Fitch Ratings has affirmed and simultaneously withdrawn Tecpetrol Internacional S.L.'s (Tecpint) Long-Term Foreign and Local Currency Issuer Default Ratings (IDRs) of 'BB'.
The Rating Outlooks are Stable.
Tecpint's ratings and Outlooks reflects its strong business position, production profile, large reserve base, low leverage, and strong and predictable cash flow profile supported by contracted volumes and prices in both Peru and Argentina. Although 90% of its EBITDA comes from operating environments rated 'B' or below, with Argentina contributing 80%, the company's ratings are not capped by a country ceiling. The applicable country ceiling for Tecpetrol is Peru, as Fitch estimates EBITDA covers consolidated interest expense by an average 4.8x. The company is expected to maintain a conservative leverage profile of less than 1.0x, on average each year over the rating horizon.
Fitch has chosen to withdraw Tecpetrol's ratings for commercial reasons.
Key Rating Drivers
Diversified Asset Base: Tecpint's diversified asset base is a credit positive. The company has oil and gas exploration and production operations in six countries across Latin America (Argentina, Peru, Ecuador, Mexico, Colombia and Bolivia) as well as gas transportation and distribution in Argentina and Mexico, and electricity generation in Mexico. The company's principal reserves are in Peru (19%), Bolivia (3%), Colombia (3%), Mexico (1%) Ecuador (5%) and Argentina (70%). Approximately 60% of E&P revenues come from sales of oil and gas and services from Argentina.
Camisea Stake: Tecpint's 10% ownership stake in blocks 88 and 56 within the Camisea natural gas field in Peru contributed nearly 20% of its EBITDA in 2022. The stake provides stable and predictable cash flows. Fitch forecasts Camisea's contribution to Tecpint's EBITDA will alone be more than adequate to cover interest expense, on average 4.8x, in 2022. Camisea's reserve life is estimated to extend for more than 25 years, although the license agreements for Camisea's two blocks, 88 and 56, expire in 2040 and 2044, respectively.
Strong Production Profile and Hydrocarbon Reserve Life: Tecpint's ratings reflect the company's medium production size, consistent with the low 'BBB' rating category, and relatively strong reserve life of approximately 11 years compared with peers. In 2022, Tecpint's total owned production is expected to average 190,000 boed (69 million boe in the year) of which 78% is gas, and the remainder is liquids. As of 2Q22, Tecpint had proved reserves of 753 million boe (80% gas and 20% liquids).
Strong Financial Profile: Tecpint's contracted volumes coupled with low cost production profile support its predictable cash flow profile. Fitch expects EBITDA of $1.25 billion in 2022. EBITDA margin remains strong, estimated at 57% in 2022, down from 69% in 2021 reflecting higher operating costs. Fitch estimates EBITDA margin will be around 50% through the rating horizon. FCF for 2022 is estimated at USD273 million, and Fitch's base case reflects negative FCF. Total debt to 1P reserves is $1.1 per barrel of oil equivalent, among the lowest in the region.
Contracted Gas Production in Argentina: Tecpint has minimal volume risk as a majority of its revenues are contracted under Plan Gas 5 (PG5). In 2022, Fitch assumes 12 million cubic meters per day sold at USD3.6 MMBTU through 2028, resulting in an average revenue of USD430 million per annum. Tecpint is exposed to payments from the Argentine federal government, which, despite a history of payment delays, has maintained payables to the company of under 30 days in the last two years. Given its strong liquidity and cash flow profile, Fitch does not expect a material impact on the company over the rating horizon, should the Argentine government significantly delay payments.
Derivation Summary
Tecpint's production is expected to average 189,000 boed over the rating horizon and maintain a strong 1P reserve life of at least 10 years, which compares favorably with other 'BB' rated oil and gas producers. These peers include Pan American Energy (BB-/Stable) with 226,000 boed and 20 years reserve life, Murphy Oil Corporation (BB+/Stable) with 196,000 of boed and 11.7 years and YPF SA (CCC-) with 529,000 of boed and 6.7 years.
Tecpint's Argentine peer Pan American Energy is capped by Argentina 's 'B-' Country Ceiling, but receives multiple-notch uplift, due to its strong liquidity profile and cash flows from Bolivia and its Mexican operations. Pan American Energy's Stable Outlook reflects the company's stable production track record, large reserve base, and low leverage. YPF's rating is equalized with the rating of Argentina, due to the government's 51% ownership and the company's strategic importance to the country.
Tecpint's capital structure is strong. Fitch expects gross leverage (total debt to EBITDA) to be 0.6x in 2022, which is in line with Pan American Energy at 1.1x, Murphy Oil at 0.8x and YPF at 1.2x. On debt to 1P reserves, Fitch estimates Tecpint's 2022 debt to 1P reserves are USD1.1 boe, comparable with Pan American Energy at USD1.75 boe, and stronger than Murphy Oil (USD2.60 boe) and YPF (USD5.86 boe).
Key Assumptions
Fitch makes the following assumptions within the rating case of the Issuer:
Production in Ecuador, Mexico and Peru to remain flat through 2026, and slow decrease in Bolivia;
Production increase in Colombia to 10k boe/d by 2024;
Fortin de Piedra gas production average of 18 million cubic meters per day from 2022 through 2026;
Realized gas prices of $3.60 MMBTU in Argentina under Plan Gas 5 from 2022 through 2026 applied to an average of 14 million cubic meters per day;
Fitch's Brent oil price assumptions USD100 per bbl for 2022, USD85 per bbl for 2022and USD53/bbl for the long term;
EBITDA margins expected to remain at an average of 51% from 2022 through 2026;
Total capex of USD 4.2 billion between 2022-2026;
Dividends USD210 million paid in 2022 and $50 million in 2023;
Peruvian EBITDA from CAMISEA average 190 million from 2022 through 2025.
RATING SENSITIVITIES
Rating sensitivities do not apply because the ratings have been withdrawn.
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: Tecpint reported a cash position of USD784 million in 3Q22. Fitch estimates with cash on hand and cash flow at the end of FY 2022, and the company can comfortably repay minimal repayment of 2023 maturities of 270 million. In November 2022, the company successfully refinanced its USD500 million bond with USD300 million in syndicated loans. They paid off the remainder of the bond in cash.
Issuer Profile
Tecpint is the ultimate parent of all Tecpetrol operating companies. Tecpint has E&P assets in Argentina, Peru, Ecuador, Mexico, Colombia, Bolivia.
Its oil and gas production in 2022 was 189 kboe/d with proved reserves of 750 MM boe.
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
PAN AMERICAN ENERGY CORP. 
