CORPORATES

OUTLOOK Oil & Gas – Latin America and the Caribbean

2 July 2019
TABLE OF CONTENTS
Commodity prices, operating
discipline favor higher earnings across
disparate sector
Integrated companies not yet
ready to increase capital spending
significantly
Oil companies’ face different
challenges in different countries
Appendix: Key metrics for rated Latin
American oil and gas companies
Moody’s related publications
Analyst Contacts
Nymia Almeida +52.55.1253.5707
Senior Vice President
nymia.almeida@moodys.com
Peter Speer +1.212.553.4565
Senior Vice President
peter.speer@moodys.com
Profitability will pick up in 2020 after slow
2019, supporting capital investment
Our outlook for the Latin American Oil and Gas industry is stable. This outlook reflects our
2 expectations for the fundamental business conditions in the sector over the next 12 to 18
months.
3
4
» Relatively stable oil and gas prices, production and capacity utilization, and
10
11 continued improvements in operating efficiency will all help raise EBITDA
by about 9% for the Latin American oil and gas industry in 2020, somewhat
offsetting weak cash flow in 2019. Stable economic and regulatory environments will
support relatively solid operating results for the major companies in the region, despite
the dissimilarities among them and the countries in which they operate. Lower oil prices
from 2018 and lower production point to a weak 2019, especially for Mexico’s PEMEX. We
would change our outlook to positive if we expected the sector’s EBITDA to grow by more
than 4% over the coming 12-18 months, and to negative if EBITDA appeared on track to
grow by less than 1.5%.

Martina Gallardo +54.115.129.2643 » Despite increasing earnings, heavy debt burdens will keep capital spending
Barreyro subdued in 2019-20 for Latin American oil and gas companies. Solid capital
AVP-Analyst
martina.gallardobarreyro@moodys.com
investment in selected prolific projects—mainly in Brazil—will help keep the region’s
production stable through 2020. Exploration and production (E&P) spending will increase
Marianna Waltz, CFA +55.11.3043.7309
MD-Corporate Finance
in Mexico, and probably in Brazil if majority-state-owned Petrobras succeeds with its asset
marianna.waltz@moodys.com sales program.

» We have a positive view of the oil sector in Brazil, a stable view for Colombia and
Argentina, and a negative view for Mexico. Increasing productivity and stable crude
prices will support E&P capital investment at Petrobras, but debt reduction remains a
focus. The operating environment for Mexico is negative due to uncertain regulatory
framework as well as PEMEX's weak liquidity. The business environment has worsened
in Argentina, and midstream bottlenecks limit growth for Vaca Muerta natural gas
in the near term, but fundamentals continue to support oil E&P at state-owned YPF.
In Colombia, efforts to reduce costs offset threats from guerrilla groups that affect
Ecopetrol’s production growth, but reserve replacement remains difficult.
 MOODY'S INVESTORS SERVICE CORPORATES

Since outlooks represent our forward-looking view on business conditions that factor into our ratings, a negative (positive) outlook suggests
that negative (positive) rating actions are more likely on average. However, the industry outlook does not represent a sum of upgrades,
downgrades or ratings under review, or an average of rating outlooks of issuers in the industry, but rather our assessment of the main
direction of business fundamentals within the overall industry.

Commodity prices, operating discipline favor higher earnings across disparate sector
Our stable outlook for the Latin America oil and gas industry for the next 12-18 months reflects our view that continued operating
discipline will support cash flow generation in 2020 given stable oil and gas prices and production. These positive developments in
2020 will balance weak operating results in 2019, driven by weaker prices from 2018 and lower production across the region. Overall
stable economic and regulatory environments will support operations in the regional sector, even considering the dissimilarities among
both companies and countries.

We anticipate that prices for Brent crude, the international benchmark, will fall between USD55-USD75/barrel (bbl) through at least
2020. Continued improvements in operating efficiency will help raise EBITDA by about 9% for the Latin American oil and gas industry
in 2020. We would change our outlook to positive if we expected the sector’s EBITDA to grow by over 4% in the coming 12-18 months,
and to negative if EBITDA appeared on track to grow by less than 1.5%.

The volatile supply/demand dynamics of oil and gas products make the ability to respond quickly to sudden and sharp changes in
forward views and prices crucial to the operating performance of any company in the sector. We use EBITDA growth as a proxy for our
assessment of the industry operating performance over the next 12-18 months, which in Latin America is mainly driven by oil prices,
economic growth and the regulatory environment of each country (see Exhibits 1-2).

Exhibit 1
Latin America oil and gas industry conditions indicate stable outlook
Indicators and outlook Negative Stable Positive
Average annual Brent price < USD45/bbl USD55-USD75/bbl > USD75/bbl

GDP growth < 1.5% 1.5%-3% > 3%

Regulatory environment /
government policy goals
• High or increasing payments to
government (royalties, dividends,
special taxes)
• Heavy environmental-related capital
spending
• Fuel price controls
• Limitations on imports of equipment
• No clear policy for unconventional
resources
• Usual, stable payments to
government (royalties, dividends,
special taxes)
• No price controls
• Capital spending flexibility and
freedom to import equipment
• No clear policy for unconventional
resources
• Usual, stable payments to
government (royalties, dividends,
special taxes)
• No price controls
• Capital spending flexibility and
freedom to import equipment
• Clear policy for unconventional
resources

Source: Moody’s Investors Service

This publication does not announce a credit rating action. For any credit ratings referenced in this publication, please see the ratings tab on the issuer/entity page on
www.moodys.com for the most updated credit rating action information and rating history.

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Exhibit 2
GDP rising slightly in oil-producing Brazil, Colombia and Mexico, but rebounding more noticeably in Argentina
Argentina Brazil Colombia Mexico
4.0%
3.5%
3.0%

2.0% 2.0%
1.5%
1.0%

0.0%

-1.0%

-2.0%
2017 2018 2019E 2020E

Source: Moody’s Investors Service

Integrated companies not yet ready to increase capital spending significantly

Although Latin American oil company earnings should improve in 2020, their heavily debt-burdened balance sheets will keep capital
spending subdued (see Exhibit 3) in comparison with previous years, with investment only in selected, higher-margin new projects.
Further reductions in production expenses and finding and development costs will remain a priority amid relatively low commodity
prices.

Although we expect the sector’s earnings to increase in 2020, its investment capacity is still limited after a stretch of low oil prices
worldwide from roughly 2014-16 held back cash flow, affecting production. The integrated sector has partially adapted to low oil prices,
but all of the Latin American companies excluding Ecopetrol have heavy balance-sheet debt burdens in terms of their earnings, and are
more focused on reducing debt than investing in reserves or production.

Except for Mexico’s PEMEX, which has an ambitious exploration and production (E&P) investment program, the oil companies will
make modest capital investments in 2019-20 in line with 2018 levels, preferring selected large-scale, higher-margin new projects. E&P
projects—which tend to absorb about 80%-90% of capital budgets for Latin American integrated oil companies—include the ramping
up of production in offshore Brazilian fields, in the Gulf of Mexico, or in Vaca Muerta in Argentina. By 2020, E&P spending may begin
increasing again in Brazil after majority-state-owned Petrobras reaches its ambitious leverage target of 1.5x net debt/EBITDA in late
2020.

Exhibit 3
Slight increase in capital spending reflects higher investments from PEMEX
Total capital investment for Petrobras, PEMEX, Ecopetrol and YPF
Pemex Petrobras Ecopetrol YPF
$40.0

$35.0

$30.0

$25.0
US billions

$20.0

$15.0 $15.3

$10.0
$8.5
$5.0
$3.5
$0.0 $3.0
2014 2015 2016 2017 2018 2019E 2020E

Source: Moody’s Financial MetricsTM; Moody’s Investors Service (estimates)

3 2 July 2019 Oil & Gas – Latin America and the Caribbean: Profitability will pick up in 2020 after slow 2019, supporting capital investment
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Our forecasts for EBITDA growth rates in 2019-20 do not reflect all accounting adjustments. We usually adjust company’s cash
flow for foreign-exchange fluctuations and certain unusual items, along with operating leases and pension liabilities, which are more
predictable. Despite our estimate for negative EBITDA growth for 2019, actual EBITDA could be higher based on our adjustments.

Meanwhile, our 2019-20 forecast for oil and gas production growth mostly reflects our projections for PEMEX and Petrobras, with
PEMEX’s production declining by 7% in 2019 and growing by 1% in 2020, and Petrobras’ production declining by 1% in 2019 and
growing by more than 5% in 2020 (see Exhibits 4-5). Declining production in 2019 reflects underinvestment in 2015-16, when oil and
gas prices fell sharply.
Exhibit 4 Exhibit 5
Stable oil prices, production growth and cost savings boost Latin America’s oil and gas production will not grow until 2020
integrated adjusted EBITDA growth in 2020
EBITDA Annual growth Production Annual growth
$140.0 30% 3,000 20%
21% 2,578
20% 20% 2,532
$120.0 $114.6 2,434
16% 2,500 2,311 15%

Barrels of oil equivalent (millions)

9% 10% 2,168 2,154
2,081
$100.0 $89.1
0% 2,000 10%

Annual growth
Annual growth
US billions

$80.0 $74.2 $71.3 -10%

$64.1 $65.6
1,500 5%
$60.0 $53.1 -20% 4%
-26%
-30% 1,000 0%
$40.0 -2%
-40% -4% -4%
$20.0 500 -5% -5%
-50% -6%
-54%
$0.0 -60% - -10%
2014 2015 2016 2017 2018 2019E 2020E 2014 2015 2016 2017 2018 2019E 2020E

Note: Growth rates for 2019 and 2020 do not reflect all usual adjustments, except for Moody’s Financial MetricsTM; Moody’s Investors Service (estimates)
operating leases and pension liabilities.
Moody’s Financial MetricsTM; Moody’s Investors Service (estimates)

Oil companies’ face different challenges in different countries

We have a positive view of the oil sector through 2020 in Brazil (Ba2 stable); a stable view for Colombia (Baa2 stable) and Argentina(B2
stable); and a negative view for Mexico (A3 negative).

An integrated oil company’s EBITDA primarily depends on external factors that include oil prices, economic growth and the prevailing
regulatory environment. Factors within an oil company’s control include operating efficiency, asset-base management, the ability
to attract partners to share risk, and to some extent the size and use of capital investment—all of which depend on the company’s
expertise and freedom to make decisions.

For example, Petrobras, Brazil’s major oil company, has significant freedom to direct its spending as it chooses, much as a non-state-
owned integrated oil major. Following its more stringent corporate governance, after a major corruption investigation in 2014-17,
Petrobras plans to lower its debt leverage further; the company has stuck to its plan to sell some of its downstream business to increase
operating efficiency and allocate more capital toward E&P.

Mexico’s federal government relies much more heavily on royalties and taxes from national oil company PEMEX and plays a bigger
role in determining its capital spending. A sharp change in Mexico’s energy agenda will likely affect PEMEX far more than the severe
drop in oil prices in 2014-16. PEMEX, which was slow to react to lower crude prices and lost access to the capital markets in late 2015,
slashed capital and operating spending in 2016-18 and entered into a few associations with certain foreign oil companies to pursue
E&P opportunities. Now a change in the country’s energy agenda may make it difficult for PEMEX to improve its upstream operating
performance while also being burdened with building a new refinery.

4 2 July 2019 Oil & Gas – Latin America and the Caribbean: Profitability will pick up in 2020 after slow 2019, supporting capital investment
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Petrobras reshuffles its business in favorable environment

Our view for the oil and gas industry in Brazil is positive. Increasing productivity in pre-salt areas1 and stable crude prices will support
cash flow generation across the production chain, including the refining business. Higher cash flow will help E&P capital investment
and Petrobras will continue to benefit from asset reshuffling, establishing a virtuous cycle that will increase oil and gas production,
operating efficiency and returns on capital (see Exhibits 6-7).
Exhibit 6 Exhibit 7
Petrobras production will decline slightly overall in 2019-20... ...but pre-salt production will continue to grow
1,000 Non-pre-salt Pre-salt production
1,000 940
921 916 911 900
886 854
900 846
921
Barrels of oil equivalent (millions)

916 920
911

Barrels of oil equivalent (millions)

900 800 179 280
886
900 700 900
490
854 540
846 600 548 604
575 880
500
860
400
800 707
300 641
840
200 426
371
307 271 296 820
100

700 - 800
2014 2015 2016 2017 2018 2019E 2020E 2014 2015 2016 2017 2018 2019E 2020E

Moody’s Financial MetricsTM; Moody’s Investors Service (estimates) Petrobras; Moody’s Investors Service (estimates)

Brazil’s resolution of transfer of rights—granting Petrobras the right to produce up to 5 billion boe through direct contracting in pre-
salt areas not under the concession model—will help Petrobras fund new E&P investment, and also allow the government to move
forward with oil and gas auctions. In addition, the E&P sector’s operating results will profit from a still-robust supply of oil equipment
and services, which will help keep daily rates under control. But Petrobras’ capital investments will remain stable at around $15 billion
in both 2019 and 2020 as the company continues to focus on debt reduction.

Meanwhile, Brazil’s GDP will grow by about 1% in 2019 and 2.0% in 2020, which would support fuel sales volumes and price increases
in a post-recession rebound. Although imports of fuel will continue to stifle Petrobras’ refining revenue, its margins should remain
positive as a result of operating efficiency and a flexible fuel pricing policy.

Brazil’s energy regulatory environment is also favorable to oil companies today—especially Petrobras, which is 40% publicly traded
and represents more than 90% the country’s oil and gas production. The federal government appears to support Petrobras’ effort to
reduce leverage so it can raise capital spending again in the medium term, benefiting both the energy industry and the economy as
a whole. Congress in late 2016 removed the requirement that Petrobras take at least a 30% equity stake in all new E&P projects in
Brazil, giving the company more freedom to decide its investment opportunities. In February 2017, federal regulators relaxed local-
content requirements for oil exploration to only about 25% from an average of 70%, benefiting Brazil’s oil industry by reducing capital-
investment needs and allowing companies to direct more resources toward E&P.

We currently foresee only limited risks for political interference in the energy industry in Brazil, which has had heavy private and foreign
investment for nearly a decade. Petrobras had been free since late 2016 to set fuel prices, but the government forced the company to
lower retail diesel prices to end a 10-day national truckers’ strike that brought the country to a standstill. The government reimbursed
fuel retail companies for the difference between market prices and controlled prices, but payment delays increased Petrobras’ working
capital needs and reduced the incentives for fuel imports. Still, despite government sensitivity to public concerns about fuel prices, it is
unlikely that public policies will significantly affect Petrobras or other refiners and fuel retailers given the subsidies that the government
provide, although with delays.

5 2 July 2019 Oil & Gas – Latin America and the Caribbean: Profitability will pick up in 2020 after slow 2019, supporting capital investment
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Petrobras has also taken firm steps to strengthen its corporate governance after a 2016 law curbed government influence on the boards
of state-owned companies, and has listed some of its new best practices in its bylaws. Such improvements would be difficult to reverse
for such a high-profile company that is constantly under high market scrutiny.

PEMEX faces operating risk in attempt to boost oil production with little private help
The operating environment for Mexico’s (A3 negative) oil industry is negative despite potentially higher capital investments in 2019-20.
PEMEX faces an uncertain regulatory and legal environment, and weak liquidity could hinder its ability to boost capital investment as
planned. Local oil service companies that provide auxiliary services to the oil and gas industry would likely benefit from new business
opportunities if PEMEX can boost its upstream capital spending. We forecast PEMEX’s capital expenditure for oil and gas development
and exploration to grow by close to 21% in 2019 to $6.9 billion, from about $5.7 billion in 2018, but that amount is well below the
minimum $12.5 billion annually that we estimate is necessary to grow oil and gas production and fully replace reserves.

The urgency to stabilize production has led the government to de-emphasize oil and gas exploration, particularly in deepwater. The
government's more nationalistic view of the industry means PEMEX will not enter into new farmouts for the foreseeable future, and
risks accelerating the depletion of its existing oil fields while devoting all of its efforts to stabilizing and then increasing oil production.
The absence of farmouts and associations with third parties for PEMEX will likely hinder the company’s medium term oil and gas trend
and reserve life, and lessen the potential for efficiency gains. The company’s cash flow generation capability is less likely to improve,
raising its cost of debt funding and narrowing its capital market access.

Exhibit 8
PEMEX on track to increase production slightly by 2020, raising risk of accelerating reserve declines
Total production Annual growth
1.3%
1,400 2.0%
1,253
1,159
1,200 0.0%
1,080
Barrels of oil equivalent (millions)

972
1,000 891 -2.0%
831 842

Annual growth
800 -4.0%

-6.8% -6.7%
600 -6.0%
-7.5%
-8.3%
400 -8.0%
-10.0%
200 -10.0%

- -12.0%
2014 2015 2016 2017 2018 2019E 2020E

Source: Moody’s Financial MetricsTM; Moody’s Investors Service (estimates)

The government’s energy agenda is focused on achieving fuel self-sufficiency, despite adequate fuel available for import from the
international markets and substantial refining capacity in Mexico already, if underutilized because of the lack of proper maintenance
or necessary upgrades. To achieve the government’s goals, PEMEX plans to build a new $8 billion refinery with a 340,000 bbl/day
capacity, to be completed in three years, according to government estimates. We believe the refinery will likely cost more and take
longer to complete. Although PEMEX’s investment in E&P will increase in the next couple of years to increase its oil production (see
Exhibit 8), Mexico may become a net importer of crude if the new refinery is completed and the company also increases the utilization
of its existing refineries.

Because Mexico imports about 65% of its domestic natural gas demand, there are plenty of opportunities for private investments in
midstream and infrastructure to increase imports. But announcements in June 2019 from the state-owned power company Comision
Federal de Electricidad (CFE, Baa1 negative) regarding contractual disagreements with pipeline companies increase legal uncertainty,
reducing investment appetite.

In 2019-20, PEMEX’s EBITDA growth will depend mostly on oil prices and production. Mexico’s energy sector will depend on PEMEX for
the foreseeable future, since recent investments in E&P from other companies will only gradually start to post production and generate
revenue. In our base-case estimate, Mexico’s economy will grow by only 1.2% in 2019 and 1.5% in 2020, which will not support robust
fuel demand. Although PEMEX is supposed to sell fuel at import parity prices and receive government compensation when pump prices

6 2 July 2019 Oil & Gas – Latin America and the Caribbean: Profitability will pick up in 2020 after slow 2019, supporting capital investment
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are lower than the benchmark, the company may not receive government subsidies in a timely manner, stressing its working capital
needs.

Third-party investor sentiment toward business opportunities in Mexico’s energy industry has been deteriorating as regulators lose
autonomy from the government, and as the new administration increasingly favors the state oil company. Major changes in the
energy law are unlikely but still a possibility, given the current administration’s support within Mexico’s Congress and Senate. New
opportunities for investing in Mexico’s energy sector have declined significantly given the indefinite suspension of oil and gas auctions
and farmouts, delaying the development and broader growth of the oil industry.

Ecopetrol still faces risk from its struggle to replace oil and gas reserves
Our view for Colombia’s oil and gas industry is stable through 2020, with stable oil prices improving oil companies’ operating results
amid continued unitization—a type of consolidation—of producing blocks and infrastructure-sharing via associations. In 2018,
Colombia increased its reserve life to 6.8 from 6.6 years in 2017 and boosted production by 1.4% after slipping in recent years,
according to the federal energy regulator Agencia Nacional de Hidrocarburos (ANH) (see Exhibit 9). State-owned and dominant
player Ecopetrol in particular increased its reserve replacement rate to 130% in 2018 from 126% in 2017, thanks to disciplined capital
investment and selected associations with international oil companies.

Still, Colombia’s tight fiscal conditions will keep Ecopetrol under pressure to increase dividends to the federal government, restraining
the amount of cash available for capital investment in oil and gas production, which will not expand by more than 1%-2% through
2020. Meanwhile, guerrilla attacks on oil and gas assets will still hurt Ecopetrol’s production in 2019, despite tapering off in recent
years, posing a persistent threat that deters new investment, and holds back profitability and production.

Exhibit 9
Colombia’s oil and gas production has rebounded after slipping in recent years
Total production Annual growth
450.0 10.0%
440.0 435.8 435.0
Barrels of oil equivalent (millions)

430.0 5.0%
420.0
410.0 1.4%

Annual growth
-0.2% 0.0%
400.0
388.1
390.0 -3.3%
380.6
375.3 -5.0%
380.0
370.0
360.0 -10.0%
-10.8%
350.0
340.0 -15.0%
2014 2015 2016 2017 2018

Source: Agencia Nacional de Hidrocarburos, Colombia

Colombia’s energy industry has been open to private, foreign investment for decades and its regulatory framework for conventional oil
and gas production has supported investments and returns. However, despite the government’s support to using fracking to capture
unconventional oil and gas, it is still unclear how quickly the country can develop these resources, estimated at 47 billion barrels of oil
equivalent.

We expect that Colombia’s GDP will grow by 3.3% in 2019 and 3.5% in 2020—faster than the 2.0% average in 2016-18. Because
Ecopetrol largely controls Colombia’s fuel market and has recently upgraded its major REFICAR refinery, the company can at least
sustain solid refining margins through 2020 amid higher demand for gasoline and diesel.

Argentina grapples with slow economy, but oil economics support rising activity in unconventional resources
Business fundamentals will remain stable for Argentina’s oil and gas industry although more favorable to the oil business than to
the natural gas sector through 2019-20 amid an evolving regulatory environment, political uncertainty ahead of the October 2019
presidential election, and weak economic activity. The business environment has worsened in Argentina, but fundamentals continue
to support oil and gas E&P at state-owned YPF (B2 stable) as a result of still attractive local oil and natural gas prices, despite recent

7 2 July 2019 Oil & Gas – Latin America and the Caribbean: Profitability will pick up in 2020 after slow 2019, supporting capital investment
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changes in supply. Investment in shale oil is rising but slowing in natural gas as a result of attractive export parity prices for oil while
natural gas prices have declined primarily as a result of higher supply from Vaca Muerta. Midstream infrastructure is not yet adequate
in Argentina and also pressure natural gas prices down.

Although Argentina’s GDP will shrink by about 1.5% in 2019, the economy will grow by around 1.5% in 2020. Rising unconventional
oil and gas production will continue to compensate for falling conventional production: unconventional sources made up 41% of
Argentina’s natural gas production as of the first five months of 2019, up from 27% in 2017, and 17% of its oil, up from 9% (see Exhibits
10-11).
Exhibit 10 Exhibit 11
Unconventional natural gas production gains ground in Argentina... ...along with unconventional oil production
Conventional natural gas Tight gas Shale gas Conventional oil Tight oil Shale oil
140.0 600

120.0
500
Cubic meters/day (millions)

Barrels/day (thousands)
100.0
400

80.0
300
60.0

200
40.0

20.0 100

0.0 0
2014 2015 2016 2017 2018 YTD May-19 2014 2015 2016 2017 2018 YTD May-19

Source: Ministerio de Energía y Minería (MINEM), Argentina Source: MINEM

Producers have reduced capital spending on natural gas E&P operations for 2019-20 in order to control supply and avoid midstream
bottlenecks during winter season and overall weak local demand to negatively affect local gas prices further. Overall, we expect natural
gas prices to lower to average $4.00/million British thermal units (MMBtu) in 2019, down from $4.50/MMBtu average in 2018, also
as a result of reduced government subsidies. The recent change in the government’s pricing criteria for its unconventional natural gas
incentive program also reduced investment since now subsidies compensate producers only up to their projects’ original estimated
volumes.

YPF, the leading local natural gas producer with around 37% of the market, is exporting natural gas to neighboring Chile through
existing gas pipelines, and will export LNG starting June 2019. A sizeable new Liquefied Natural Gas terminal would boost exports
considerably but is still in the early planning. Local demand for oil is more diversified than demand for gas, with far better export
opportunities; today YPF exports only jet fuel and liquefied petroleum gas, and does not plan to export crude for some time. Even
as YPF’s unconventional crude production ramps up in coming years, incremental production will help the company achieve self-
sufficiency in crude by 2021, rather than expand its crude exports. Argentina’s strong labor unions keep production costs high, but labor
has shown some signs of flexibility as market conditions have shifted amid stronger investment appetite, especially in Vaca Muerta.

For refiners, currency depreciation in 2019 will raise the cost of local Medanito light crude and Escalante heavy crude, which both
traded at roughly 15% discounts to the international Brent benchmark as of June 2019. Downstream operations can only gradually pass
through rising costs to pump prices as a result of the weak local economic conditions and high inflation. YPF has close to a 60% share
in Argentina’s domestic gasoline and diesel markets and typically acquires 20% of its crude processing needs from third parties. PAE
Argentine Branch (Ba3 stable), which has a roughly 15% domestic market share for fuel, is self-sufficent in oil today, processing nearly
60% of its crude production at its Campana refinery and exporting most of the rest.

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Venezuela’s oil and gas sector will continue to suffer from lack of sufficient investments
We have a negative perspective for Venezuela’s (C stable) energy sector. Years of government interference in the oil industry and the sharp
decline in oil prices since late 2014 jeopardized Petroleos de Venezuela’s (PDVSA) ability to invest and control its operating and financial
results, weakening its asset base. Economic recession in recent years has worsened investment in Venezuela, hurting both oil and gas
production (see Exhibit 12) and fuel demand for PDVSA, a key source of revenue and foreign currency for the government. PDVSA’s production
will continue to decline, with limited ability to generate cash flow or attract external funding even to invest in oilfield development.

Exhibit 12
Venezuela’s production has fallen away sharply in recent years
Production Annual growth
1,200 0%

979 969 -1%

1,000 -5%
Barrels of oil equivalent (millions)

869

800 743 -10%

Annual growth
-10%
600 553 -15%
-14%

400 -20%

200 -25%

-26%
- -30%
2014 2015 2016 2017 2018

Source: Organization of the Petroleum Exporting Countries (OPEC); Moody’s Investors Service (natural gas estimates)

9 2 July 2019 Oil & Gas – Latin America and the Caribbean: Profitability will pick up in 2020 after slow 2019, supporting capital investment
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Appendix: Key metrics for rated Latin American oil and gas companies
Exhibit 13
Ratings and metrics of rated Latin American oil companies
Ratings as of July 1, 2019; key financial metrics, 2014-20 (estimated)
Total Cash from
revenue EBITDA Total Capital operations EBITDA/
(USD (USD production expenditures (USD RCF/ Debt/ Interest
millions) millions) (mboe) (USD millions) millions) Debt EBITDA expense
BRAZIL: Petroleo Brasileiro S.A. - PETROBRAS (Ba2 stable)
2014 $143,657 $36,165 886,200 $35,394 $21,764 16.7% 5.0x 5.4x
2015 $97,314 $33,914 921,317 $22,149 $20,518 17.9% 4.8x 3.6x
2016 $81,405 $34,564 916,200 $14,648 $19,933 18.3% 4.7x 3.5x
2017 $88,827 $35,003 911,433 $13,390 $20,431 21.5% 4.0x 3.9x
2018 $95,584 $40,015 854,050 $11,009 $20,520 27.1% 2.9x 4.9x
2019E $91,090 $28,571 846,385 $16,203 $8,926 10.9% 3.9x 3.5x
2020E $101,443 $32,848 900,037 $15,310 $13,100 14.3% 3.3x 4.0x
MEXICO: Petroleos Mexicanos (PEMEX, Baa3 negative)
2014 $119,336 $60,347 1,252,833 $17,168 $7,262 2.8% 3.2x 7.9x
2015 $73,696 $7,687 1,158,500 $16,046 $3,086 -0.6% 22.5x 1.0x
2016 $57,622 $19,585 1,080,000 $8,123 -$5,261 -0.7% 8.7x 2.4x
2017 $74,069 $27,136 971,500 $4,870 -$706 4.4% 6.3x 3.1x
2018 $87,527 $32,619 890,833 $5,673 $3,331 2.2% 5.0x 3.5x
2019E $82,687 $24,583 831,062 $6,927 -$1,127 -0.4% 6.4x 2.5x
2020E $84,555 $25,294 841,800 $8,500 -$976 -0.3% 6.3x 2.6x
COLOMBIA: Ecopetrol S.A. (Baa3 stable)
2014 $33,095 $12,852 240,767 $6,600 $7,753 11.9% 1.4x 15.2x
2015 $19,287 $6,131 248,333 $5,443 $3,563 13.9% 3.2x 6.6x
2016 $15,919 $5,879 233,000 $1,805 $4,012 19.8% 3.0x 5.8x
2017 $18,964 $7,731 232,000 $1,957 $5,003 33.8% 2.0x 8.8x
2018 $23,255 $10,533 236,000 $2,800 $6,831 45.3% 1.3x 11.6x
2019E $17,376 $8,271 223,728 $3,000 $3,795 32.9% 1.5x 9.3x
2020E $18,091 $9,022 232,677 $3,000 $4,422 39.8% 1.4x 9.8x
ARGENTINA: YPF S.A. (B2 stable)
2014 $17,550 $5,223 198,167 $6,438 $5,311 62.9% 1.5x 6.5x
2015 $16,971 $5,388 203,833 $7,217 $4,049 40.5% 2.4x 5.1x
2016 $14,262 $4,081 205,000 $4,662 $2,570 29.8% 2.8x 3.1x
2017 $15,318 $4,318 196,500 $3,928 $3,651 29.1% 2.9x 3.7x
2018 $16,647 $5,921 187,333 $3,659 $4,088 33.0% 2.4x 5.0x
2019E $16,403 $4,401 179,973 $3,500 $3,576 37.3% 2.7x 3.9x
2020E $16,769 $4,334 179,973 $3,500 $3,887 39.9% 2.6x 4.2x

Note: All ratios are based on adjusted financial data and incorporate Moody’s global standard adjustments for non-financial corporations.
Source: Moody's Financial MetricsTM; Moody's Investors Service (estimates)

10 2 July 2019 Oil & Gas – Latin America and the Caribbean: Profitability will pick up in 2020 after slow 2019, supporting capital investment
 MOODY'S INVESTORS SERVICE CORPORATES

Moody’s related publications

Sector in-depth reports:

» Cross-Sector – Global: Natural gas gaining momentum as energy-transition awareness moves into spotlight, June 26, 2019

» Oil and Gas – Global: Natural gas and efficiencies feature strongly in national energy transition strategies, June 4, 2019

» Oil and Gas – Emerging Markets: Regulatory and security policies send state energy sectors in different directions, May 13, 2019

» Oil and Gas - US and Latin America: Energy trade shift supports US economy but is negative for some LatAm exporters, April 11,
2019

» Oil and Gas - Argentina: Shale momentum to persist despite economic stress and evolving federal policy, March 25, 2019

» Non-Financial Companies - Mexico: Insecurity poses greatest risk for oil and lodging but causes broad logistical problems, March 5,
2019

» Global oil and gas industry heads into 2019 on steady footing; faces risks from oversupply, January 3, 2019

Outlooks:

» Oilfield Services and Drilling – Global: Robust recovery unlikely without a surge in North American E&P capital spending, June 18,
2019

» Exploration and Production– Global: Earnings will grow marginally amid reduced capital spending, less stellar volume growth, March
4, 2019

» Oil & Gas, Base Metals & Steel, Pulp & Paper - Latin America: 2019 outlooks mostly stable; pulp/paper is positive (slides), December
13, 2018

» Oil and Gas – Global: 2019 outlooks mostly positive as firmer prices take hold (slides), December 10, 2018

Sector comments:

» Oil & Gas – Mexico: Growing appetite for natural gas gives sector ample room for long-term growth, June 3, 2019

» Oil and Gas - Argentina: Change in compensation policy to slow momentum for unconventional natural gas, February 4, 2019

Credit opinion:

» Petroleos Mexicanos, June 7, 2019

Issuer in-depth:

» Petroleos Mexicanos: Frequently asked questions about standalone credit quality, link to sovereign rating, and government
production targets, March 1, 2019

Rating methodology:

» Independent Exploration and Production, May 2017

To access any of these reports, click on the entry above. Note that these references are current as of the date of publication of this
report and that more recent reports may be available. All research may not be available to all clients.

11 2 July 2019 Oil & Gas – Latin America and the Caribbean: Profitability will pick up in 2020 after slow 2019, supporting capital investment
 MOODY'S INVESTORS SERVICE CORPORATES

Endnotes
1 Pre-salt oil deposits are located offshore under deep, thick layers of rock and salt, about 18,000 feet below the ocean surface. Pre-salt resources were first
discovered in Brazil’s offshore Santos Basin in 2005 by Petrobras.

12 2 July 2019 Oil & Gas – Latin America and the Caribbean: Profitability will pick up in 2020 after slow 2019, supporting capital investment
 MOODY'S INVESTORS SERVICE CORPORATES

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13 2 July 2019 Oil & Gas – Latin America and the Caribbean: Profitability will pick up in 2020 after slow 2019, supporting capital investment