Fitch Ratings has affirmed Pan American Energy S.L. Argentine Branch'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.

In conjunction with these rating actions, Fitch has affirmed the ratings of the senior secured and unsecured notes issued by Pan American Energy LLC Sucursal Argentina and Pan American Energy, S.L., Argentine Branch, which are guaranteed by Pan American Energy S.L. at 'BB-'.

Supporting factors for PAE's 'BB-' ratings are its stable production track record, large reserve base, and low leverage. The FC IDR is three-notches higher than Argentina's 'B-' Country Ceiling due to the cash held abroad by the company, its access to hard-currency credit lines, and cash flow from its Bolivian and Mexican operations. The combination of these factors adequately cover the next 24 months of debt service by a ratio in excess of 1.5x.

Key Rating Drivers

Geographic Diversification: PAE's operations in Mexico and Bolivia are positive credit considerations. However, the company's overall credit quality remains highly tied to Argentina, as PAE's operations in that country represent an estimated 80% of its EBITDA in 2021. An increase contribution to EBITDA from Mexico and Bolivia during the rating horizon, could result in the applicable Country Ceiling changing from Argentina to Bolivia (Country Ceiling of B) or Mexico (Country Ceiling of BBB+) per Fitch's Non-Financial Corporates Exceeding the Country Ceiling Rating Criteria.

Stable Production Profile: PAE has a strong and stable production profile that is consistent with a higher rating category. It is expected to increase daily average production to over 240,000boe/d by 2023 under Fitch's base case with production in 2022 projected to grow by high-single digits. PAE's consolidated production increased by 10% By September 2022, driven by higher Argentine gas production (+11%). Fitch believes the company has extraordinary flexibility from its strong reserve base, which allows production adjustments to support profitability.

Strong Hydrocarbon Reserves: The company has a strong 1P reserve life of 20 years, providing ample flexibility to adjust capex investment. PAE reported 1,585MMboe in 1P reserves, 68% of which is oil and 32% natural gas as of YE 2021. Fitch estimates PAE had oil 1P reserve life of 27 years and gas 1P reserve life of 14 years at YE 2021. PAE's strong reserve base is supported by a strong concession life. Operating concessions expire in 2046-2047, and the company's Mexico asset has a remaining concession life of 24 years.

Solid Leverage Metrics: The company's capital structure remains strong with gross leverage, defined as total debt to EBITDA, of 1.2x at LTM September 2022. Total debt to 1P reserves was USD1.75/boe as of FY 2021. Fitch estimates the company's gross leverage will average 1.4x between 2022-2025 as PAE's indebtedness modestly increases to execute on expansion plans. The company has solid access to capital and will likely refinance its debt at competitive rates, especially with its Mexican asset in full operation.

Integrated Business Model: PAE's integrated energy model in Argentina gives the company flexibility to optimize profitability. After the integration of Axion Energy by PAE, the company became the largest private integrated energy company in Argentina. PAE's upstream business is the largest private Oil & Gas company in the country, and the largest private entity with 18% market share in oil production and 14% in gas production in Argentina.

Axion was the third largest refiner in Argentina as of 3Q22 with a 15% market share with 95kbbl/d of refining capacity after the refinery's successful modernization. PAE expects to operate the refinery at 80% capacity and to produce higher-value products. PAE's facility along with YPF are the only facilities in Argentina that can process its heavy crude, which it generally exported. With the completion of the expansion, PAE has greater flexibility to meet domestic demand of diesel product, with the ability to adjust its operations in line with domestic and international demand.

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 Country Ceiling at 'B-'; however, its medium production size of 240kboed 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 Tecpetrol Internacional (BB/Stable) with production of 195kboed, Murphy Oil Corporation (BB+/Stable) with 150kboed and YPF SA (CCC-) with 529kboed. Further, PAE reported 1,585 million boe of 1P reserves at the end of 2021 equating to a reserve life of 20.9 years, higher than Murphy Oil's at 14 years and Tecpetrol's with 12 years. Fitch expects the company will be able to maintain its strong reserve life.

PAE's capital structure remained strong in YE 2021 and through the 3Q22. Fitch estimates PAE 2022 gross leverage measured by total debt to EBITDA to be 1.1x, down from 1.7x at YE 2021, in line with Murphy Oil (2.3x), but higher than Tecpetrol (estimated 0.9x). On debt to 1P reserve basis, Fitch estimates PAE's debt as of 2021 to 1P reserves at USD1.75 boe compared to Tecpetrol (USD1.30boe), Murphy Oil (USD3.4boe) and YPF (USD6.50boe). PAE operates in a lower operating environment (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 USD100bbl in 2022, USD70bbl in 2022, USD85bbl in 2023 and USD53bbl in the long term;

Reserve replacement ratio of 102% per annum;

Domestic gas price of USD3.7MMBTU in 2022 and USD3.50MMBTU over the rated horizon;

Average gross production of 225,000boe/d-240,000boe/d from 2022-2025;

Production cost of $9.5boe between 2022-2025;

Royalties of $7.5boe between 2022-2025;

SG&A of $6.0boe between 2022-2025;

Annual consolidated capex averaging of USD1,400 million per year from 2022-2025;

No dividend payments.

RATING SENSITIVITIES

Factors that could, individually or collectively, lead to positive rating action/upgrade:

Cash flows from operations outside of Argentina (Bolivia and Mexico) adequately covering hard currency gross interest expense for 12 months, resulting in a higher applied Country Ceiling than Argentina (B-).

Factors that could, individually or collectively, lead to negative rating action/downgrade:

Downgrade of the Country Ceiling of Argentina;

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.

Best/Worst Case Rating Scenario

International scale credit ratings of Non-Financial Corporate issuers have a best-case rating upgrade scenario (defined as the 99th percentile of rating transitions, measured in a positive direction) of three notches over a three-year rating horizon; and a worst-case rating downgrade scenario (defined as the 99th percentile of rating transitions, measured in a negative direction) of four notches over three years. The complete span of best- and worst-case scenario credit ratings for all rating categories ranges from 'AAA' to 'D'. Best- and worst-case scenario credit ratings are based on historical performance. For more information about the methodology used to determine sector-specific best- and worst-case scenario credit ratings, visit https://www.fitchratings.com/site/re/10111579.

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 and conservative 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.

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

Unless otherwise disclosed in this section, the highest level of ESG credit relevance is a score of '3'. This 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. For more information on Fitch's ESG Relevance Scores, visit www.fitchratings.com/esg

(C) 2022 Electronic News Publishing, source ENP Newswire