimated to be turned around primarily with the incorporation of new fields that promise an increase in the production of natural gas.

This same base scenario assumes that Pemex will maintain its strategies to reduce unscheduled stoppages, primarily at refineries and operating wells not producing acceptable levels of profitability under the business plan. The Adjusted EBITDA Margin estimated in this scenario presents an average 24.9% for 2020-2024 (vs. 25.9% and 35.2% observed in 2019 and 2018); which we believe could be maintained with the federal support strategy to lower the tax pressure on Pemex’s financial results, increased crude production, which would allow for greater absorption of the fixed costs and expenses, and the expected growth in internal demand, based on sale prices, and also improved efficiency in the refining costs.

Also, of note is the price strategy for oil products, primarily gasoline and diesel, which has helped to main acceptable levels of profitability by transferring the logistics costs to the domestic sale prices. Additionally, in terms of the pension plan and given the recent review of the Collective Bargaining Agreement, the Defined Contribution Plan is expected to continue, which has allowed Pemex to reduce the pressure on its liquidity, taking advantage of the support from the federal government through federal promissory notes to support the labor liability, as established in the Energy Reform.

Our stressed scenario estimates the production-price ratio will present lower growth in net sales, at -0.1% for 2020-2024, reaching P$923mm for 2020, P$992mm for 2021, P$1.052tn for 2022, P$1.137tn for 2023 and P$1.275tn for 2024; primarily due to delays in the exploration and production process, added to a deceleration in the increase in prices because of higher international inventories and lower efficiencies in the national oil refining system. However, the impairment projected in this scenario is expected to make a relative recovery in revenue as of 2022, following the inertia of production, the participation of private interests in the exploitation of mature fields and the new refinery in Dos Bocas, Tabasco.

Additionally, it is estimated that the company’s strategy in terms of maximizing operating revenue in production may not represent adequate levels for the current wells in operation and the refineries to become self-sufficient; therefore, the Adjusted EBITDA margin in the stressed scenario could be an average 4.9% lower for 2020-2024. It is important to note that these costs consider the tax burden, which under a scenario with adverse conditions where the prices for Mexican mix follow a downward trend, will have a direct impact on the lower absorption of these costs, resulting in lower profitability. Meanwhile, it is estimated that the start of operations of the new Dos Bocas refinery, which we expect to have fewer unscheduled stoppages and lower maintenance costs, could have a positive effect on the Adjusted EBITDA margin as of 2024.

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Adjusted Cash Flow (AFCF) and debt levels The AFCF estimated in a base scenario considers figures of P$69mm for 2020, P$261mm for 2021, P$368mm for 2022, P$372mm for 2023, and P$291mm for 2024, principally related to the operational profitability estimated from the production and sales strategies. As mentioned in previous reviews, the factors that represent no impact on cash flow do have a direct impact on the exchange rate fluctuation, on the debt and the loss due to impairment on the company’s assets. Our projections estimate that the operating results for Pemex will continue to compensate the impacts on costs and expenses associated with the virtual movements reverted in the statement of cash flows, reporting net flow before working capital. Meanwhile, the working capital remains directly related to the operating activities of Pemex, principally in terms of inventories, where a large portion is product in transit or fuels available for domestic sale. Additionally, the levels of financing through vendors are directly limited to the Pemex expenditure budget and the operating growth strategy. In the coming years, Pemex will maintain a net trend focused on settling its liabilities with third parties as a sign of strength in its operations influenced by the estimated recovery of oil prices.

It should be noted that the calculation of the AFCF includes a special adjustment according to the estimate for the additional taxes the federal government charges Pemex, compared with any other company in Mexico, to consider a more standardized metric in terms of a corporation.

Meanwhile, Pemex’s strategy in terms of taking on new debt has been to maintain zero increase in its debt, in real terms, for the next three years, to then gradually reduce the debt. In this regard, our expectation for the coming years takes into consideration that the direct supports the federal government has recently given to Pemex are extraordinary and not recurring, while the volatility in the exchange rate makes it difficult to predict the final effect on the debt. However, we expect the indirect support, reflected in a

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substantially lower tax burden, will continue to produce improved operating results, particularly as of 2020.

Based on that discussed, the net debt has experienced a decrease year-over-year, following the injection of capital from the federal government last September, plus Pemex’s operating strategy to improve its profitability and increate its levels of crude production, which, will mean that Pemex will maintain its primary and financial balance with a downward trend, reducing Pemex’s exposure to new financing. This is reflected in our base scenario, considering the net debt would report levels of P$2.364tn for 2020, P$2.503tn for 2021, P$2.825tn for 2022, P$3.144tn for 2023, and P$3.476tn for 2024. These factors translate into stability in the principal analysis metrics, estimating DSCR levels of 0.2x for 2020, 0.4x for 2021, 0.5x for 2022, and 0.4x for 2023 and 2024 under a base scenario, with Years Payment of Net Debt to AFCF at 34.0 years for 2020, 9.6 years for 2021, 7.7 years for 2022, 8.4 years for 2023, and 8.9 years for 2024.

Under a scenario with adverse conditions, which projects a lower operational profitability following the decline in production considering the current installed capacity, and also lower crude prices, the AFCF estimated for Pemex would be P$30mm for 2020, P$84mm for 2021, P$106mm for 2022, P$111mm for 2023, and P$125mm for 2024. Added to this, Pemex could be expected to require greater levels of debt in order to cover investments so as to continue with their strategy to maximize the profitability of the production units, such as refineries and those related to crude exploration and extraction, which would translate into higher levels of debt than those estimated under a base scenario at P$2.686tn for 2020, P$3.085tn for 2021, P$3.780tn for 2022, P$4.645tn for 2023, and P$5.660tn for 2024. This could lead to a deceleration of the DSCR with 0.1x for 2020, 0.2x for 2021, and an average 0.2x for 2022-204; and Years Payment of Net Debt to AFCF at 90.0 years for 2020, 36.5 years for 2021, 35.6 years for 2022, 41.7 years for 2023, and 45.5 years for 2024 under a stressed scenario.

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Our analysis considered a technical note that incorporates two fundamental principles related to credit rating that HR Ratings gives Pemex. The first is the belief that the federal government has an implicit guarantee that supports Pemex’s debt; therefore, the Pemex rating must be the same as that given for Mexico’s Sovereign Debt. The sovereign debt rating is not an assessment of the Mexican government, rather it seeks to rate the total debt of the public sector. Formally, Mexico’s public debt includes: 1) the federal government, 2) the State-owned Productive Enterprises, and 3) the development banks. Our assessment of Mexico’s Sovereign Debt incorporates the first and second parts. Pemex is included in the second, as a State-owned Productive Enterprise.

The second principle is related to the tax burden or tax structure of Pemex, given the high level of taxes set as a state entity operating as a virtual monopoly in the extraction of resources, which, at the end of the day, belong to the state and not to Pemex. Therefore, our calculation of the Adjusted Free Cash Flow reviewed a significant portion of the taxes that Pemex pays, in order to determine the Free Cash Flow for the State-owned Productive Enterprise as though it were a “regular” corporate entity.

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Appendix – Baseline Scenario

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Appendix – Stress Scenario

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Glossary • Barrel: Unit of volume for oil and derivative hydrocarbons, equal to 42 gal. (US) or

158.987304 liters. One cubic meter equals 6.28981041 barrels.

• Barrel of oil equivalent (COE): The volume of gas (or other energy sources) expressed in barrels of crude, equivalent to the same amount of energy (energy equivalency) obtained from crude.

• Barrels per day (bpd): In production, the number of barrels of hydrocarbons produced in a 24-hour period. This is usually given as an average figure over a longer period. It is calculated dividing the number of barrels during the year by 365 or 366 days, accordingly.

• Fuel: Refers to any substance used to produce thermal energy through a chemical or nuclear reaction. The energy produced by the conversion of a combustible mass to heat.

• Adjusted Free Cash Flow (AFCF): Net Flow from Operating Activities – Investment Expenses for Maintenance – Special Adjustments.

• Net Debt to AFCF: Net Debt / AFCF 12 months

• Net Debt to EBITDA: Net Debt / EBITDA 12 months

• Debt Service Coverage Ratio (DSCR): Cash Flow 12m / Debt Service 12m (Interest + Amortizations of Capital).

• Natural gas: A mix of light paraffinic hydrocarbons, with methane as the main constituent with small quantities of ethane and propane; with variable proportions of non-organic gases, nitrogen, carbon dioxide and hydrogen sulfide. Natural gas may be found in association with crude or may be found independently in unassociated gas wells or dry gas.

• Hydrocarbons: Group of organic compounds that contain mainly carbon and hydrogen. These are the simplest organic compounds and can be considered the principal substances from which are other organic compounds are derived.

• Excise Tax: Special tax on production and services, by which the federal government taxes self-consumption and the sale of gasoline, diesel and natural gas by Pemex Refinación and Pemex Gas y Petroquímica Básica to authorized retailers, who in turn sell directly to the end consumer.

• Reserve: The portion feasible to recover from the total volume of hydrocarbons existing in subsoil rock.

• Probable reserve: The amount of hydrocarbons estimated as of a specific date, using drilled and undrilled boring holes, defined by geological and geophysical methods, located in areas adjacent to productive deposits where there are technical and economic probabilities of obtaining production of hydrocarbons, at the same stratigraphic level where there are proved reserves.

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• Proved reserve: The volume of hydrocarbons measured at atmospheric conditions, which can be economically productive, using the exploitation methods and systems applicable at the time of the assessment, both primary and secondary.

• Possible reserves: The quantity of hydrocarbons estimated on a specific date in undrilled boring holes, defined using geological and geophysical methods, located in areas away from producing fields, but within the same geologic province, with possibilities of technically and economically producing hydrocarbons, at the same stratigraphic level where there are proved reserves.

• Mbd and MMbd: Thousands of barrels per day (Mbd) and millions of barrels per day (MMbd).

• MMboe: Millions of barrels of oil equivalent.

• MMfcd: millions of cubic feet per day

• mm: thousands of millions.

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HR Ratings Management Contacts Management

Chairman of the Board of Directors Vice President of the Board of Directors

Alberto I. Ramos +52 55 1500 3130 Aníbal Habeica +52 55 1500 3130

[email protected] [email protected]

Chief Executive Officer

Fernando Montes de Oca +52 55 1500 3130

[email protected]

Analysis

Chief Credit Officer Deputy Chief Credit Officer

Felix Boni +52 55 1500 3133 Pedro Latapí +52 55 8647 3845


UNSECURED PUBLIC FINANCE / SOVEREIGNS SECURED PUBLIC FINANCE / INFRASTRUCTURE

Ricardo Gallegos +52 55 1500 3139 Roberto Ballinez +52 55 1500 3143


Álvaro Rodríguez +52 55 1500 3147 Roberto Soto +52 55 1500 3148


Financial Institutions / ABS Corporates / ABS

Angel García +52 55 1253 6549 Luis Miranda +52 55 1500 3146


Methodologies José Luis Cano +52 55 1500 0763

[email protected]

Alfonso Sales +52 55 1253 3140

[email protected]

Regulation

Chief Risk Officer Head Compliance Officer

Rogelio Argüelles +52 181 8187 9309 Alejandra Medina +52 55 1500 0761


Business Development

Business Development

Francisco Valle +52 55 1500 3134

[email protected]

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Mexico: Guillermo González Camarena No. 1200, Piso 10, Colonia Centro de Ciudad Santa Fe, Delegación Álvaro Obregón, C.P. 01210, Ciudad de México. Tel 52 (55) 1500 3130. United States: One World Trade Center, Suite 8500, New York, New York, ZIP Code 10007, Tel +1 (212) 220 5735.

Complementary information

Previous Rating.

PEMEX LT: HR AAA Stable Outlook PEMEX ST: HR+1 PEMEX Global rating: HR A- (G) Negative Outlook PEMEX 11U: HR AAA Stable Outlook PEMEX 11-3: HR AAA Stable Outlook PEMEX 12U: HR AAA Stable Outlook PEMEX 13-2: HR AAA Stable Outlook PEMEX 14: HR AAA Stable Outlook PEMEX 14U: HR AAA Stable Outlook PEMEX 14-2: HR AAA Stable Outlook PEMEX 15U: HR AAA Stable Outlook PEMEX 19: HR AAA Stable Outlook PEMEX 14-2 (G): HR A- (G) Negative Outlook PEMEX 15U (G): HR A- (G) Negative Outlook 2.500% Notes 2021: HR A- (G) Negative Outlook 3.750% Notes 2024: HR A- (G) Negative Outlook 4.875% Notes 2028: HR A- (G) Negative Outlook 3.750% Notes 2025: HR A- (G) Negative Outlook 6.500% Notes 2027: HR A- (G) Negative Outlook 6.750% Notes 2047: HR A- (G) Negative Outlook 5.350% Notes 2028: HR A- (G) Negative Outlook 6.350% Notes 2048: HR A- (G) Negative Outlook Notes 2023: HR A- (G) Negative Outlook Notes 2025: HR A- (G) Negative Outlook Notes 2029: HR A- (G) Negative Outlook Notes 2022: HR A- (G) Negative Outlook 6.49% Notes 2027: HR A- (G) Negative Outlook 6.84% Notes 2030: HR A- (G) Negative Outlook 7.69% Bonds 2050: HR A- (G) Negative Outlook 6.00% Notes 2029; HR A- (G) Negative Outlook PEMEX 2,250M EUR: HR A- (G) Negative Outlook

Date of the last Rating Action.

PEMEX LP: October 2, 2018 PEMEX CP: October 2, 2018 PEMEX Global: November 6, 2018 PEMEX 11U: October 2, 2018 PEMEX 11-3: October 2, 2018 PEMEX 12U: October 2, 2018 PEMEX 13-2: October 2, 2018 PEMEX 14: October 2, 2018 PEMEX 14U: October 2, 2018 PEMEX 14-2: October 2, 2018 PEMEX 15U: October 2, 2018 PEMEX 19: December 10, 2019 PEMEX 14-2 (G): November 6, 2018 PEMEX 15U (G): November 6, 2018 2.500% Notes 2021: November 6, 2018 3.750% Notes 2024: November 6, 2018 4.875% Notes 2028: November 6, 2018 3.750% Notes 2025: November 6, 2018 6.500% Notes 2027: November 6, 2018 6.750% Notes 2047: November 6, 2018

The rating assigned by HR Ratings LLC to the entity, issuer and/or issue is based upon the analysis performed under a base case and stress case scenario, in accordance with the following methodology(ies) established by the rating agency: Rating Methodology for Corporate Debt Credit Risk Evaluation, May 2014 General Methodological Criteria, March 2019 Sovereign Debt Methodology, May 2017 Adjustments for the Free Cash Flow and Pemex Debt as Sovereign Technical Note, October 2014 For more information with respect to this (these) metodology(ies), please consult the website:

www.hrratings.com/en/methodology

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5.350% Notes 2028: November 6, 2018 6.350% Notes 2048: November 6, 2018 Notes 2023: November 6, 2018 Notes 2025: November 6, 2018 Notes 2029: November 6, 2018 Notes 2022: November 6, 2018 6.49% Notes 2027: September 23, 2019 6.84% Notes 2030: September 23, 2019 7.69% Bonds 2050: September 23, 2019 6.00% Notes 2029: November 6, 2018 PEMEX 2,250M EUR: November 6, 2018

Period of the financial information used by HR Ratings for the assignment of the current rating.

1st Quarter 2011 to 4th Quarter 2019.

Main sources of information used, including third parties. Internal financial and operational report published by the Company, final term sheet of the notes and bonds, presentations issued by the Company and Audited Financial Statements by BOD and KPMG for 2018 year.

Ratings assigned by other rating agencies that were used by HR Ratings (if so). NA

HR Ratings considered at the moment of assigning or reviewing the rating, the existence of mechanisms designed to align the incentives between the originator, servicer and guarantor and the possible buyers of the rated instrument (where it applies).

NA

*HR Ratings, LLC (HR Ratings), is a Credit Rating Agency registered by the Securities and Exchange Commission (SEC) as a Nationally Recognized Statistical Rating Organization (NRSRO) for the assets of public finance, corporates and financial institutions as described in section 3 (a) (62) (A) and (B) subsection (i), (iii) and (v) of the US Securities Exchange Act of 1934.

The rating was solicited by the entity or issuer, or on its behalf, and therefore, HR Ratings has received the corresponding fees for the rating services provided. The following information can be found on our website at www.hrratings.com: (i) The internal procedures for the monitoring and surveillance of our ratings and the periodicity with which they are formally updated, (ii) the criteria used by HR Ratings for the withdrawal or suspension of the maintenance of a rating, (iii) the procedure and process of voting on our Analysis Committee, and (iv) the rating scales and their definitions. HR Ratings ratings and/or opinions are opinions of credit quality and/or regarding the ability of management to administer assets; or opinions regarding the efficacy of activities to meet the nature or purpose of the business on the part of issuers, other entities or sectors, and are based exclusively on the characteristics of the entity, issuer or operation, independent of any activity or business that exists between HR Ratings and the entity or issuer. The ratings and/or opinions assigned are issued on behalf of HR Ratings, not of its management or technical staff, and do not constitute an investment recommendation to buy, sell, or hold any instrument nor to perform any business, investment or other operation. The assigned ratings and/or opinions issued may be subject to updates at any time, in accordance with HR Ratings’ methodologies. HR Ratings bases its ratings and/or opinions on information obtained from sources that are believed to be accurate and reliable. HR Ratings, however, does not validate, guarantee or certify the accuracy, correctness or completeness of any information and is not responsible for any errors or omissions or for results obtained from the use of such information. Most issuers of debt securities rated by HR Ratings have paid a fee for the credit rating based on the amount and type of debt issued. The degree of creditworthiness of an issue or issuer, opinions regarding asset manager quality or ratings related to an entity’s performance of its business purpose are subject to change, which can produce a rating upgrade or downgrade, without implying any responsibility for HR Ratings. The ratings issued by HR Ratings are assigned in an ethical manner, in accordance with healthy market practices and in compliance with applicable regulations found on the www.hrratings.com rating agency webpage. There Code of Conduct, HR Ratings’ rating methodologies, rating criteria and current ratings can also be found on the website. Ratings and/or opinions assigned by HR Ratings are based on an analysis of the creditworthiness of an entity, issue or issuer, and do not necessarily imply a statistical likelihood of default, HR Ratings defines as the inability or unwillingness to satisfy the contractually stipulated payment terms of an obligation, such that creditors and/or bondholders are forced to take action in order to recover their investment or to restructure the debt due to a situation of stress faced by the debtor. Without disregard to the aforementioned point, in order to validate our ratings, our methodologies consider stress scenarios as a complement to the analysis derived from a base case scenario. The rating fee that HR Ratings receives from issuers generally ranges from US$1,000 to US$1,000,000 (or the foreign currency equivalent) per issue. In some instances, HR Ratings will rate all or some of the issues of a particular issuer for an annual fee. It is estimated that the annual fees range from US$5,000 to US$2,000,00 (or the foreign currency equivalent).

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Documents

Petróleos Mexicanos HR AAA HR+1 · subsection (i), (iii) and (v) of the US Securities Exchange Act of 1934. Twitter: @HRRATINGS Petróleos Mexicanos State-owned Enterprise HR AAA