Reporte de Barclays sobre Pemex by El Sol de México Online

Credit Research

11 January January 2019 11 2019

LatAm Oil & Gas

Petróleos Mexicanos (PEMEX): Crude Awakening; Initiating at Underweight We initiate on Petróleos Mexicanos (PEMEX) with an Underweight rating. Even with PEMEX trading close to all-time wides to EM corporates and the sovereign, the lack of a comprehensive overhaul of its tax regime in the near term will result in further credit deterioration, which should weigh on ratings and valuations. We initiate coverage on Petróleos Mexicanos (PEMEX; Baa3/BBB+/BBB+) with an Underweight rating. 2019 offers little reason for optimism, as we think fundamentals will deteriorate further, reflecting the company’s heavy tax burden, incremental debt funding for capex deployment, disappointing production and worsening credit metrics. Even with PEMEX trading flat to EM and Mexican BBs and close to all-time wides to the sovereign, we think bonds are still expensive.

•

Tax Burden: PEMEX’s fiscal burden is among the most onerous in LatAm and continues to weigh heavily on the credit, even after recent reforms. We think that this will inevitably result in the company issuing more debt to fund its capex program in 2019 and beyond. We think a comprehensive overhaul is necessary to create a sustainable path forward, but do not yet see the government’s incentive to do so in the near term.

•

Capital market dependence expected to increase: Absent a change in PEMEX’s tax regime, we think that capital market dependence will become more challenging. For 2019, we think the company needs USD5.5-10.0bn in gross debt (assuming Brent prices of USD45-75/bbl), but think that this number will be larger in 2020 and beyond.

•

Ratings actions and forced selling: We think that Fitch will downgrade PEMEX by up to two notches, given the recent changes to its methodology for government-related entities and ongoing fundamental deterioration. If this occurs, PEMEX would only be rated one notch above high yield at two agencies. We have identified about USD6bn of potential forced selling from US IG investors if PEMEX were excluded from the US Agg index.

This document is intended for institutional investors and is not subject to all of the independence and disclosure standards applicable to debt research reports prepared for retail investors under U.S. FINRA Rule 2242. Barclays trades the securities covered in this report for its own account and on a discretionary basis on behalf of certain clients. Such trading interests may be contrary to the recommendations offered in this report. Please see analyst certifications and important disclosures beginning on page 27 . Completed: 11-Jan-19, 14:29 Completed: 10-Jan-19, 15:53 GMT GMT Released: Released:11-Jan-19, 11-Jan-19,14:35 14:00GMT GMT

FOCUS Andrew De Luca +1 212 412 3428 andrew.deluca@barclays.com BCI, US Badr El Moutawakil +1 212 526 8907 badr.elmoutawakil@barclays.com BCI, US Dennis Kilic +1 212 526 4007 dennis.kilic@barclays.com BCI, US

Barclays | LatAm Oil & Gas

We think the market has become increasingly tactical and believe bonds could remain rangebound in the near term (spread to sovereign of 220-290bp). Nevertheless, ongoing high fiscal burden leading to further fundamental deterioration and downgrade risks should drive this range gradually wider toward 325-375bp. In this context, we would see any compression of PEMEX’s spread to sovereign toward the lower bound of the range as an opportunity to reduce risk.

Trade Ideas •

Swap out of PEMEX 4.500% 2026s into PEMEX 2044s. PEMEX’s 10s/30s curve has flattened massively, but we think it could flatten further or even invert under a negative ratings action scenario, which would put bonds closer to US Agg index exclusion.

•

Swap into MEX 4.000% 2023s from PEMEX 4.625% 2023s. PEMEX’s spread to the sovereign is close to an all-time high, but it could widen further if ratings continue to decouple from Mexico.

•

Swap into MEXCAT 2026s from PEMEX 4.500% 2026s. We think the amended tender and consent solicitation, accompanied by meaningful improvement in covenants, is very positive for MEXCAT, which continues to trade very wide to the sovereign.

Relative Value and Trade Ideas PEMEX had an extremely unfavorable 2018 performance. At the start of the year, PEMEX 2025s traded about 45bp through EM Corp + Quasi Sovereign BBs and only roughly 35bp back of EM Corp + Quasi Sovereign BBBs (excluding PEMEX). As the year progressed, Mexican corporates broadly began to underperform the broader market as leftist-candidate Andres Manuel Lopez Obrador’s (AMLO) presidential bid gained momentum. While Mexican risk assets benefited from a short-lived rally leading up to the July 1 election and the month following, they fiercely sold off in October when AMLO launched a referendum proposing the cancellation of the Mexico City airport (MEXCAT) project. Contagion from the MEXCAT episode was widespread across all Mexican corporates, but specifically PEMEX. Today, PEMEX trades roughly flat to EM Corp + Quasi Sovereign BBs (over 150bp back of EM Corp + Quasi Sovereign BBBs). PEMEX also underperformed Mexican corporates and now trade wide to Mexican BBs, compares with flat to Mexican BBBs and 30bp inside of Mexican BBs at the start of 2018. Looking to 2019, we see little reason for optimism, as many of the challenges that plagued the credit then are still evident . Taxes will remain onerous, even after considering minor benefits from a 125bp cut to its upstream tax rate (to 65.0%), and we expect PEMEX to issue more debt to fund its capex program. Our sensitivity analysis (toggling Brent from USD45/bbl to USD75/bbl) suggests that PEMEX needs USD5.5-10.0bn in gross debt to bridge its cash shortfall in 2019, which would translate into net issuance of USD2.5-6.5bn (assuming its fully funded in the capital markets). Furthermore, we think that production will continue to disappoint, given the ongoing under-investment in upstream, and do not see a scenario in which production stabilizes in 2019. We think that deteriorating fundamentals will result in PEMEX’s being downgraded by at least one agency in 2019. The agencies continue to give PEMEX a significant uplift from Mexico’s rating, as PEMEX’s issuer rating is rated five to eight notches above its stand-alone credit profile rating (b3/bb-/B-). However, we think that Fitch will decouple PEMEX from the sovereign in 2019 by up to two notches, due to a change in rating methodology for governmentrelated entities (effective in 2018) and ongoing weak fundamentals. This would effectively put

11 11 January January 2019 2019

Barclays | LatAm Oil & Gas

PEMEX on the cusp of high yield at two agencies, as Moody’s had decoupled the credit in November 2015 and rates PEMEX Baa3. Barclays’ Mexico economist Marco Oviedo thinks that a sovereign downgrade is possible in 2019 (Mexico Quarterly Outlook: Institutional populism, December 7, 2018), which would also weigh on PEMEX’s ratings. We think potential forced selling could reach USD6bn from US IG accounts if PEMEX were downgraded to HY, which could result in bonds widening 75-125bp to the index. The market has become increasingly sensitive to deteriorating credit stories, and concerns of a subinvestment grade rating would weigh heavily on PEMEX bonds. In the months leading up to Petrobras’ (PETBRA) first downgrade to high yield in early 2015, the credit widened from trading in line with EM BBBs to trading flat to EM BBs. In the weeks following the downgrade, Petrobras widened further and traded midway between EM BBs and EM Bs, before ultimately trading as wide as EM Bs for a number of months thereafter. With PEMEX bonds trading flat to EM Corp + Quasi Sovereign and Mexican BBs, we think there is more room to go in a potential downgrade scenario. FIGURE 1. PETBRA traded at the midpoint between EM BBs and EM Bs following its downgrade, but as wide as EM Bs in the following months OAS 1,400

BBB

PETBRA

1,200 1,000 800 600 400

200 Dec-18

Sep-18

Jun-18

Mar-18

Dec-17

Sep-17

Jun-17

Mar-17

Dec-16

Sep-16

Jun-16

Mar-16

Dec-15

Sep-15

Jun-15

Mar-15

Dec-14

Sep-14

Mar-14

Jun-14

Source: Barclays Research

Note: EM BBB index excludes PEMEX. Source: Barclays Research

Dec-18

Oct-18

Sep-18

Jan-18

Dec-18

Nov-18

Oct-18

Sep-18

100 Aug-18

150

100 Jul-18

150

Jun-18

200

May-18

200

Apr-18

250

Mar-18

250

Feb-18

300

Jan-18

300

Aug-18

PEMEX 2025s

350

Jul-18

PEMEX 2025s

350

Jun-18

MEX Corp + Quasi-Sovs BB

400

May-18

450

Apr-18

400

EM Corp + Quasi-Sov BB

Mar-18

450

MEX Corp + Quasi-Sov BBB*

OAS

EM Corp + Quasi-Sov BBB*

Feb-18

OAS

FIGURE 3. PEMEX 2025s has also disconnected from Mexico BBBs and now trades flat to Mexico BBs

Nov-18

FIGURE 2. PEMEX trades roughly flat to EM Corp + Quasi Sov BBs, after having traded 45bp through at the beginning of 2018

Note: Mexico BBB index excludes PEMEX. Source: Barclays Research

US IG and emerging market issuers: Effect from a sub-IG rating Similar to previous EM issuers included in US investment grade indices (due to SEC registration rights), the technical picture for PEMEX bonds could become particularly negative in case of a subinvestment grade downgrade by several agencies (depending on the index). Similar to the

11 11 January January 2019 2019

Barclays | LatAm Oil & Gas

cases of Teva Pharmaceutical (TEVA) or Petrobras (PETBRA), PEMEX has benefited from a significant crossover sponsorship from US IG and Asia life insurance accounts looking for yield in liquid capital structures in emerging markets. However, one of the structural difference between US IG and HY indices could, once again, negatively affect an issuer such as PEMEX: the major US IG indices includes SEC-registered EM issuers, but that is not the case of US HY indices, which by definition include only issuers domiciled in a developed market country. As a result, selling flows from US IG funds would not be matched by buying demand from US HY funds. To estimate the potential selling pressure on PEMEX bonds, we considered the holdings of 21 US IG benchmarked funds totaling USD880bn AuM. Based on this sample, and assuming that it is representative of the overall size of the US IG market, we estimate that US IG funds own about USD12bn of PEMEX bonds. What we have learned from PETBRA and TEVA is that US IG funds have broadly reduced their total exposure to the downgraded name by roughly 50% (between their initial holding four months prior to the downgrade to two months after the downgrade), while retaining a portion of their exposure as off-benchmark holdings. By applying the same methodology for PEMEX, we estimate that there could be potential “forced selling” of USD6bn in the case of a sub-IG downgrade. These numbers would likely lead to at least similar or even greater sell-off than for PETBRA or TEVA, where bonds tend to underperform by up to 10% versus peers (from a total return perspective) into the downgrade, before bouncing back, due to the exacerbated effect from forced selling flows. FIGURE 4. We think that the PEMEX 5.500% of 2021s, 6.500% of 2027s, 6.750% of 2047s, and 6.350% of 2048s would be the most susceptible bonds to US IG forced selling

PERP

12-Feb-48

23-Jan-46

21-Sep-47

23-Jan-45

2-Jun-41

27-Jun-44

15-Jun-38

26-Feb-29

15-Jun-35

12-Feb-28

4-Aug-26

13-Mar-27

23-Jan-26

15-Apr-25

24-Nov-25

15-Jan-25

21-Feb-24

18-Jan-24

15-Feb-24

21-Sep-23

30-Jan-23

15-Mar-23

13-Mar-22

4-Feb-21

24-Jan-22

5-Mar-20

21-Jan-21

3-May-19

Estimated amount held by US IG accounts by bond (USD mn) 500 450 400 350 300 250 200 150 100 50 0

Source: Barclays Research

Trade Ideas •

11 11 January January 2019 2019

Swap out of PEMEX 4.500% 2026s into PEMEX 2044s. This is a bearish trade for investors expecting a negative ratings action at PEMEX. Its 10s/30s curve has flattened significantly over the past year as spreads have widened. Despite its trading at historically flat levels, we believe that the curve has room for further flattening and potentially to invert under a negative rating actions scenario, which would push bonds closer to a US Agg index exclusion. In previous idiosyncratic stress episodes (such as PETBRA or TEVA) or market stress episodes (such as VALEBZ), investment grade 10s/30s curves tended to invert when 10y spreads widened above c.350bp. In the case of PETBRA, TEVA or VALEBZ (Figure 8), the cash price convergence between the 10y and 30y led to a temporary spread inversion, as bonds shifted from a spread trading convention to a cash price one with wider spreads.

Barclays | LatAm Oil & Gas

In the event Fitch downgrades PEMEX’s senior rating to BBB- with a Negative Outlook, we think a part of the negative technical would start playing out and prompt the curve to invert. We recommend swapping into PEMEX 2044s, given its low cash price and limited nondedicated sponsorship compared with other “on-the-run” PEMEX bonds, such as the 2048s.

•

Swap into MEX 4.000% 2023s from PEMEX 4.625% 2023s. This is a bearish trade for investors expecting a negative ratings action at PEMEX. Despite its spread to the sovereign being close to a multi-year high, we believe that the relationship has more room for widening over 1H19. Barclays sovereign strategy and economics estimates up to USD2bn of sovereign issuance in 2019, compared with our estimate of USD5.5-10bn for PEMEX. We think this technical is significantly worse for PEMEX throughout the year. Moreover, we believe that PEMEX’s high tax burden and falling production will likely result in a decoupling of ratings between it and MEX, as most recently highlighted by Fitch. Previous cases of rating decoupling between sovereign and quasi-sovereigns give us comfort in our trade (for example, ESKOM or PETBRA). Sebastian Vargas (BCI, US) rates the Mexico sovereign Underweight.

•

Swap into MEXCAT 2026s from PEMEX 4.500% 2026s. After the amended tender and consent solicitation, MEXCAT 2026s yield 5.9%, which we believe could be materially higher assuming annual amortization payments (see MEXCAT – The sweeter end, December 21, 2018). MEXCAT agreed to create a principal accumulation account (PAA), proposing to contribute USD200mn annually allocated on a pro rata basis based on the principal amount outstanding of each bond. We believe amortization payments will be likely, as the USD200mn is deposited in the PAA and remains part of the collateral until maturity. However, despite meaningful improvement in covenants, bonds trade excessively wide to the MEX sovereign. MEXCAT 2026s trade c.175bp wide of MEX 2026s, comparesd with a 3040bp spread to sovereign at issuance and a 50-60bp average spread before the referendum. We believe the acceptance of the consent solicitation removes a significant overhang related to MEXCAT’s credit fundamentals and headline risks. Petr Grishchenko (BCI, US) rates MEXCAT Overweight.

FIGURE 5. We think PEMEX’s 10s/30s curve could invert in a negative ratings actions scenario, as investment grade curves tend to invert in stress episodes when 10y spreads widen above c.350bp 10s/30s

VALEBZ

Oct-18

Dec-18

Jun-18

Aug-18

Feb-18 Apr-18

Oct-17

Dec-17

Jun-17

Aug-17

Feb-17 Apr-17

Oct-16

TEVA

Dec-16

Aug-16

Apr-16

Jun-16

Feb-16

Oct-15

Dec-15

Jun-15

Aug-15

Feb-15 Apr-15

Oct-14

Dec-14

Aug-14

Apr-14

Jun-14

250 200 150 100 50 0 -50 -100 -150 -200 -250

PETBRA

Source: Barclays Research

11 11 January January 2019 2019

Barclays | LatAm Oil & Gas FIGURE 6. Systemically important quasi-sovs normally underperform their sovereigns substantially when downgraded Spread to sov

ESKOM

FIGURE 7. MEXCAT continues to trade very wide to the sovereign, and we think it can tighten further over the coming months OAS

PETBRA

450 400 350 300 250 200 150 100 50 0

700

600 500

400 300

200

300 MEX 26s MEXCAT 26s

250 200

150 100 50 0

Dec-18

Aug-18

Apr-18

Dec-17

Apr-17

Aug-17

Dec-16

Aug-16

Apr-16

Dec-15

Apr-15

Source: Barclays Research

Aug-15

Dec-14

Aug-14

Apr-14

100

Spread (RHS)

Source: Barclays Research

Initiate Coverage of LatAm Oil & Gas We initiate coverage on the LatAm Oil & Gas sector with a Market Weight rating. Spreads of the sector are trading almost 110bp wide to the broader EM Corp/Quasi and 60bp back of the LatAm sub-index. We view current valuations as fair, given our negative view on PEMEX (which represents approximately 48% of the LatAm Oil & Gas sub-index), partially tempered by the broadly supportive technical on many of the remaining names within the sector, such as PETBRA (almost 34% of the sub-index). We expect relatively limited supply from the LatAm Oil & Gas sector in 2019, outside of PEMEX. As outlined in our 2019 outlook (EEMEA/LATAM Corporate Credit Strategy: Flat supply in 2019, November 9, 2018), we think many integrated Oil & Gas names in LatAm will continue to pay down gross debt using cash on hand (ECOPET most recently paid down its USD1.5bn bond maturing in July 2019 using internal cash flow) or use alternative sources of funding (PETBRA recently issued BRL3bn in local currency bonds. for example). This should provide a positive technical for many of the remaining issuers in the index and offset any meaningful spread widening in case of a PEMEX downgrade.

11 11 January January 2019 2019

Barclays | LatAm Oil & Gas FIGURE 8. LatAm Oil & Gas trades c.110bp wide to the broader EM sector

OAS

FIGURE 9. PEMEX represents 48% of the LatAm Oil & Gas sub-index

YPFDAR 5%

LatAm Oil & Gas EM USD Corp + Quasi-Sovereign LatAm USD Corp + Quasi-Sov

500

Other 6%

ECOPET 7%

450

PEMEX 48%

400 350

300

PETBRA 34%

250 200

Source: Barclays Research

Oct-18

Dec-18

Jun-18

Aug-18

Apr-18

Feb-18

Oct-17

Dec-17

Jun-17

Aug-17

Apr-17

Feb-17

Dec-16

150

Source: Barclays Research

Investment Thesis Our Underweight rating reflects our expectation that fundamentals will deteriorate further. At its core, PEMEX has one main problem: the government’s take is so burdensome that PEMEX cannot fund its capex without the capital markets. The company’s fiscal burden has stripped it of 80-115% of its EBITDA per year over the past ten years. This, in turn, has led to PEMEX’s second issue: the government’s take has hampered the company’s ability to invest in its business, most notably in upstream. Because of this, production has declined almost 50% since peaking in 2004 and has now reached a 25-year low. Mexico’s budget mandates higher capex at PEMEX in 2019, but we think it will remain well below what is needed to stabilize and eventually grow production to 2.48mn bpd by 2024. We think the new administration has yet to show signs of how it intends to “save” PEMEX, and absent a comprehensive overhaul of its fiscal regime, the company will continue to rely heavily on the capital markets, which will likely lead to more fundamental deterioration in the medium term. Our Underweight view is partially tempered by Barclays’ Commodities research team’s constructive oil outlook. At USD72/bbl and USD75/bbl Brent in 2019 and 2020, respectively, we think fundamentals will muddle along and gross leverage will reach 3.5x and 3.7x, respectively. PEMEX fundamentals are highly sensitive to oil price fluctuations. Given where oil is, we think it is necessary to toggle prices downward to assess downside risks appropriately. With Brent at USD45/bbl, USD55/bbl, USD65/bbl, and USD75/bbl, we forecast gross leverage reaching 5.6x, 4.7x, 3.9x, and 3.4x, respectively. In its 2019 budget, Mexico is using a Mexican crude mix of USD55/bbl, which would be equivalent to roughly USD65/bbl.

11 11 January January 2019 2019

Barclays | LatAm Oil & Gas FIGURE 10. PEMEX generates very healthy FCF (before the government’s take), reaching about 13% of its gross debt balance in 3Q18 LTM FCF Free Cash Flow (before Govt. Take) as % of tota (USD bn) debt Free Cash Flow (as % of Debt) 80.0 140.0%

FIGURE 11. But that take is onerous and accounts for 80-115% of EBITDA over the past 10 years

EBITDA (USD bn) 105.0

70.0

120.0%

90.0

60.0

100.0%

75.0

80.0%

60.0

60.0%

45.0

40.0%

30.0

20.0%

15.0

0.0%

20% LTM

FY 17

0% FY 16

-20.0%

FY 15

FY 09

LTM

FY 17

FY 16

FY 15

FY 14

FY 13

FY 12

FY 11

FY 10

FY 09

(10.0)

40%

FY 14

10.0

60%

FY 13

20.0

80%

FY 12

30.0

as % of EBITDA 120% 100%

FY 11

40.0

Government Take (as % of EBITDA)

FY 10

50.0

EBITDA

Source: Company reports, Barclays Research

FIGURE 12. Heavy government take has resulted in negative cash flow, which has been funded using the capital markets

FIGURE 13. As a result, gross debt has ballooned over recent years, and leverage has deteriorated, as well Gross Gross Debt Gross Debt (excl. Pension funds) Leverage (USD bn) Gross Leverage 120.0 7.0x

USD bn

Free Cash Flow (after Govt. Take)

Net New Debt

20.0 15.0

6.0x

100.0

10.0 5.0

80.0

0.0

60.0

5.0x 4.0x

-5.0

3.0x

40.0

-10.0

2.0x

Source: Company reports, Barclays Research

LTM

FY 17

FY 16

FY 15

FY 14

FY 13

FY 12

FY 11

FY 10

FY 09

LTM

FY 17

FY 16

FY 15

FY 14

FY 13

0.0x

FY 12

FY 11

1.0x

FY 10

20.0

-20.0 FY 09

-15.0

Source: Company reports, Barclays Research

Barclays’ expects oil to recover meaningfully in 2019 Barclays’ commodities research team recently published a report in which it affirmed its 2019 forecast for USD72/bbl Brent (The Blue Drum: Wait for It, December 14, 2018), which would be in line with 2018’s average. Beyond 2019, Barclays forecasts USD75/bbl Brent in 2020 and USD80/bbl by 2025. We expect the current price weakness, driven by macroeconomic concerns, to be short-lived as inventories decline modestly over the coming months, due to supply side disruptions (including OPEC and OPEC+ production cuts announced in December, among others). Barclays’ commodities research team thinks that sharp supply adjustments will percolate in 1H19, with a more material price recovery in 2Q19 (versus 1Q19) as production cuts become evident in inventory statistics. Barclays expects USD75/bbl Brent in 2Q19, up from USD71/bbl Brent in 1Q19 (USD53/bbl Brent currently).

11 11 January January 2019 2019

Barclays | LatAm Oil & Gas FIGURE 14. Barclays commodities research recently affirmed its USD72/bbl and USD75/bbl Brent forecast for 2019 and 2020, as it expects prices to recover on supply-side disruptions Barclays energy price forecast 2018 2016 2017

2019

2018

2019 2020 2025

Brent

WTI WTIBrent Henry Hub

-1.7

-3.9

-4.3

-7.1

-6.4

-9.0

-6.7

-8.0

-6.5

-6.0

-7.0

-6.9

-7.0

2.49

2.96

3.05

2.82

2.95

3.63

3.11

3.51

2.67

2.74

2.78

2.72

3.06

Source: Barclays Research

Upstream: The means to an end PEMEX aims to stabilize production at 1.85mn bpd in 2019 and grow it to 2.48mn bpd in 2024, while incorporating 1.5bn barrels per year to reserves (indicating a reserve replacement ratio of about 2.0x). If PEMEX succeeds in achieving its 2.48mn bpd production target for 2024, it would be the highest level since 2013. We think this is an overly optimistic target in the near and long term, given current production trends and the company’s capex budget. Production has declined every quarter y/y since January 2016 (excluding September 2018, which had a favorable y/y comparison), with November 2018 production declining to the lowest level in over 25 years (-8.0% y/y to 1.72mn bpd). Similarly, reserves have been declining consistently. At December 31, 2017, PEMEX’s proved reserves amounted to roughly 7.4bn barrels of oil equivalent (boe), or roughly eight years of reserve life. This compares with about 13.1bn boe, or roughly 11 years of reserve life just five years ago. To hold reserves flat, we estimate that PEMEX would need to invest USD10-13bn per year, assuming a USD10-13/bbl F&D cost (upstream DD&A/bbl suggests a capex level of USD8bn-USD12bn per year). This is significantly above the USD5.3bn of upstream cash capex we expect for FY19 (versus USD4.3bn expected for FY18 and USD4.6bn in FY17). During 2010-14, PEMEX invested USD13.0-17.0bn in upstream capex per year, and reserve life remained stable at roughly 11 years, while production declines averaged only -1.5%. Reserves and production began to decline at a faster pace as PEMEX began to reduce its upstream capex over the following years. To achieve these ambitious targets, PEMEX has stated it will focus on: 1) increasing drilling activity and repairing wells in operating fields with 2P reserves; 2) increasing the recovery factor of mature fields; 3) reducing the decline of exploited fields; and 4) developing newly discovered fields. PEMEX’s CFO recently stated that over 40% of capex has historically been allocated to deep-water projects, which has failed to yield any meaningful production for PEMEX. CEO Octavio Romero has stated that the company will focus on onshore and shallow water fields and aims to drill 150 wells in 2019 (versus 50 wells in 2018), while offering incentives to reduce drilling times from 80 to 70 day. Most recently, the Mexican oil regulator (Comision Nacional de Hidrocarburos, or CNH) announced that it would cancel two upcoming oil and gas auctions from Round Three. This comes after the secretary of energy requested the exclusion of 37 onshore blocks and nine unconventional and conventional areas from the auction to review Mexico’s energy policy and evaluate the results of existing exploration and production contracts. He also requested that the CNH defer the auction of farm-outs by six months to review the objectives of the process. We think these demonstrate Mexico’s willingness to delay auctions in the near term as the new government assesses the benefit to Mexico. As a result, we do not expect any contributions from these initiatives in the near term.

11 11 January January 2019 2019

Barclays | LatAm Oil & Gas

PEMEX’s debt to proved reserves has deteriorated meaningfully versus major LatAm integrated peers since 2016. While PEMEX, PETBRA and ECOPET exhibited deteriorating metrics over the past 10 years, there has been a significant divergence between PEMEX and its LatAm peers beginning in 2016. Proved reserves for PETBRA and ECOPET increased marginally in 2016-17, while both companies managed to pay down debt quite meaningfully during this time, while PEMEX has had lower reserves and higher debt. PETBRA’s gross debt declined from USD118.1bn in 2016 to USD88.1bn in 3Q18 (debt to proved reserves declined from USD12.2/bbl to USD9.0/bbl), while EOCPET’s gross debt declined from USD17.4bn to USD13.4bn (debt to proved reserves declined from USD10.9/bbl to USD8.1/bbl). PEMEX’s gross debt increased from USD95.7bn, to USD106.5bn, while debt to proved reserves increased from USD11.2/bbl, to USD13.8/bbl.

0.0%

10.0

-2.0%

8.0

-4.0%

6.0

-6.0%

4.0

-10.0%

2.0 -

FY 11

FY 18E

FY 17

FY 16

FY 15

FY 14

FY 13

FY 12

FY 11

-12.0% FY 10

9.0 8.0 7.0 6.0 5.0 4.0 3.0 2.0 1.0 FY 17

-8.0%

Life (Years)

Reserve Life (years)

FY 16

Hydrocarbon Production Change

Total Proved Rreserves (bn boe)

Reserves (bn boe) 12.0

FY 15

18.0 16.0 14.0 12.0 10.0 8.0 6.0 4.0 2.0 -

Production change (%) 2.0%

FY 14

Upstream Capex

FY 13

USD bn

FIGURE 16. Reserves have declined significantly over recent years, with reserve life at just eight years

FY 12

FIGURE 15. Production began to decline significantly in 2015 as upstream cash capex was reduced

Note: September 2018 production benefited from a favorable y/y comparison, given the hurricane effect in September 2017. Source: Company reports, Barclays Research

Source: Company reports, Barclays Research

FIGURE 17. PEMEX estimates that its cash costs (before profit sharing) are among the most competitive globally

FIGURE 18. PEMEX’s debt to proved reserves has diverged versus global peers beginning in 2016 and is now roughly USD14/bbl

Production Costs (before taxes)

Debt to 1P Reserves

Taxes and Duties

16.0

USD/boe 12

PETBRA

PEMEX

ECOPET

14.0

10 3.2 8

2.7

10.0

2.3

12.0 8.0 6.0

7.9

8.2

6.7

7.7 5.5

4.0 2.0

Source: Company reports, Barclays Research

3Q18

2017

2016

2015

2014

2017

2013

2016

2012

2015

2011

2014

2010

2013

Note: Taxes and duties is before profit-sharing duties and income taxes.

2009

0.0

Note: The government’s take is estimated by Barclays Research and includes profitsharing duties and income taxes. Source: Company reports, Barclays Research

Downstream: High capex and subsidized fuel prices, eventually We think AMLO’s downstream policy will be onerous for PEMEX in the medium term. In the near term, however, we think fuel prices will remain liberalized and provide a tailwind for the company. In January 2017, as part of the energy reform, the Mexican government began to liberalize gasoline and diesel prices. As of December 31, 2017, they have been fully liberalized

11 11 January January 2019 2019

Barclays | LatAm Oil & Gas

and are determined by the free market. As a result, PEMEX’s downstream segment has turned a profit in 2018 after years of negative contributions. AMLO has long criticized this reform and during his inauguration speech confirmed his intention to reduce fuel prices. He acknowledged, however, the importance of increasing prices in the near term by inflation (without committing to international price parity), as Mexico continues to import gasoline and diesel. AMLO aims to regain Mexico’s energy independence (ie, process 1.8mn bpd by 2022 to meet domestic demand) and ultimately subsidize fuel prices. By processing 1.8mn bpd, AMLO states that PEMEX will produce 780k bpd of gasoline and 560k bpd of diesel, compared with about 940k bpd of gasoline and roughly 440k bpd of diesel consumption estimated by 2023, according to the secretary of energy. To reach this target, AMLO has mandated that PEMEX invest heavily in its outdated refineries and build a new refinery in Dos Bocas, Tabasco. PEMEX operates six refineries with 1.63mn bpd capacity, but they are running at 32% capacity (only processed 519k bpd in November 2018). PEMEX estimates it would need to invest about MXN5bn (roughly USD250mn) per refinery to have them run at 70-75% utilization. Additionally, AMLO estimates that the Dos Bocas refinery (about 340k bpd capacity) will cost about USD8bn. We think these projects will weigh on the company’s capex budget in 2019 and onward, with PEMEX already allocating USD2.9bn in capex for these projects in 2019. PEMEX stated that downstream maintenance capex is USD750mn per year (roughly USD460/bbl) for its six refineries. PEMEX estimates that the effect of fuel theft is USD2.5-USD3bn per year. As part of PEMEX’s efforts to reduce this, the company has begun to transport fuel via trucks (rather than utilizing pipelines, which have been tapped). PEMEX stated that before the introduction of this plan, fuel theft averaged roughly 68k bpd, but has since declined to 18k bpd. This has resulted in widerange shortages across Mexico as PEMEX adjusts its business model, but management believes this situation should normalize soon. FIGURE 19. The secretary of energy expects diesel and gasoline imports to decline beginning in 2019, on higher domestic refining throughput Shortage ('000 bpd)

Gasoline

But expected to improve

2032

2031

2030

2029

2028

2027

2026

2025

2024

2023

2022

2021

2020

2019

2018

2017

2016

2015

2014

2013

2012

2011

2010

2009

2008

Shortage has increased significantly since 2007

2007

0 -100 -200 -300 -400 -500 -600 -700 -800 -900

Diesel

Source: Secretaria de Energía (SENER), Barclays Research

Tax Burden: It’s not me, it’s you Mexico’s over-reliance on tax revenues has driven PEMEX’s financial malaise, as it has stripped the company of 80-105% of its EBITDA generation over the past 10 years. Mexico’s burdensome fiscal regime (particularly compared with peers in LatAm, such as Brazil and Colombia) has resulted in PEMEX’s increasingly depending on the capital markets to fund its capex program, refinance debt amortizations and even service interest expense at times. PEMEX pays a 65.0% tax on upstream revenues, with very limited cost deductibles (the higher of 12.5% of the reference price and USD6.1/bbl and USD8.3/bbl for shallow water and onshore production,

11 11 January January 2019 2019

Barclays | LatAm Oil & Gas

respectively, and). This compares poorly with LatAm peers, such as Petrobras, which only pays royalties of 5-10% of the hydrocarbon reference prices and a special participation payment of up to 40% of net income on profitable fields. We expect PEMEX’s fiscal burden to ease in 2019, but remain onerous for its capital structure. Secondary legislation, which passed shortly after the approval of the 2013 energy reform, established a new tax regime for oil and gas investments in Mexico, as outlined in the Hydrocarbon Revenue Law (with further changes made in 2016 and 2017). The aim was to ease PEMEX’s tax burden and included a reduction in the company’s E&P tax rate and an increase in its deductible cost cap. While these initiatives have alleviated some of PEMEX’s fiscal burden, taxes remain heavy, as they are mostly revenue based and generally have low rates of deductible costs (for onshore and shallow fields). PEMEX’s tax rate declined to 65.0% of its upstream revenues in FY19, an improvement from the 66.25% rate in FY18 and 70% in FY15. Additionally, its deductible cost cap for onshore and shallow fields increased to 12.5% (from 12.025% in FY18 and 10.6% in FY15), which should also provide a tailwind. We expect both to remain at these levels in the near term. We estimate that these initiatives will reduce PEMEX’s fiscal burden to USD27.2/boe (or 48.4% per barrel of oil equivalent in FY19) from USD29.1/boe in FY18 (or 51.7% per barrel of oil equivalent). FIGURE 20. PEMEX’s fiscal burden should receive some relief in 2019, as the tax rate is scheduled to decline to 65.0% (from 66.25% in FY18) and the cost deduction cap to increase to 12.5% (from 12.025%), but a larger overhaul is still needed to create a sustainable capital structure Tax Schedule

2014

2015

2016

2017

2018

2019+

Cost Cap

10.600%

11.075%

11.550%

12.025%

12.500%

Tax Rate

70.00%

68.75%

67.50%

66.25%

65.00%

Shallow Water (USD/bbl)

6.1

Onshore (USD/bbl)

8.3

(0.1)

Government Take (USD bn) Exploration Taxes:

Extraction Taxes:

(0.1) (3.3)

(2.5)

(3.2)

(4.2)

(3.1)

Profit Sharing & Income Taxes

(55.7)

(23.7)

(16.3)

(19.8)

(23.2)

(20.8)

Total Government Take

(55.7)

(27.1)

(18.9)

(23.1)

(27.5)

(23.9)

78.8

39.3

32.2

42.5

56.2

Mex Basket Mix (USD/boe) Government Take (USD/boe) as % of Mex Basket Mix

43.4

20.0

15.1

24.1

29.1

27.2

55.1%

51.0%

46.8%

56.7%

51.7%

48.4%

Source: Company reports, Barclays Research

In a scenario in which its upstream tax rate were reduced to 50% of upstream revenues (versus 65% currently), we estimate PEMEX would generate a cash benefit of USD5.5-6.0bn per year, with net leverage declining to 2.9x by YE22 (versus 3.7x estimated under our base case scenario). In a more positive scenario in which PEMEX is taxed at 35% of upstream revenues, we estimate that the company would generate a cash benefit of USD11.0-11.5bn per year, with net leverage improving to 2.2x by YE22, ceteris paribus.

11 11 January January 2019 2019

Barclays | LatAm Oil & Gas FIGURE 21. If PEMEX’s upstream tax rate were reduced to 35% or 50% (from 65% currently), we estimate cash savings would reach USD5.5-6.0bn and USD11.0-11.5bn per year, respectively, which would significantly reduce leverage Pro-forma Net Leverage Tax Rate Government Take Net Leverage Tax Rate Government Take Net Leverage Tax Rate Government Take Net Leverage

2019

2020

2021

2022

65.00%

(21.6)

(21.1)

(20.6)

3.3x

3.6x

3.7x

50.00%

(15.8)

(15.4)

(15.0)

3.1x

3.2x

3.1x

2.9x

35.00%

(10.0)

(9.7)

(9.5)

2.9x

2.8x

2.6x

2.2x

Source: Company reports, Barclays Research

New Issuance: It’s all about crude prices We estimate that PEMEX will issue USD5.5-10.0bn in 2019 if we toggle Brent at USD45-75/bbl. This translates into USD2.5-6.5bn of net issuance, after accounting for USD3.2bn in hard currency bond amortizations maturing in 2019. This compares with the company’s net new issuance limit of USD5.5bn for the year, as mandated by the Mexican federal budget. At our specified Brent price range, our model assumes EBITDA generation of USD20-31.5bn in FY19, hard currency amortizations of USD3.2bn (refinancing only 2019 hard currency bond amortizations), cash capex of USD8.4bn, a capital injection of MXN25bn (about USD1.3bn) from the department of energy, a YE18 cash balance of USD4.2bn and no additional drawdowns on revolvers. At lower oil prices, lower EBITDA would largely be matched by lower government take. The Mexican government’s 2019 budget includes a USD55/bbl Mexican crude price assumption (or an implied USD65/bbl Brent) and 1.8mn bpd production. We estimate PEMEX will need to refinance c.USD5.3bn of hard currency bonds in 2020 and USD7.4-7.6bn per year in 2021-2022. These refinancing requirements, in addition to ongoing capex burden, will result in gross issuance being larger in 2020 than 2019, peaking in 2021/22 over our forecast horizon. While PEMEX has proven to have access to capital markets in challenging macro backdrops (for example, in 2016, when it issued almost USD17bn in hard currency bonds, while Brent averaged USD45/bbl), this time may prove different. Investor sentiment has soured over recent months due to the company’s lack of a credible business plan, and continued lack of clarity could dampen appetite . FIGURE 22. We think PEMEX will issue USD5.5-10.0bn in 2019 at a Brent price of USD45-75/bbl, which would translate to net new issuance of USD2.5-6.5bn. This would result in gross leverage of 3.4-5.6x Debt Issuance Cash, YE18 (estimated)

USD45/bbl

USD55/bbl

USD65/bbl

USD75/bbl

4.2

EBITDA

20.3

24.3

28.6

32.9

Cash Interest

-6.6

Capex

-8.4

Free Cash Flow (before Govt. Take) Govt. Take Free Cash Flow Amortizations (2019 only) Govt. Contribution Net Change in Cash, before issuance

11 11 January January 2019 2019

5.4

9.4

13.6

17.9

-13.0

-16.1

-18.9

-21.6

-7.7

-6.8

-5.3

-3.7

-3.2

1.3

-9.6

-8.7

-7.2

-5.7

Barclays | LatAm Oil & Gas

Debt Issuance

USD45/bbl

USD55/bbl

USD65/bbl

USD75/bbl

Cash, YE19

4.2

Debt Issuance, Gross

9.6

8.7

7.2

5.7

Debt Issuance, Net

6.4

5.5

4.0

2.4

Debt, 2018E

108.3

Debt, 2019E

114.7

113.8

112.3

110.8

Net Debt

110.5

109.6

108.1

106.6

Gross Leverage

5.6

4.7

3.9

3.4

Net Leverage

5.4

4.5

3.8

3.2

Note: EBITDA includes exploration and extraction taxes. Source: Company reports, Barclays Research

FIGURE 23. PEMEX has had proven access to the capital markets during periods of oil volatility... Hard Currency Issuance (LHS)

USDmn

FIGURE 24. ...even when leverage has moved up significantly during these periods

Brent (USD/bbl) 120

Brent (RHS)

8,000 7,000

100

6,000

5,000

Gross Leverage (LHS)

7.0x

Brent (USD/bbl) 120

6.0x

100

USDmn

Brent (RHS)

5.0x

4.0x

4,000

60 3.0x

2,000

Source: Barclays Research

3Q18

1Q18

3Q17

1Q17

3Q16

0 1Q16

0.0x 3Q15

1Q15

3Q14

1.0x 1Q14

3Q18

1Q18

3Q17

1Q17

3Q16

1Q16

3Q15

1Q15

3Q14

1Q14

3Q13

1Q13

3Q13

1,000

2.0x

1Q13

3,000

Source: Barclays Research

Potential rating actions: The risk is real We think the risk of negative ratings actions has heightened considerably for 2019 and that PEMEX will see negative actions during the year. A recent change to Fitch’s methodology for rating government-related entities, as well as the company’s deteriorating fundamentals, could result in a decoupling of PEMEX by up to two notches, bringing its rating to BBB- (from BBB+ currently). We think this would be unexpected by the market and taken very negatively, as it would put the credit on the verge of just two ratings above BB+. While we think Moody’s could revise PEMEX’s outlook to Negative, we think a downgrade to HY in 2019 is unlikely unless there is a shift in the company’s strategy to focus more on downstream.

•

11 11 January January 2019 2019

We think Fitch could downgrade PEMEX by up to two notches in 2019, which would put its rating at BBB-. In 2018, Fitch revised its rating methodology for government-related entities, stating that credits that have more than four notches of rating differential between the stand-alone credit profile and the government (PEMEX’s SCP is already five notches below) could result in a top-down rating change of minus two notches. On October 19, Fitch revised PEMEX’s outlook to Negative from Stable and hinted at decoupling it from the sovereign, stating that the company’s standalone credit profile could deteriorate into the CCC category (from B- currently) in the short to medium term, which would prevent Fitch from assessing the government’s incentives to support the company as “very strong” and could result in a negative rating action for PEMEX’s IDR. Fitch stated that Negative ratings actions could occur if PEMEX fails to 1) stabilize production (Fitch expects it to decline 5% for the next two

Barclays | LatAm Oil & Gas

years); 2) grow capex to a level that allows it to replenish reserves (which it estimates at USD15-18bn per year); or 3) generate neutral to positive FCF, something we consider to be impossible under the current tax regime. Fitch also stated that if total debt to 1P reserves increases above USD15/boe (currently at USD14/boe) and funds from operations (FFO) adjusted leverage stays above 8.0x (currently near 14.0x at 2Q18, but expected toward 10.0x), this could result in a downgrade.

•

We do not expect Moody’s to downgrade PEMEX in 2019, but think it could revise its outlook to Negative if fundamentals deteriorate further. In its October 2018 review, Moody’s stated that PEMEX’s total leverage (including pension obligations) could reach 6.1x in 2019, assuming stable production (2,475k boepd) and USD60/bbl Brent in 2019. It stated that a material increase in financial leverage or a significant deterioration in production could result in a reduction of PEMEX’s baseline credit assessment (BCA)and a subsequent downgrade of its ratings. We think PEMEX’s potential production shortfall could be a catalyst for a negative outlook revision. We think that Moody’s could downgrade PEMEX if management were to accelerate downstream investments, as it would signal a significant shift in the company’s business model (towards more refining activities and potential for controlled fuel prices). Moody’s also cited higher downstream capex (assuming PEMEX is responsible for the projects), delaying oil and gas auctions, near-term debt maturities and the potential elimination of oil exports to focus on refining as reasons for a downgrade.

•

We do not think S&P will decouple PEMEX from the sovereign. S&P does not expect PEMEX’s relationship with the government to change in the next 24 months, given the likelihood of sovereign support if it faces unexpected setbacks. S&P downgraded PEMEX’s stand-alone credit profile to BB- from BB on August 31, but affirmed its BBB+ rating and stated it continues to correlate PEMEX’s ratings with the sovereign. On January 3, S&P revised its Brent and WTI assumptions for 2019 and 2020 by USD10/bbl and now sees USD55/bbl Brent and USD50/bbl WTI.

Barclays’ macro and sovereign strategists think that a sovereign downgrade by one notch could occur as early as 2H19, due to the deteriorating institutional framework in Mexico, which we believe would put significant pressure on PEMEX. If a downgrade of the sovereign were to materialize, the implication for PEMEX would be greatest at agencies that still rate PEMEX flat to the sovereign. FIGURE 25. Rating agency summary

Sovereign Rating:

Moody’s

S&P

Fitch

BBB+

PEMEX Rating:

Baa3

BBB+

Sovereign Outlook:

Stable

PEMEX Outlook:

Stable

Negative

Differential to Sov:

Sovereign Uplift

Standalone Credit Profile/Baseline Credit Assessment

bb-

B-

October 12, 2018

August 31, 2018

October 19, 2018

Last review:

11 11 January January 2019 2019

Barclays | LatAm Oil & Gas

Moody’s

S&P

Fitch

Downgrade could result if production fails Growing liquidity concerns, material Could lower PEMEX’s rating if S&P’s view of to stabilize and PEMEX continues with increase in financial leverage, or a its relationship with the government and its unsustainable reserves replacement significant deterioration in production ratios and negative FCF, with total debt to likelihood of support changes. could result in a downgrade of PEMEX’s BCA Furthermore, a downward revision of 1P reserve to USD15/boe or above and a and debt ratings. In addition, because PEMEX’s SACP would follow a further sustained FFO adjusted leverage above Downside Scenario: PEMEX’s ratings benefit from implicit deterioration of the current production 8x. Could result from the failure by the support from the sovereign, a downgrade platform and of capital investments that sovereign to remedy PEMEX’s capital of the government’s rating or a change in don’t improve the reserve replacement structure, which would prevent Fitch from Moody’s assumptions about government ratio, resulting in a debt-to-EBITDA ratio assessing the government’s incentives to support could lead to a downgrade of approaching 6.0x. support the company as “very strong” (or PEMEX’s ratings. a SCP commensurate with CCC).

Upside Scenario:

An upgrade would only follow a similar Could result from an upgrade of Mexico For a rating upgrade, PEMEX would need to rating action on the sovereign. S&P could and strong operating and financial improve its liquidity position and operating raise the company’s SACP if new projects performance. The Negative Rating profile further, reduce debt and increase materialize and contribute higher-than- Outlook could be revised back to Stable if retained cash flow. Improving operating expected incremental production, while the PEMEX’s strategy is revised to allow for a metrics and a lower tax burden that company’s initiatives to strengthen its sustainable upstream capex that is supports higher levels of internal funding finances, improve profitability and reduce sufficient to maintain a close to 100% for capital spending and prospects for a financing needs in the intermediate term reserve replacement ratio and stable solid trend of increases in production and lead to a debt-to-EBITDA ratio below 4.5x production while reporting neutral to reserves could benefit the company’s BCA. on a consistent basis. positive FCF through the cycle.

Source: Moody’s, Standard & Poor, Fitch Ratings, Barclays Research

Upstream Overview PEMEX’s oil production has been in constant decline since peaking at 3.4mn bpd in 2004. Since then, it has declined almost 50%, and in November 2018, the company reported its lowest production figure in over 25 years (-8.0% y/y to 1.72mn bpd). This decline has been widespread across PEMEX’s producing fields, in some cases due to the natural decline of maturing fields, but also due to idiosyncratic production issues at others. For example, the Cantarell well, which produced 2.06mn bpd at its peak in 2004 and represented about 60% of total production, has been in structural decline and now produces only 110k bpd (roughly 5% of total production). At the Xanab field, PEMEX’s largest in the Southwest marine region, production declined over 30% y/y in 3Q18 (about 50k bpd decline), due to water invasion. FIGURE 26. Crude production peaked at 3.4mn bpd in 2004, but Cantarell peaked that year and PEMEX’s total production has fallen consistently since then, due to natural declines and production issues Cantarell Southeast Marine Northern Region

mn bpd 3.5

KMZ Southern Region

3.0 2.5 2.0 1.5 1.0 0.5 2017

2018*

2016

2015

2014

2013

2012

2011

2010

2009

2008

2007

2006

2005

2004

2003

2002

2001

2000

1999

1998

1997

1996

1995

1994

1993

1992

1991

1990

0.0

Source: Company reports, Barclays Research

11 11 January January 2019 2019

Barclays | LatAm Oil & Gas

PEMEX extracts hydrocarbons from three main regions: the Northeastern Marine (includes Ku Maloob Zaap and Cantarell) and Southwestern Marine regions (includes Xanab), which are jointly referred to as the Marine regions; the Southern region; and the Northern region. Together, these contain 7.7bn boe proved reserves, 14.2bn boe of 2P reserves and 21.1bn boe of 3P reserves. Most of PEMEX’s production comes from shallow-water offshore production, with 83% of its crude production in 3Q18 coming from offshore. The US continues to be PEMEX’s main export market (c.65% of total crude exports), but this has come down quite significantly over the past ten years, after having reached as high as about 90%. The remainder of PEMEX’s production is exported to Europe (roughly 15%) and the Far East (about 20%). PEMEX produces four main types of crude, but heavy crude (Altamaria and Maya, with APIs of 15.0-16.5 degrees and 21.0-22.0 degrees, respectively) represents almost 60% of its production. The remaining output is composed of Isthmus (light crude with API of 32.0-33.0 degrees) and Olmeca (extra-light crude with API of 38.0-39.0 degrees). Given the heavier weighting of PEMEX’s crude production, the Mexican oil basket has typically traded at a 15% discount to Brent (which has higher gravity and lower sulfur content). FIGURE 27. PEMEX mainly produces heavy crude, which represents almost 60% of production Production ('000 bpd) 4,000

Heavy

Light

FIGURE 28. Mexico’s blend trades about 15% below Brent, reflecting its lower gravity and higher sulfur content Brent Price (LHS)

Price (USD/bbl) 160

Extra Light

3,500 3,000

Discount (%)

Mexican Blend Price (LHS)

10%

140

120

100

2,500

-5%

2,000

-10%

Oct-18

May-18

Jul-17

Dec-17

Feb-17

Apr-16

Sep-16

Nov-15

Jan-15

Jun-15

-25% Aug-14

-20%

0 Oct-13

2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018

-15%

20 Mar-14

500

Dec-12

1,000

May-13

1,500

Source: Company reports, Barclays Research

FIGURE 29. Offshore production has steadily increased over recent years and now represents almost 83% of total production

FIGURE 30. PEMEX exported 1.18mn bpd in 3Q18, of which c.65% was sent to the US, which is down from almost 80% just five years ago

% total production 85% 80% 75%

Offshore Production

75.4% 74.6% 74.4% 75.2% 76.2%

77.7%

79.0%

Asia 21%

81.3%

70%

Europe 13%

65%

United States 66%

60% 55%

11 11 January January 2019 2019

FY 17

FY 16

FY 15

Source: Company reports, Barclays Research

FY 14

FY 13

FY 12

FY 11

FY 10

50% Source: Company reports, Barclays Research

Barclays | LatAm Oil & Gas

Marine regions (83% of crude production in 3Q18; 62% of natural gas production) Overview: The Marine region comprises the Northeastern and Southwestern Marine regions, which are located on the continental shelf and its slope in the Gulf of Mexico. These regions cover a surface area of approximately 550k square kilometers located entirely within Mexican territorial waters and along the coastal states of Tabasco, Campeche, Yucatán, Quintana Roo and the southern coast of the state of Veracruz. Production and Reserves: Production from this region has been in constant decline since it reached a record 2.83mn bpd in 2004 and is now producing just 1.51mn bpd. This is attributed mostly to weaker production from Cantarell (in the Northeastern Marine region), where production has cratered from 2.06mn bpd in 2004 to just about 110k bpd in 3Q18. This was partially offset by significant growth at Ku-Maloob Zaap (also located in the Northeastern Marine region) from c.300k bpd to almost 820k bpd. The Southwestern Marine region had healthy growth in 2005-14, but began to decline over recent years. In 3Q18, the Southwestern Marine region produced 468k bpd, mainly reflecting operational issues at its largest field in the region, Xanab. Crude proved reserves totaled 3,558mn and 848mn barrels of oil in the Northeastern and Southwestern Marine regions, respectively, at January 1, 2018, or 76% of Mexico’s proved oil reserves jointly. Proved oil reserves in this region have been in constant decline and today have a reserve life of about eight years (versus almost 11 years in 2012). FIGURE 31. The Marine region’s production (over 80% of total crude production) has been declining since 2004, due to maturing fields and production issues Production ('000 bpd)

Northeastern Marine

FIGURE 32. Proved reserves (and reserve life) have declined in the Marine region, due particularly to lower reserves in the Northeastern region 1P Reserves (mn barrels)

Southwestern Marine

3,000

14,000

2,500

12,000

2,000

10,000

Proved Reserves (LHS)

Reserve Life (# of years)

Reserve Life (RHS)

18.0 16.0 14.0 12.0 10.0 8.0 6.0 4.0 2.0 -

8,000

1,500

6,000 1,000

4,000

500

2,000

Note: Production data are for crude and the Northeastern and Southwestern Marine regions only. Source: Company reports, Barclays Research

2016

2014

2012

2010

2008

2006

2004

2002

2000

1998

2018

2016

2014

2012

2010

2008

2006

2004

2002

2000

1998

1996

1994

1992

1990

Note: Reserve data and life are for crude and the Northeastern and Southwestern Marine regions only. Source: Company reports, Barclays Research

Southern region (12% of crude production in 3Q18; 18% of natural gas production)3 Overview: The Southern region covers an area of approximately 392k square kilometers, including the states of Guerrero, Oaxaca, Chiapas, Tabasco, Yucatán, Quintana Roo, Campeche and Veracruz. Production and Reserves: The Southern region produced 226k bpd in 3Q18, or roughly 12% of PEMEX’s crude, with no single field producing more than 25k bpd. The region represented almost 25% of PEMEX’s crude production in the 1990s, but declines accelerated at the turn of the century and outpaced PEMEX’s overall declines. Crude proved reserves totaled 661mn barrels of oil at January 1, 2018 (11% of Mexico’s proved oil reserves), or just under seven years of life, while its dry gas proved reserves totaled 1,682MMcfd (26% of Mexico’s dry gas reserves). The region remains important for PEMEX, as it produces almost 20% of the company’s natural gas.

11 11 January January 2019 2019

Barclays | LatAm Oil & Gas

Northern Region (5% of crude production in 3Q18; 20% of natural gas production): Overview: The Northern region, including its offshore area, is located on the continental shelf in the Gulf of Mexico along the coast of the state of Tamaulipas and the northern coast of the state of Veracruz and covers an area of approximately 1.8mn square kilometers. The area responsible for onshore production is located mainly in the states of Veracruz, Tamaulipas, Nuevo León, Coahuila, San Luis Potosí and Puebla. Production and Reserves: The Northern region produced 90k bpd of crude production in 3Q18 and represents only 5% of PEMEX’s crude production. It represents 30% of PEMEX’s total Proved, Probable and Possible (3P) oil reserves and includes the Chicontepec formation. At one stage, PEMEX had estimated this basin could produce 800k bpd once developed, but challenging geological traits have made it difficult to develop its massive 3P reserves. Today, this asset is immaterial to PEMEX’s crude production. This formation has been dubbed as PEMEX’s greatest challenge. FIGURE 33. Production from the Southern region has also declined massively over the years and now represents only 12% of total production Production ('000 bpd)

Southern

FIGURE 34. PEMEX extracts over 80% (about 1.5mn bpd) of its crude from the Southwestern and Northeastern Marine regions

Northern

Southern 12%

900 800 700 600 500 400 300 200 100 0

Northern 5%

Northeastern Marine 57%

2018

2016

2014

2012

2010

2008

2006

2004

2002

2000

1998

1996

1994

1992

1990

Southwester n Marine 26%

Source: Company reports, Barclays Research

FIGURE 35. PEMEX’s Hydrocarbon reserves (as of January 1, 2018) Hydrocarbon Reserves

1P (90%)

2P (50%)

3P (10%)

Northeastern Marine region

3,558

2,216

1,761

Southwestern Marine region

848

822

814

Southern region

661

146

231

Oil (millions of bbls)

Northern region

740

1,669

2,273

5,807

4,853

5,079

Northeastern Marine region

188

Southwestern Marine region

152

Southern region

190

Northern region

266

324

621

480

514

Northeastern Marine region

1,362

766

307

Southwestern Marine region

1,388

1,059

640

Southern region

1,682

330

555

Northern region

2,162

4,069

5,119

Sub-Total (Oil) NGL and Condensates (millions of bbls)

Sub-Total (NGL and Condensates) Dry Gas (MMcfd)

11 11 January January 2019 2019

Barclays | LatAm Oil & Gas

Hydrocarbon Reserves Sub-Total (Dry Gas)

1P (90%)

2P (50%)

3P (10%)

6,593

6,223

6,620

Note: Reserve data are as of January 1, 2018. Source: Company reports, Barclays Research

The Energy Reform: Looking back to 2013 In December 2013, the Mexican Constitution was amended to loosen the limitations on Mexico’s energy industry. At its core, the changes aimed to boost Mexico’s (and PEMEX’s) production of hydrocarbons. To do so, Mexico ended PEMEX’s 76-year monopoly over the energy sector and created a more favorable framework for developing a private sector and permitting private investment across the value chain. Mexico would also allow the reallocation of some of its energy assets through auctions (known as rounds). In Round Zero, PEMEX was granted 100% of proved reserves, 83% of the proved and probable reserves, 71% of the proved, probable and possible reserves and 21% of the prospective resources (only the latter was below its requested amount, which was 31%). Additionally, it created a less (although still very) burdensome tax regime for PEMEX. The Mexican energy reform provides four types of contracts: 1. Licensing contracts: a license holder is entitled to the oil and gas that are extracted from the subsoil and the right to market such hydrocarbons; 2. Production-sharing contracts: a contractor is entitled to receive a percentage of production (split between the state and the private company); 3. Profit-sharing contracts: a contractor is entitled to receive a percentage of the profit from the sale of the extracted hydrocarbon; 4. Service contracts: a contractor receives a cash payment for services performed. Under the Hydrocarbons Law established by the energy reforms, Pemex can partner with the private sector to tap more complex formations for which it lacks the technical expertise (and has ultimately led the company to focus on its abundant onshore and shallow water reserves in the Marine regions). Specifically for PEMEX, the new framework would allow it to form strategic alliances via farm-outs and contract migrations. In a farm-out, Pemex auctions off the right for a partner to develop assets in a process managed by the CNH. In a contract migration, Pemex negotiates a partnership directly with private companies to execute contracts and services more efficiently where Pemex has not been profitable. Management plans on significant investment contributions from the private sector in new and existing projects, partially alleviating the company’s need to spend heavily on capex. For E&P joint-ventures, production will be shared equitably, but the private sector will be expected to contribute a greater share of development costs. The CNH held nine auctions (across four rounds, including Round Zero), with a total of 104 areas being awarded to PEMEX and other international operators. Round 1 bidding began in July 2015 and totaled four phases, including exploration and extraction blocks in shallow/deep water and onshore fields located in the Southeast; Perdido Fold Belt and Saline Basins; and Burgos, North and South Fields. A total of 38 blocks was awarded from the 54 offered; and winners included Chevron, BP and Exxon, among others. Round 2 bidding began in June 2017 and also consisted of four phases for shallow/deep water and onshore areas in the Tampico-Misantla, Veracruz, Burgos, Perdido Area, Mexican Mountain Ranges, Saline and Southeast Basins. A total of 50 blocks was awarded (out of 68 offered). Round 3.1 bidding began in March 2018 and included 35 shallow water blocks (Burgos, Tampico-Misantla-Veracruz and Southeast Basins) of which 16 were awarded. This was the last administered auction before AMLO’s administration requested that the CNH cancel Rounds 3.2 and 3.3 (which had been scheduled for February 2019) and postponed the farm-out of seven onshore clusters from PEMEX. Round 3.2 was anticipated to award 37 areas with 260mn boe of prospective resources, while Round 3.3 was expected to offer

11 11 January January 2019 2019

Barclays | LatAm Oil & Gas

nine shale blocks with 1.1bn boe of prospective wet and dry gas resources. AMLOâ&#x20AC;&#x2122;s administration stated that it would halt auction rounds for up to three years, as it is evaluating the existing contracts and its energy policy, until foreign operators demonstrate increased domestic production.

11 11 January January 2019 2019

Barclays | LatAm Oil & Gas FIGURE 36. Upstream Overview and Operating Statistics FY 09

FY 10

FY 11

FY 12

FY 13

FY 14

FY 15

FY 16

FY 17

2015-2017 2013-2017

13,993 83.6% 16.4%

13,796 82.6% 17.4%

13,811 82.3% 17.7%

13,869 82.4% 17.6%

13,439 82.4% 17.6%

13,018 83.1% 16.9%

9,632 82.8% 17.2%

8,562 84.3% 15.7%

7,695 83.5% 16.5%

8,630 83.5% 16.5%

10,469 83.1% 16.9%

48.0% 13.5% 28.8% 9.7%

45.5% 15.1% 29.0% 10.4%

44.5% 15.3% 28.8% 11.4%

44.4% 15.6% 27.8% 12.2%

45.0% 16.1% 27.1% 11.8%

46.2% 17.1% 25.0% 11.7%

46.3% 19.2% 21.7% 12.8%

52.7% 14.4% 17.7% 15.2%

52.1% 16.5% 15.3% 16.2%

50.2% 16.8% 18.5% 14.6%

47.9% 16.7% 22.3% 13.1%

1,378 77.1% 22.9%

1,384 76.5% 23.5%

1,358 77.3% 22.7%

1,353 77.8% 22.2%

1,333 77.8% 22.2%

1,292 77.5% 22.5%

1,193 78.4% 21.6%

1,109 80.3% 19.7%

997 80.7% 19.3%

1,100 79.8% 20.2%

1,185 78.8% 21.2%

2,123 50.9% 28.3% 15.8% 5.0%

2,264 51.1% 26.6% 17.1% 5.2%

Reserve Mix (millions boe) Total Proved Reserves % Crude Oil, NGL and Condensates % Natural Gas % Northeastern Marine region % Southwestern Marine region % Southern region % Northern region Production Mix (millions boe) Total Production % Crude Oil, NGL and Condensates % Natural Gas Crude Production (million bpd)

2,601

2,577

2,553

2,548

2,522

2,429

2,267

2,154

1,948

% Northeastern Marine region % Southwestern Marine region % Southern region % Northern region

57.4% 19.9% 19.1% 3.6%

54.2% 21.1% 20.6% 4.0%

52.6% 22.0% 20.8% 4.7%

51.4% 23.0% 19.9% 5.7%

51.7% 23.5% 19.1% 5.7%

50.7% 25.5% 18.6% 5.1%

49.7% 28.0% 17.4% 5.0%

50.3% 28.7% 16.0% 5.0%

53.1% 28.2% 13.7% 5.0%

Natural Gas Production (MMcfd)

7,031

7,020

6,594

6,385

6,370

6,532

6,401

5,792

5,068

% Northeastern Marine region % Southwestern Marine region % Southern region % Northern region

25.4% 15.8% 22.8% 36.1%

22.6% 16.7% 25.1% 35.6%

21.3% 18.3% 25.7% 34.7%

20.9% 19.7% 25.9% 33.5%

22.2% 20.8% 24.7% 32.3%

25.9% 21.4% 23.2% 29.5%

28.6% 22.6% 21.6% 27.2%

30.6% 23.1% 21.6% 24.6%

33.3% 23.7% 19.9% 23.1%

5,754 30.7% 23.1% 21.1% 25.1%

6,033 27.8% 22.3% 22.3% 27.6%

10.2 11.0 7.3

10.0 10.8 7.4

10.2 10.8 8.0

10.3 10.8 8.2

10.1 10.7 8.0

10.1 10.8 7.6

8.1 8.5 6.4

7.7 8.1 6.2

7.7 8.0 6.6

7.8 8.2 6.4

8.8 9.3 7.0

11.2 6.2 14.0 18.0

11.1 6.3 13.2 17.4

11.3 6.2 12.5 18.8

11.6 6.1 12.3 17.6

11.5 6.1 12.2 16.5

12.2 6.4 11.7 18.9

9.7 5.3 8.4 17.9

10.1 3.8 7.1 19.9

9.4 4.2 6.8 20.7

9.7 4.5 7.5 19.4

10.7 5.2 9.7 18.6

Reserve Life (years) Total Proved Reserves Crude Oil, NGL and Condensates Reserves Natural Gas Reserves Crude Reserve Life Northeastern Marine reserves Southwestern Marine reserves Southern reserves Northern reserves

11 January January 2019 2019 11

Barclays | LatAm Oil & Gas

FY 09

FY 10

FY 11

FY 12

FY 13

FY 14

FY 15

FY 16

FY 17

2015-2017 2013-2017

Reserve Additions (millions boe) Operating additions Extensions and Discoveries

389

394

242

134

137

120

-114

237

Enhanced recovery

Operating additions

389

394

242

134

137

120

-114

237

674 1,063 83.6% 16.4%

794 1,188 64.1% 35.9%

1,130 1,372 74.2% 25.8%

1,277 1,411 79.0% 21.0%

824 903 76.6% 23.4%

96 233 92.0% 8.0%

-1,675 -1,555 88.8% 11.2%

154 40 338.4% -238.4%

-63 174 29.8% 70.2%

-528 -447 89.1% 10.9%

-133 -41 140.8% -40.8%

77.1% 83.6% 55.2%

85.8% 71.9% 131.2%

101.0% 97.0% 115.0%

104.3% 105.9% 98.7%

67.8% 66.7% 71.4%

18.0% 21.4% 6.4%

-130.3% -147.6% -67.7%

3.6% 15.0% -43.3%

17.5% 6.5% 63.8%

-40.6% -45.4% -21.9%

-3.5% -6.2% 6.7%

2,290 11,220 13,510 0 13,510

2,334 11,911 14,245 0 14,245

2,633 10,537 13,170 0 13,170

2,535 12,042 14,577 0 14,577

2,864 14,236 17,100 0 17,100

2,919 14,192 17,111 0 17,111

2,781 10,165 12,946 0 12,946

2,229 6,094 8,324 0 8,324

1,710 2,815 4,525 0 4,525

2,240 6,358 8,598 0 8,598

2,501 9,500 12,001 0 12,001

1.7 8.1

1.7 8.6

1.9 7.8

1.9 8.9

2.1 10.7

2.3 11.0

2.3 8.5

2.0 5.5

1.7 2.8

2.0 5.8

2.1 8.0

Revisions Total organic proved reserve additions % Crude Oil, NGL and Condensates % Natural Gas

Organic Reserve Replacement (%) Total Proved Reserves Crude Oil, NGL and Condensates Reserves Natural Gas Reserves

Finding Costs (USD millions) Finding Costs Exploration Costs Development Costs Operational Finding Costs Acquisition Costs Total Organic Finding Costs Exploration Costs (USD/boe) Development Costs (USD/boe)

Note: Crude production mix and reserve life by region only includes oil (excludes NGL and condensates) due to lack of information. Natural Gas production mix by region includes dry and wet gas due to lack of information. Reserve data are as of January 1, 2018. Source: Company reports, Barclays Research

11 January January 2019 2019 11

Barclays | LatAm Oil & Gas

Downstream Overview PEMEX owns and operates six refineries in Mexico: Cadereyta, Madero, Minatitlán, Salamanca, Salina Cruz and Tula. These have a total distillation capacity of 1,627k bpd, but operated at only a 39% utilization rate in 3Q18, reflecting lower crude availability (particularly light crude) and operational difficulties. To increase the processing of crude oil at its refineries and the production of petroleum products, PEMEX is implementing maintenance programs for critical equipment to improve the reliability of its operations and improve the performance levels of its refineries.

•

Cadereyta is located outside of Monterrey, Nuevo Leon. The unit started up in 1979 and has the capacity to process 275k bpd. PEMEX completed the reconfiguration of the Caderetya refinery in 2003.

•

Madero is located in the State of Tamaulipas and is PEMEX’s smallest refinery. It started operations in 1914 and has the capacity to process 177k bpd. The unit has been suffering from maintenance issues since December 2017 and has not processed since July 2018. PEMEX completed the reconfiguration of Madero in 2003.

•

Minatitlán is located in the state of Veracruz and started operations in 1956. The unit has the capacity to process 285k bpd, but it did not process any crude in November. PEMEX completed the reconfiguration of Minatitlán in 2011.

•

Salamanca is located in the state of Guanajuato and started operations in 1950. It has the capacity to process 245k bpd. The unit is in a procurement stage for Salamana.

•

Salina Cruz is PEMEX’s largest refinery, with the capacity to process 330k bpd. It is located in the State of Oaxaca and started operations in 1979. The reconfiguration of this unit is in the planning stage.

•

Tula is located in the state of Hidalgo and started operations in 1977. It has the capacity to process 315k bpd. The facility is being reconfigured for USD2.8bn, but construction has been delayed due to budgetary constraints (construction is c.45% complete). The reconfiguration is intended generally to modernize crude oil processing, increase efficiency in producing high-value fuels, expand production of higher-value products and increase refining margins.

In addition to its six refineries in Mexico, PEMEX owns a 50% stake in a joint venture with Shell in Deer Park, Texas, which has the capacity to process 340k bpd of crude oil. Under its partnership agreement, Shell operates the facility, but PEMEX and Shell each provide 50% of the refinery’s crude oil input and own 50% of the refinery’s output. Pemex mainly produces gasoline, diesel, fuel oil and jet fuel for domestic consumption. In 2018, gasoline production averaged 245k bpd, compared with estimated consumption in Mexico of 820k bpd. This implies that Mexico imports roughly c.575k bpd of gasoline, or 70% of total consumption. In 2018, diesel production averaged 120k bpd, compared with estimated consumption of 390k bpd. This implies that Mexico imports c.270k bpd of diesel, or 70% of total consumption.

11 11 January January 2019 2019

Barclays | LatAm Oil & Gas FIGURE 37. Utilization rates were 70-80% through 2014, but declined significantly ('000 bpd)

Crude Processed ('000 bpd)

1,400

Utilization Rate (%)

Utilization (%) 90.0% 80.0% 70.0% 60.0% 50.0% 40.0% 30.0% 20.0% 10.0% 0.0%

1,200 1,000 800

600 400 200

Capacity (â&#x20AC;&#x2DC;000 bpd)

Refinery

Utilization Rate Reconfiguratio Start-up (%) n

Cadereyta

275

39.1%

Completed

1979

Madero

177

0.0%

Completed

1914

MinatitlĂĄn

285

2.4%

Completed

1956

Salamanca

245

39.9%

Process

1950

Salina Cruz

330

46.3%

Planning

1979

Tula

315

43.6%

Execution (45%)

1977

Total

1,627

30.9%

2018*

2016

2014

2012

2010

2008

2006

2004

2002

2000

FIGURE 38. PEMEX operates six refineries in Mexico with 1,627k bpd of capacity

Source: Company reports, Barclays research

Note: Utilization rate includes October and November 2018 Source: Company reports, Barclays Research

FIGURE 39. Refining throughout has fallen significantly over recent months due to lower production, as well as a lack of maintenance

FIGURE 40. Fuel production in Mexico has fallen drastically in Mexico as refining has declined

('000 bpd) Light

1,400

Heavy

('000 bpd)

Gasoline

Diesel

1,600

Jet Fuel

Other

Extra-light

1,200

1,400

1,000

1,200

800

1,000

600

800

Fuel Oil

600

400

200

Source: Company reports, Barclays Research

11 11 January January 2019 2019

2018*

2016

2014

2012

2010

2008

2006

2004

2002

0 2000

2018*

2016

2014

2012

2010

2008

2006

2004

2002

2000

Source: Company reports, Barclays Research

Barclays | LatAm Oil & Gas

Financials FIGURE 41. Financials Overview Petróleos Mexicanos (PEMEX)

FY 15

FY 16

FY 17

FY 18E

FY 19E

FY 20E

Operational Brent Price (USD/bbl)

$53.6

$45.1

$54.8

$72.0

$75.0

Oil Production (‘000 bpd)

2,267

2,154

1,948

1,833

1,754

1,719

Revenues

73.4

57.8

74.0

87.7

88.6

90.4

Gross Profit

(7.2)

29.1

13.0

26.9

30.2

30.1

-9.8%

50.3%

17.6%

30.7%

34.1%

33.3%

Income Statement Summary

Gross margin (%) Adjusted EBITDA Adjusted EBITDA margin (%)

27.0

14.7

23.6

29.6

31.6

36.8%

25.5%

31.9%

33.7%

35.7%

35.0%

Cash Flow Summary Adjusted EBITDA

27.0

14.7

23.6

29.6

31.6

Cash Interest Paid

(4.0)

(4.7)

(5.7)

(6.4)

(6.6)

(7.0)

(20.9)

(14.2)

(20.4)

(22.6)

(20.8)

(21.1) (0.2)

Government Take (excluding Royalties) Working capital

5.9

(2.8)

(4.0)

(2.5)

(0.2)

Other operating items

(5.9)

(0.1)

3.9

1.6

Operating Cash Flow

2.1

(7.1)

(2.7)

(0.2)

4.1

3.3

(16.0)

(8.1)

(4.6)

(5.7)

(8.4)

(9.2)

Capital Expenditures Other Investing Items

0.3

1.0

0.4

0.6

Investing Cash Flow

(15.7)

(7.1)

(4.1)

(5.1)

(8.4)

(9.2)

11.8

12.2

3.4

4.8

2.8

6.0

0.6

3.9

1.3

Change in Net Debt Contributions from (paid to) Government Other Financing Items

Financing Cash Flow F/X Impact

12.4 0.6

16.2 0.9

3.4 -

4.8 (0.3)

4.1 -

6.0 -

Change in Cash

(0.5)

2.9

(3.5)

(0.8)

(0.3)

0.1

Balance Sheet Summary Cash

6.4

7.9

5.0

4.2

4.0

4.1

Gross Debt

86.8

95.7

103.7

108.3

111.1

117.1

Net Debt

80.4

87.8

98.7

104.1

107.1

113.0

4.6

4.8

6.6

6.8

Credit Lines Availability Credit Metrics Gross Leverage

3.2x

6.5x

4.4x

3.7x

3.5x

Net Leverage

3.0x

6.0x

4.2x

3.5x

3.4x

Free Cash Flow (as % of Gross Debt, before Govt. Take)

8.2%

2.0%

12.8%

16.2%

3.7x 3.6x 15.0%

13.1%

Data are in USD billion Source: Company reports, Barclays Research

Summary of Ratings Bloomberg Barclays EM USD Aggregate Index Old

New

LatAm Oil & Gas

Coverage Suspended

Market Weight

PETROLEOS MEXICANOS

Coverage Suspended

Underweight

Source: Barclays Research

11 11 January January 2019 2019

Barclays | LatAm Oil & Gas

Analyst(s) Certification(s): We, Dennis Kilic, Badr El Moutawakil, Sebastian Vargas, Petr Grishchenko and Andrew De Luca, hereby certify (1) that the views expressed in this research report accurately reflect our personal views about any or all of the subject securities or issuers referred to in this research report and (2) no part of our compensation was, is or will be directly or indirectly related to the specific recommendations or views expressed in this research report. Important Disclosures: This document is intended for institutional investors and is not subject to all of the independence and disclosure standards applicable to debt research reports prepared for retail investors under U.S. FINRA Rule 2242. Barclays trades the securities covered in this report for its own account and on a discretionary basis on behalf of certain clients. Such trading interests may be contrary to the recommendations offered in this report. Barclays Research is produced by the Investment Bank of Barclays Bank PLC and its affiliates (collectively and each individually, “Barclays”). All authors contributing to this research report are Research Analysts unless otherwise indicated. The publication date at the top of the report reflects the local time where the report was produced and may differ from the release date provided in GMT. Availability of Disclosures: For current important disclosures regarding any issuers which are the subject of this research report please refer to https://publicresearch.barclays.com or alternatively send a written request to: Barclays Research Compliance, 745 Seventh Avenue, 13th Floor, New York, NY 10019 or call +1-212-526-1072. Barclays Capital Inc. and/or one of its affiliates does and seeks to do business with companies covered in its research reports. As a result, investors should be aware that Barclays may have a conflict of interest that could affect the objectivity of this report. Barclays Capital Inc. and/or one of its affiliates regularly trades, generally deals as principal and generally provides liquidity (as market maker or otherwise) in the debt securities that are the subject of this research report (and related derivatives thereof). Barclays trading desks may have either a long and / or short position in such securities, other financial instruments and / or derivatives, which may pose a conflict with the interests of investing customers. Where permitted and subject to appropriate information barrier restrictions, Barclays fixed income research analysts regularly interact with its trading desk personnel regarding current market conditions and prices. Barclays fixed income research analysts receive compensation based on various factors including, but not limited to, the quality of their work, the overall performance of the firm (including the profitability of the Investment Banking Department), the profitability and revenues of the Markets business and the potential interest of the firm’s investing clients in research with respect to the asset class covered by the analyst. To the extent that any historical pricing information was obtained from Barclays trading desks, the firm makes no representation that it is accurate or complete. All levels, prices and spreads are historical and do not necessarily represent current market levels, prices or spreads, some or all of which may have changed since the publication of this document. Barclays Research Department produces various types of research including, but not limited to, fundamental analysis, equity-linked analysis, quantitative analysis, and trade ideas. Recommendations and trade ideas contained in one type of Barclays Research may differ from those contained in other types of Barclays Research, whether as a result of differing time horizons, methodologies, or otherwise. In order to access Barclays Statement regarding Research Dissemination Policies and Procedures, please refer to https://publicresearch.barcap.com/S/RD.htm. In order to access Barclays Research Conflict Management Policy Statement, please refer to: https://publicresearch.barcap.com/S/CM.htm. Primary Issuers/Bonds PETROLEOS MEXICANOS, Underweight, CD/D/E/J/K/L/M/N Valuation Methodology: We think 2019 offers little reason for optimism, as fundamentals are expected to deteriorate further, reflecting the company’s heavy tax burden, incremental debt funding for capex deployment, disappointing production, and worsening credit metrics. Risks that May Impede Achievement of the Rating: Overhaul to current tax regime. Representative Bond: PEMEX 6 03/05/20 (USD 101.57, 08-Jan-2019) Materially Mentioned Issuers/Bonds MEXICO CITY AIRPORT TRUST, Overweight, CD/J Valuation Methodology: We believe the new proposal materially changes the risk reward profile of MEXCAT bonds, which now need to be repaid before any alternative airport can be build in Mexico City. Risks that May Impede Achievement of the Rating: the expected repurchases from the principal accumulation account might not materialize Representative Bond: MEXCAT 4 1/4 10/31/26 (USD 89.86, 10-Jan-2019) MEXCAT 4 1/4 10/31/26 (USD 89.86, 10-Jan-2019) MEXICO GOVERNMENT INTERNATIONAL BOND, Underweight, A/CD/D/E/J/K/L/M/N Valuation Methodology: President-elect Lopez Obrador has started to walk the way he talked for the last 30 years. The immediate implication is that there will be changes in how things work in Mexico. The first indications were the Airport survey and its aftermath, and the President notion that referendums could be an important vehicle to decide on critical executive topics. The next milestone is the 2019 budget, which we think will leave markets questioning, at the very least, execution risks. In this context, we think that, more likely than not, rating agencies will downgrade Mexico sovereign one notch with a negative outlook. Therefore, despite recent underperformance, we maintain our Underweight rating on the sovereign. We recommend rotating into Colombia, in particular, from Mexico 2027s into Colombia 2027s. Risks that May Impede Achievement of the Rating: Tha AMLO changes his policy path in energy reforms and that the budget results market positive Representative Bond: MEX 3.6 01/30/25 (USD 96.46, 10-Jan-2019) MEX 4 10/02/23 (USD 100.33, 08-Jan-2019) PETROLEOS MEXICANOS, Underweight, CD/D/E/J/K/L/M/N PEMEX 4 1/2 01/23/26 (USD 88.30, 08-Jan-2019)

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Barclays | LatAm Oil & Gas PEMEX 4 5/8 09/21/23 (USD 94.74, 08-Jan-2019) PEMEX 5 1/2 06/27/44 (USD 79.10, 08-Jan-2019) All pricing information is indicative only. Prices are sourced from Refinitiv as of the last available closing price at the time of production of the research report, unless another time and source is indicated. Disclosure Legend: A: Barclays Bank PLC and/or an affiliate has been lead manager or co-lead manager of a publicly disclosed offer of securities of the issuer in the previous 12 months. B: An employee or non-executive director of Barclays Bank PLC and/or an affiliate is a director of this issuer. CD: Barclays Bank PLC and/or an affiliate is a market-maker in debt securities issued by this issuer. CE: Barclays Bank PLC and/or an affiliate is a market-maker in equity securities issued by this issuer. D: Barclays Bank PLC and/or an affiliate has received compensation for investment banking services from this issuer in the past 12 months. E: Barclays Bank PLC and/or an affiliate expects to receive or intends to seek compensation for investment banking services from this issuer within the next 3 months. FA: Barclays Bank PLC and/or an affiliate beneficially owns 1% or more of a class of equity securities of this issuer, as calculated in accordance with US regulations. FB: Barclays Bank PLC and/or an affiliate beneficially owns a long position of more than 0.5% of a class of equity securities of this issuer, as calculated in accordance with EU regulations. FC: Barclays Bank PLC and/or an affiliate beneficially owns a short position of more than 0.5% of a class of equity securities of this issuer, as calculated in accordance with EU regulations. GD: One of the analysts on the fundamental credit coverage team (or a member of his or her household) has a financial interest in the debt or equity securities of this issuer. GE: One of the analysts on the fundamental equity coverage team (or a member of his or her household) has a financial interest in the debt or equity securities of this issuer. H: This issuer beneficially owns more than 5% of any class of common equity securities of Barclays PLC. I: Barclays Bank PLC and/or an affiliate is party to an agreement with this issuer for the provision of financial services to Barclays Bank PLC and/or an affiliate. J: Barclays Bank PLC and/or an affiliate is a liquidity provider and/or trades regularly in the securities of this issuer and/or in any related derivatives. K: Barclays Bank PLC and/or an affiliate has received non-investment banking related compensation (including compensation for brokerage services, if applicable) from this issuer within the past 12 months. L: This issuer is, or during the past 12 months has been, an investment banking client of Barclays Bank PLC and/or an affiliate. M: This issuer is, or during the past 12 months has been, a non-investment banking client (securities related services) of Barclays Bank PLC and/or an affiliate. N: This issuer is, or during the past 12 months has been, a non-investment banking client (non-securities related services) of Barclays Bank PLC and/or an affiliate. O: Not in use. P: A partner, director or officer of Barclays Capital Canada Inc. has, during the preceding 12 months, provided services to the subject company for remuneration, other than normal course investment advisory or trade execution services. Q: Barclays Bank PLC and/or an affiliate is a Corporate Broker to this issuer. R: Barclays Capital Canada Inc. and/or an affiliate has received compensation for investment banking services from this issuer in the past 12 months. S: This issuer is a Corporate Broker to Barclays PLC. T: Barclays Bank PLC and/or an affiliate is providing equity advisory services to this issuer. U: The equity securities of this Canadian issuer include subordinate voting restricted shares. V: The equity securities of this Canadian issuer include non-voting restricted shares. Explanation of the Barclays Research Corporate Credit Sector Rating System Overweight (OW): For sectors rated against the Bloomberg Barclays U.S. Credit Index, the Bloomberg Barclays Pan-European Credit Index, the Bloomberg Barclays EM Asia USD High Grade Credit Index or the Bloomberg Barclays EM USD Corporate and Quasi-Sovereign Index, the analyst expects the six-month excess return of the sector to exceed the six-month excess return of the relevant index. For sectors rated against the Bloomberg Barclays U.S. High Yield 2% Issuer Capped Credit Index, the Bloomberg Barclays Pan-European High Yield 3% Issuer Capped Credit Index excluding Financials, the Bloomberg Barclays Pan-European High Yield Finance Index or the Bloomberg Barclays EM Asia USD High Yield Corporate Credit Index, the analyst expects the six-month total return of the sector to exceed the six-month total return of the relevant index. Market Weight (MW):

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Barclays | LatAm Oil & Gas For sectors rated against the Bloomberg Barclays U.S. Credit Index, the Bloomberg Barclays Pan-European Credit Index, the Bloomberg Barclays EM Asia USD High Grade Credit Index or the Bloomberg Barclays EM USD Corporate and Quasi-Sovereign Index, the analyst expects the six-month excess return of the sector to be in line with the six-month excess return of the relevant index. For sectors rated against the Bloomberg Barclays U.S. High Yield 2% Issuer Capped Credit Index, the Bloomberg Barclays Pan-European High Yield 3% Issuer Capped Credit Index excluding Financials, the Bloomberg Barclays Pan-European High Yield Finance Index or the Bloomberg Barclays EM Asia USD High Yield Corporate Credit Index, the analyst expects the six-month total return of the sector to be in line with the six-month total return of the relevant index. Underweight (UW): For sectors rated against the Bloomberg Barclays U.S. Credit Index, the Bloomberg Barclays Pan-European Credit Index, the Bloomberg Barclays EM Asia USD High Grade Credit Index or the Bloomberg Barclays EM USD Corporate and Quasi-Sovereign Index, the analyst expects the six-month excess return of the sector to be less than the six-month excess return of the relevant index. For sectors rated against the Bloomberg Barclays U.S. High Yield 2% Issuer Capped Credit Index, the Bloomberg Barclays Pan-European High Yield 3% Issuer Capped Credit Index excluding Financials, the Bloomberg Barclays Pan-European High Yield Finance Index or the Bloomberg Barclays EM Asia USD High Yield Corporate Credit Index, the analyst expects the six-month total return of the sector to be less than the six-month total return of the relevant index. Sector definitions: Sectors in U.S. High Grade Research are defined using the sector definitions of the Bloomberg Barclays U.S. Credit Index and are rated against the Bloomberg Barclays U.S. Credit Index. Sectors in U.S. High Yield Research are defined using the sector definitions of the Bloomberg Barclays U.S. High Yield 2% Issuer Capped Credit Index and are rated against the Bloomberg Barclays U.S. High Yield 2% Issuer Capped Credit Index. Sectors in European High Grade Research are defined using the sector definitions of the Bloomberg Barclays Pan-European Credit Index and are rated against the Bloomberg Barclays Pan-European Credit Index. Sectors in Industrials and Utilities in European High Yield Research are defined using the sector definitions of the Bloomberg Barclays Pan-European High Yield 3% Issuer Capped Credit Index excluding Financials and are rated against the Bloomberg Barclays Pan-European High Yield 3% Issuer Capped Credit Index excluding Financials. Sectors in Financials in European High Yield Research are defined using the sector definitions of the Bloomberg Barclays Pan-European High Yield Finance Index and are rated against the Bloomberg Barclays Pan-European High Yield Finance Index. Sectors in Asia High Grade Research are defined on Barclays Live and are rated against the Bloomberg Barclays EM Asia USD High Grade Credit Index. Sectors in Asia High Yield Research are defined on Barclays Live and are rated against the Bloomberg Barclays EM Asia USD High Yield Corporate Credit Index. Sectors in EEMEA and Latin America Research are defined on Barclays Live and are rated against the Bloomberg Barclays EM USD Corporate and Quasi Sovereign Index. These sectors may contain both High Grade and High Yield issuers.

To view sector definitions and monthly sector returns for Asia, EEMEA and Latin America Research, go to https://live.barcap.com/go/research/EMSectorReturns on Barclays Live. Explanation of the Barclays Research Corporate Credit Rating System For all High Grade issuers covered in the US, Europe or Asia, and for all issuers in Latin America and EEMEA, the credit rating system is based on the analyst’s view of the expected excess return over a six-month period of the issuer’s index-eligible corporate debt securities* relative to the expected excess return of the relevant sector, as specified on the report. Overweight (OW): The analyst expects the six-month excess return of the issuer’s index-eligible corporate debt securities to exceed the six-month expected excess return of the relevant sector. Market Weight (MW): The analyst expects the six-month excess return of the issuer’s index-eligible corporate debt securities to be in line with the sixmonth expected excess return of the relevant sector. Underweight (UW): The analyst expects the six-month excess return of the issuer’s index-eligible corporate debt securities to be less than the sixmonth expected excess return of the relevant sector. Rating Suspended (RS): The rating has been suspended temporarily due to market events that make coverage impracticable or to comply with applicable regulations and/or firm policies in certain circumstances including where the Investment Bank of Barclays Bank PLC is acting in an advisory capacity in a merger or strategic transaction involving the company. Coverage Suspended (CS): Coverage of this issuer has been temporarily suspended. Not Covered (NC): Barclays’ fundamental credit research team does not provide formal, continuous coverage of this issuer and has not assigned a rating to the issuer or its debt securities. Any analysis, opinion or trade recommendation provided on a Not Covered issuer or its debt securities is valid only as of the publication date of this report and there should be no expectation that additional reports relating to the Not Covered issuer or its debt securities will be published thereafter. For all High Yield issuers (excluding those covered in EEMEA or Latin America), the credit rating system is based on the analyst’s view of the expected total returns over a six-month period of the rated debt security relative to the expected total return of the relevant sector, as specified on the report. Overweight (OW): The analyst expects the six-month total return of the debt security subject to this rating to exceed the six-month expected total return of the relevant sector. Market Weight (MW): The analyst expects the six-month total return of the debt security subject to this rating to be in line with the six-month expected total return of the relevant sector.

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Barclays | LatAm Oil & Gas Underweight (UW): The analyst expects the six-month total return of the rated debt security subject to this rating to be less than the six-month expected total return of the relevant sector. Rating Suspended (RS): The rating has been suspended temporarily due to market events that make coverage impracticable or to comply with applicable regulations and/or firm policies in certain circumstances including where the Investment Bank of Barclays Bank PLC is acting in an advisory capacity in a merger or strategic transaction involving the company. Coverage Suspended (CS): Coverage of this issuer has been temporarily suspended. Not Covered (NC): Barclays’ fundamental credit research team does not provide formal, continuous coverage of this issuer and has not assigned a rating to the issuer or its debt securities. Any analysis, opinion or trade recommendation provided on a Not Covered issuer or its debt securities is valid only as of the publication date of this report and there should be no expectation that additional reports relating to the Not Covered issuer or its debt securities will be published thereafter. Where a recommendation is made at the issuer level, it does not apply to any sanctioned securities, where trading in such securities would be prohibited under applicable law, including sanctions laws and regulations. *In EEMEA and Latin America (and in certain other limited instances in other regions), analysts may occasionally rate issuers that are not part of the Bloomberg Barclays U.S. Credit Index, the Bloomberg Barclays Pan-European Credit Index, the Bloomberg Barclays EM Asia USD High Grade Credit Index or Bloomberg Barclays EM USD Corporate and Quasi Sovereign Index. In such cases the rating will reflect the analyst’s view of the expected excess return over a six-month period of the issuer’s corporate debt securities relative to the expected excess return of the relevant sector, as specified on the report. Distribution of ratings assigned by Barclays Corporate Credit Research at the issuer level: 24% have been assigned an Overweight rating which, for purposes of mandatory regulatory disclosures, is classified as a Buy rating; 64% of issuers with this rating category are investment banking clients of the Firm; 79% of the issuers with this rating have received financial services from the Firm. 52% have been assigned Market Weight rating which, for purposes of mandatory regulatory disclosures, is classified as a Hold rating; 69% of issuers with this rating category are investment banking clients of the Firm; 81% of the issuers with this rating have received financial services from the Firm. 24% have been assigned an Underweight rating which, for purposes of mandatory regulatory disclosures, is classified as a Sell rating; 66% of issuers with this rating category are investment banking clients of the Firm; 82% of the issuers with this rating have received financial services from the Firm. Distribution of ratings assigned by Barclays Corporate Credit Research at the bond level: 25% have been assigned an Overweight rating which, for purposes of mandatory regulatory disclosures, is classified as a Buy rating; 58% of bonds with this rating category are investment banking clients of the Firm; 70% of the issuers with this rating have received financial services from the Firm. 52% have been assigned Market Weight rating which, for purposes of mandatory regulatory disclosures, is classified as a Hold rating; 54% of bonds with this rating category are investment banking clients of the Firm; 77% of the issuers with this rating have received financial services from the Firm. 23% have been assigned an Underweight rating which, for purposes of mandatory regulatory disclosures, is classified as a Sell rating; 48% of bonds with this rating category are investment banking clients of the Firm; 73% of the issuers with this rating have received financial services from the Firm. Explanation of the Barclays EM Sovereign Credit Issuer Rating System Overweight (OW): The analyst expects the six-month excess return of the country’s index eligible bonds to exceed the six-month excess return of the Bloomberg Barclays EM USD Sovereign Index. Market Weight (MW): The analyst expects the six-month excess return of the country’s index eligible bonds to be in line with the six-month excess return of the Bloomberg Barclays EM USD Sovereign Index. Underweight (UW): The analyst expects the six-month excess return of the country’s index eligible bonds to be less than the six-month excess return of the Bloomberg Barclays EM USD Sovereign Index. Rating Suspended (RS): The rating has been suspended temporarily due to market events that make coverage impracticable or to comply with applicable regulations and/or firm policies in certain circumstances including where the Investment Bank of Barclays Bank PLC is acting in an advisory capacity. Distribution of ratings assigned by Barclays Emerging Markets Sovereign Research at the issuer level: 30% have been assigned an Overweight rating which, for purposes of mandatory regulatory disclosures, is classified as a Buy rating; 27% of issuers with this rating category are investment banking clients of the Firm; 73% of the issuers with this rating have received financial services from the Firm. 32% have been assigned Market Weight rating which, for purposes of mandatory regulatory disclosures, is classified as a Hold rating; 17% of issuers with this rating category are investment banking clients of the Firm; 67% of the issuers with this rating have received financial services from the Firm. 38% have been assigned an Underweight rating which, for purposes of mandatory regulatory disclosures, is classified as a Sell rating; 50% of issuers with this rating category are investment banking clients of the Firm; 100% of the issuers with this rating have received financial services from the Firm. Types of investment recommendations produced by Barclays FICC Research: In addition to any ratings assigned under Barclays’ formal rating systems, this publication may contain investment recommendations in the form of trade ideas, thematic screens, scorecards or portfolio recommendations that have been produced by analysts in FICC Research. Any such investment recommendations produced by non-Credit Research teams shall remain open until they are subsequently amended, rebalanced or closed in a future research report. Any such investment recommendations produced by the Credit Research teams are valid at current market conditions and may not be otherwise relied upon. Disclosure of other investment recommendations produced by Barclays FICC Research:

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Barclays | LatAm Oil & Gas Barclays FICC Research may have published other investment recommendations in respect of the same securities/instruments recommended in this research report during the preceding 12 months. To view all investment recommendations published by Barclays FICC Research in the preceding 12 months please refer to https://live.barcap.com/go/research/Recommendations. Legal entities involved in producing Barclays Research: Barclays Bank PLC (Barclays, UK) Barclays Capital Inc. (BCI, US) Barclays Bank Ireland Plc, Frankfurt Branch (BBI, Frankfurt) Barclays Securities Japan Limited (BSJL, Japan) Barclays Bank PLC, Hong Kong branch (Barclays Bank, Hong Kong) Barclays Capital Canada Inc. (BCCI, Canada) Barclays Bank Mexico, S.A. (BBMX, Mexico) Barclays Securities (India) Private Limited (BSIPL, India) Barclays Bank PLC, India branch (Barclays Bank, India) Barclays Bank PLC, Singapore branch (Barclays Bank, Singapore) Disclaimer: This publication has been produced by Barclays Research Department in the Investment Bank of Barclays Bank PLC and/or one or more of its affiliates (collectively and each individually, “Barclays”). It has been distributed by one or more Barclays affiliated legal entities listed below. It is provided to our clients for information purposes only, and Barclays makes no express or implied warranties, and expressly disclaims all warranties of merchantability or fitness for a particular purpose or use with respect to any data included in this publication. To the extent that this publication states on the front page that it is intended for institutional investors and is not subject to all of the independence and disclosure standards applicable to debt research reports prepared for retail investors under U.S. FINRA Rule 2242, it is an “institutional debt research report” and distribution to retail investors is strictly prohibited. Barclays also distributes such institutional debt research reports to various issuers, media, regulatory and academic organisations for their own internal informational news gathering, regulatory or academic purposes and not for the purpose of making investment decisions regarding any debt securities. Media organisations are prohibited from re-publishing any opinion or recommendation concerning a debt issuer or debt security contained in any Barclays institutional debt research report. Any such recipients that do not want to continue receiving Barclays institutional debt research reports should contact debtresearch@barclays.com. Barclays will not treat unauthorized recipients of this report as its clients and accepts no liability for use by them of the contents which may not be suitable for their personal use. Prices shown are indicative and Barclays is not offering to buy or sell or soliciting offers to buy or sell any financial instrument. Without limiting any of the foregoing and to the extent permitted by law, in no event shall Barclays, nor any affiliate, nor any of their respective officers, directors, partners, or employees have any liability for (a) any special, punitive, indirect, or consequential damages; or (b) any lost profits, lost revenue, loss of anticipated savings or loss of opportunity or other financial loss, even if notified of the possibility of such damages, arising from any use of this publication or its contents. Other than disclosures relating to Barclays, the information contained in this publication has been obtained from sources that Barclays Research believes to be reliable, but Barclays does not represent or warrant that it is accurate or complete. Barclays is not responsible for, and makes no warranties whatsoever as to, the information or opinions contained in any written, electronic, audio or video presentations of third parties that are accessible via a direct hyperlink in this publication or via a hyperlink to a third-party web site (‘Third-Party Content’). Any such Third-Party Content has not been adopted or endorsed by Barclays, does not represent the views or opinions of Barclays, and is not incorporated by reference into this publication. Third-Party Content is provided for information purposes only and Barclays has not independently verified its accuracy or completeness. The views in this publication are solely and exclusively those of the authoring analyst(s) and are subject to change, and Barclays Research has no obligation to update its opinions or the information in this publication. Unless otherwise disclosed herein, the analysts who authored this report have not received any compensation from the subject companies in the past 12 months. If this publication contains recommendations, they are general recommendations that were prepared independently of any other interests, including those of Barclays and/or its affiliates, and/or the subject companies. This publication does not contain personal investment recommendations or investment advice or take into account the individual financial circumstances or investment objectives of the clients who receive it. The securities and other investments discussed herein may not be suitable for all investors. Barclays is not a fiduciary to any recipient of this publication. Investors must independently evaluate the merits and risks of the investments discussed herein, consult any independent advisors they believe necessary, and exercise independent judgment with regard to any investment decision. The value of and income from any investment may fluctuate from day to day as a result of changes in relevant economic markets (including changes in market liquidity). The information herein is not intended to predict actual results, which may differ substantially from those reflected. Past performance is not necessarily indicative of future results. The information provided does not constitute a financial benchmark and should not be used as a submission or contribution of input data for the purposes of determining a financial benchmark. This document is being distributed (1) only by or with the approval of an authorised person (Barclays Bank PLC) or (2) to, and is directed at (a) persons in the United Kingdom having professional experience in matters relating to investments and who fall within the definition of “investment professionals” in Article 19(5) of the Financial Services and Markets Act 2000 (Financial Promotion) Order 2005 (the “Order”); or (b) high net worth companies, unincorporated associations and partnerships and trustees of high value trusts as described in Article 49(2) of the Order; or (c) other persons to whom it may otherwise lawfully be communicated (all such persons being “Relevant Persons”). Any investment or investment activity to which this communication relates is only available to and will only be engaged in with Relevant Persons. Any other persons who receive this communication should not rely on or act upon it. Barclays Bank PLC is authorised by the Prudential Regulation Authority and regulated by the Financial Conduct Authority and the Prudential Regulation Authority and is a member of the London Stock Exchange. The Investment Bank of Barclays Bank PLC undertakes U.S. securities business in the name of its wholly owned subsidiary Barclays Capital Inc., a FINRA and SIPC member. Barclays Capital Inc., a U.S. registered broker/dealer, is distributing this material in the United States and, in connection therewith accepts responsibility for its contents. Any U.S. person wishing to effect a transaction in any security discussed herein should do so only by contacting a representative of Barclays Capital Inc. in the U.S. at 745 Seventh Avenue, New York, New York 10019.

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Barclays | LatAm Oil & Gas Non-U.S. persons should contact and execute transactions through a Barclays Bank PLC branch or affiliate in their home jurisdiction unless local regulations permit otherwise. Barclays Bank PLC, Paris Branch (registered in France under Paris RCS number 381 066 281) is regulated by the Autorité des marchés financiers and the Autorité de contrôle prudentiel. Registered office 34/36 Avenue de Friedland 75008 Paris. This material is distributed in Canada by Barclays Capital Canada Inc., a registered investment dealer, a Dealer Member of IIROC (www.iiroc.ca), and a Member of the Canadian Investor Protection Fund (CIPF). All Barclays research reports are distributed to institutional investors in Japan by Barclays Securities Japan Limited. Barclays Securities Japan Limited is a joint-stock company incorporated in Japan with registered office of 6-10-1 Roppongi, Minato-ku, Tokyo 106-6131, Japan. 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Please be advised that any discussion of U.S. tax matters contained herein (including any attachments) (i) is not intended or written to be used, and cannot be used, by you for the purpose of avoiding U.S. tax-related penalties; and (ii) was written to support the promotion or marketing of the transactions or other matters addressed herein. Accordingly, you should seek advice based on your particular circumstances from an independent tax advisor.

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Barclays | LatAm Oil & Gas ÂŠ Copyright Barclays Bank PLC (2019). All rights reserved. No part of this publication may be reproduced or redistributed in any manner without the prior written permission of Barclays. Barclays Bank PLC is registered in England No. 1026167. Registered office 1 Churchill Place, London, E14 5HP. Additional information regarding this publication will be furnished upon request. BRCF2242

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