Fitch Ratings has assigned a 'BB-' rating to Pan American Energy, S.L., Argentine Branch's proposed issuance of up to USD500 million of amortizing senior secured notes due in 2032.
The notes will be guaranteed by Pan American Energy S.L. (PAE; BB-/Stable), and net debt proceeds will be used to finance capex and working capital, growth of its Oil & Gas business in Argentina and other general corporate purposes.
PAE's 'BB-' ratings reflect its stable production track record, large reserve base, and low leverage. The applicable Country Ceiling is Bolivia's 'B-' rating.
The FC IDR is three-notches above the Country Ceiling given that cash held abroad by the company, and cash flows from its Mexican and Bolivian operations, adequately cover the next 24 months of debt service by a ratio in excess of 1.5x. Fitch estimates EBITDA from Mexico and Bolivia represent 13% and 2% of total EBITDA, respectively.
Key Rating Drivers
Geographic Diversification: PAE's operations in Mexico and Bolivia are positive credit considerations. Still, the company's overall credit quality remains highly tied to Argentina, as PAE's operations in that country represents an estimated 80% of its EBITDA by FY2023. An increase contribution to EBITDA from Mexico over the rating horizon could result in the applicable Country Ceiling changing from Bolivia (Country Ceiling B-) to Mexico (Country Ceiling BBB+), per Fitch's Corporate Rating Criteria.
Integrated Business Mode: PAE's energy business model in Argentina gives the company flexibility to optimize profitability. It operates the country's largest privately owned oil and gas (O&G) business, with 16% market share in oil production and 14% in gas production, and it is the third largest refiner with a 15% market share. PAE has a strong and stable production profile that is consistent with a higher rating category. Fitch's base case assumes production will average 222kboe/d over the rating horizon. PAE reported 1,647MMboe in 1P reserves, consistent with the 'BBB' rating category.
Solid Leverage Metrics: The company's capital structure remains strong with gross leverage of 1.1x as of FY2023. Total debt to 1P reserves was USD1.4/boe as of FY2023. Fitch estimates the company's gross leverage will average 1.2x between 2024-2026, assuming debt close to USD3.0billion and average EBITDA per year of USD2.1 billion over the next three years. The company has solid access to capital and will likely refinance its debt at competitive rates, especially with its Mexican asset in full operation.
Strong Ownership: PAE is rated on a standalone basis. Per Fitch's parent-subsidiary criteria, it views the legal, strategic and operational incentive from its shareholders as low. The company's primary shareholders, which is a 50/50 strategic alliance between BP plc (A+/Stable) and BC Energy Investments Corp. ([BC Energy] formerly known as Bridas Corporation). BC Energy is also a 50/50 joint venture between Bridas Energy Holdings Ltd. and CNOOC International Ltd, a subsidiary of CNOOC Limited (A+/Negative). Despite this, PAE's ratings are not affected by those of its shareholders. The company stands to benefit from their industry and international expertise and relationships with global creditors.
Derivation Summary
PAE's FC IDR continues to be constrained by the Argentine Operating Environment (OE) of 'b'; however, its medium production size of 222kboed and strong 1P reserve life of close to 19 years compare favorably to other 'BB' rated oil and gas E&P producers. These peers include Murphy Oil Corporation (BB+/Positive) with 193kboed and YPF SA (CCC-) with 514kboed. Further, PAE reported 1,647 million boe of 1P reserves at the end of 2023 equating to a reserve life of 20.4 years, higher than Murphy Oil's at 10.3 years. Fitch expects the company will be able to maintain its strong reserve life.
Fitch estimates PAE's 2024 EBITDA gross leverage to be 1.2x, higher than Murphy Oil of 0.6x. On debt to 1P reserve basis, Fitch PAE's debt as of 2023 to 1P reserves at USD1.40boe lower than Murphy Oil at USD1.84boe and YPF at USD6.50boe. PAE operates in a lower OE, which is a constraining factor for its ratings, but receives a three-notch uplift from the Country Ceiling due to its cash flows from export revenues and cash flows from abroad.
Key Assumptions
Fitch's Key Assumptions Within Our Rating Case for the Issuer Include
Fitch's price deck is applied at USD80bbl in 2024, USD70bbl in 2025, USD65bbl in 2026 and USD60bbl in 2027;
A reserve replacement ratio of 102% per annum;
Domestic gas price of USD3.7MMBTU in 2023 and USD3.50MMBTU over the rated horizon;
Average gross production of 222kboe/d between 2024-2026;
Production cost of $11.0boe between 2024-2026;
Royalties of $7.0boe between 2022-2026;
SG&A of $6.0boe between 2023-2026;
Annual consolidated capex averaging of USD1,700 million per year from 2024-2026;
No dividend payments.
RATING SENSITIVITIES
Factors That Could, Individually or Collectively, Lead to Positive Rating Action/Upgrade
Cash flows from operations in Mexico adequately covering hard currency gross interest expense by at least 2.5x for 12 months, while maintaining hard currency debt service coverage ratio above 1.5x.
Factors That Could, Individually or Collectively, Lead to Negative Rating Action/Downgrade
Downgrade of the Country Ceiling of Bolivia;
PAE's ratings could be negatively affected if hard-currency liquidity is weakened by capital controls;
Inability to renew hard-currency committed credit lines from highly rated international banks.
Liquidity and Debt Structure
Strong Liquidity: Fitch believes PAE can comfortably service debt with cash on hand and cash flows through the rating horizon in the event the company faces a challenging financing environment due to the Argentina's capital controls. PAE also has a strong track record of tapping local and international markets and accessing capital at competitive rate.
Issuer Profile
PAE is a leading integrated energy company with upstream and downstream operations in Argentina, as well as upstream operations in Bolivia and Mexico. It is the second largest oil and gas producer in Argentina and the largest exporter of oil.
Date of Relevant Committee
07 December 2023
REFERENCES FOR SUBSTANTIALLY MATERIAL SOURCE CITED AS KEY DRIVER OF RATING
The principal sources of information used in the analysis are described in the Applicable Criteria.
ESG Considerations
Pan American Energy's has an ESG Relevance Score of '4' for GHG Emissions & Air Quality due to the growing importance of policies designed to limit the greenhouse gas (GHG) emissions from the production of oil and gas and potentially lessening demand, which has a negative impact on the credit profile, and is relevant to the ratings in conjunction with other factors.
The highest level of ESG credit relevance is a score of '3', unless otherwise disclosed in this section. A score of '3' means ESG issues are credit-neutral or have only a minimal credit impact on the entity, either due to their nature or the way in which they are being managed by the entity. Fitch's ESG Relevance Scores are not inputs in the rating process; they are an observation on the relevance and materiality of ESG factors in the rating decision. For more information on Fitch's ESG Relevance Scores, visit https://www.fitchratings.com/topics/esg/products#esg-relevance-scores.
MURPHY OIL CORPORATION 
