Fitch Ratings has affirmed Pan American Energy S.L.'s (PAE) Long-Term Foreign Currency (FC) Issuer Default Rating (IDR) and its Long-Term Local Currency (LC) IDR at 'BB-'.
The Rating Outlook is Stable.
Fitch has also affirmed the ratings of the senior secured and unsecured notes issued by Pan American Energy, S.L., Argentine Branch, which are guaranteed by Pan American Energy S.L. at 'BB-'.
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, given that hard-currency cash flows from operations in Mexico are not enough to cover HC interest expenses yet.
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 8% and 5% 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 90% of its EBITDA by FY2023. An increase contribution to EBITDA from Mexico and Bolivia during the rating horizon could result in the applicable Country Ceiling changing from Bolivia (Country Ceiling of B-) to Mexico (Country Ceiling of BBB+), per Fitch's Corporate Rating Criteria.
Integrated Business Model: PAE's energy business model in Argentina gives the company flexibility to optimize profitability. It's oil and gas (O&G) business is the largest privately owned, with 16% market share in oil production and 14% in gas production; and it's 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 1,643MMboe 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 LTM June 2023. Total debt to 1P reserves was USD1.55/boe as of FY 2022. Fitch estimates the company's gross leverage will average 1.3x between 2023-2026, assuming debt close to USD2.8billion 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 Limited (A+/Stable). Despite this, PAE's ratings are not impacted 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 20 years compare favorably to other 'BB' rated oil and gas E&P producers. These peers include Murphy Oil Corporation (BB+/Stable) with 196kboed and YPF SA (CCC-) with 529kboed. Further, PAE reported 1,643 million boe of 1P reserves at the end of 2022 equating to a reserve life of 20.2 years, higher than Murphy Oil's at 10 years. Fitch expects the company will be able to maintain its strong reserve life.
Fitch estimates PAE 2023 EBITDA gross leverage to be 1.3x, higher than Murphy Oil of 0.8x. On debt to 1P reserve basis, Fitch estimates PAE's debt as of 2022 to 1P reserves at USD1.55boe lower than Murphy Oil at USD2.63boe 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 price deck is applied at USD80bbl in 2023, USD75bbl in 2024, USD70bbl in 2025 and USD65bbl in 2026;
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 2023-2026;
Production cost of $11.0boe between 2022-2025;
Royalties of $7.0boe between 2022-2025;
SG&A of $6.0boe between 2022-2025;
Annual consolidated capex averaging of USD1,700 million per year from 2023-2026;
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's the second largest oil and gas producer in Argentina and the largest exporter of oil.
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
Fitch has revised Pan American Energy's ESG Relevance Score for GHG Emissions & Air Quality to '4' from '3' due to the growing importance of the continued development and execution of the company's energy-transition strategy. This 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 
