EMERGING_MARKET_CORPORATES：LATAM_OIL_&_GAS_3Q12_RESULTS_&_ZSCORE_VALUATION_UPDATE-2012-11-28.ppt

,Credit,GlobalMarketsResearch,EmergingMarkets,Global Emerging MarketsOil27 November 2012,Emerging Market CorporatesLatAm Oil unchanged from our last weekly update on Nov 19th-we had three Sellrecommendations and a Hold on the remainder of the complex.Pemexs mediumterm bonds have the largest negative zscores with the 8.0%19s at-1.65,the5.75%18s at-1.59 and the 6.0%20s at-1.54.In its 3Q12 results,Pemex postedcrude oil production of 2,451kbpd-slightly below 2012 guidance of 2,560kbpd.Sales improved as local prices for oil products rose and costs remained undercontrol.As a result,EBITDA for 3Q12 declined 3.1%qoq but increased 11.7%yoyto MXN282.8bn.Leverage remained low despite a decline in cash as Pemexstotal debt in 3Q12 declined 3.6%qoq.Year-to-date the company has issuedUSD4.35bn,matching the USD4.35bn guidance in their financing plan.,Market UpdateResearch TeamDenis ParisienResearch Analyst(+1)212 250-Natalia CorfieldResearch Analyst(+1)212 Oil&Gas spread to sovereign trend 1year period(in bps)2001501005026-Nov 26-Mar 26-Jul 26-NovECOPET 7.625 19 Petrobras 7.875 19PEMEX 8.0 19Selected Z-Scores comparison(as ofNovember 26th)26-May 26-Jul 26-Sep 26-NovECOPET 7.625 19 Petrobras 7.875 19PEMEX 8.0 19Z-Scores recommendations(As ofNovember 26th)Bond Prev Rec.Z-Score Cur Rec.PETBRA 5.75 20 Buy 1.61 BuyPETBRA 5.375 21 Buy 1.27 BuyPETBRA 7.75%14 Sell-1.50 SellPETBRA 6.436 15 Sell-1.78 SellPDVSA 5.0 15 Hold-1.19 SellPDVSA 5.125 16 Hold-2.04 SellPDVSA 8.5 17 Hold-1.04 SellPETBRA 5.875%18 Sell-2.17 SellPETBRA 8.375%18 Sell-1.84 SellPEMEX 5.75%18 Sell-1.59 SellPEMEX 8.0%19 Sell-1.65 SellPEMEX 6.0%20 Sell-1.54 SellPDVSA 12.75 22 Sell-0.87 HoldPETBRA6.875 40 Buy 0.43 HoldPETBRA 6.75 41 Buy 0.45 Hold,1.50.5-0.5-1.5-2.5-3.5,We highlight the risks to our recommendations.Risks on the Oil and Gas quasi sovereign bonds include but are not limited to:global growth and energy demand and commodity price risk,changes ingovernment regulation,taxation and royalty regimes,high investmentrequirements,general sovereign and fiscal risks due to their governmentownership/control and sponsorship,changes in rules regulating foreign currencyrevenues and profits,foreign currency risks,environmental risks andproject/operating risks.Upside risks include an early,effective resolution to the EUsovereign/bank crisis and/or to the US fiscal cliff,stronger than expected globalgrowth and oil prices,and unexpected rich oil and gas discoveries.Deutsche Bank Securities Inc.DISCLOSURES AND ANALYST CERTIFICATIONS ARE LOCATED IN APPENDIX 1.MICA(P)072/04/2012.,27 November 2012Page 2,Oil Emerging Market CorporatesTable of ContentsCommodities Quarterly crude oil overview.3Financial results.4Ecopetrol SA 3Q12 results(unconsolidated).5Petrobras 3Q12 results.8Pemex 3Q12 results.12PDVSA.15Annex 1-Valuation trends.17Annex 2-Industry trends.19Deutsche Bank Securities Inc.,27 November 2012,Oil Emerging Market CorporatesCommodities Quarterly crude oil overviewIn the following section,we provide DBs commodities team views regarding the outlook forcrude oil taken from the Commodities Quarterly report of October the 2nd.We highlight acondensed version of the main points of the report considering the demand and supplyanalysis,as well as the price outlook.OverviewSupply worries driven by production/export disruptions due to geopolitics and/or operationalissues have,for the most part,edged out fears over a more significant drop in demand andcontinue to pose upside risk to the market.DB economists project growth will bottom out inQ3/Q4 of this year and accelerate in 2013,largely the 2H,with GDP forecast to pick up to3.2%next year from 2.9%growth projected this year.Based on their projections,this impliesthat while global oil demand growth rates will be moderate,demand will not faltermeaningfully.In addition,central bank action,notably the Feds liquidity injections,is broadlyseen as supportive for growth and consequently beneficial for commodities.DemandThe DB commodities team forecasts global oil demand next year will grow by 850kbd,or justunder 1%yoy.China remains a focal point given its dominant role in global oil demand on agrowth basis,as the countrys oil demand is expected to contribute 40%of global oildemand growth next year.DB economists project Chinas GDP at 7.7%this year and 8.2%next year,down from the 8.3%and 8.6%respective forecasts made at the start of the year.Based on the recent downgrades to Chinas GDP,the countrys oil demand growth isforecasted to rise by 2.6%this year and 3.7%for the next year.Demand outside of China in other parts of the EM world has been generally healthy.Forexample Saudi oil demand YTD is up 5%and Brazils oil demand YTD is up 4.3%.The DBcommodities team forecasts EM demand,excluding China,will average growth of 2.6%thisyear and 2.4%next year,led by the Middle East and Latin America.SupplyNon-OPEC supply growth this year is forecast to exceed that of last year,according to allthree benchmark forecasters.Higher non-OPEC supply for next year is predicated onexpectations for increased production in the Middle East and Latin America,while US outputgrowth is expected to moderate to about 500kbd in 2013 from 800kbd growth in 2012.However,non-OPEC production disappointments pose the risk of downward adjustments tosupply growth and disruptions that persist today will remain a key feature of next yearsbalance in light of ongoing geopolitical risks.Price outlookThe DB commodities team raised their oil price forecast in light of the impressive rebound inprices since the steep declines in June/July.Brent oil is forecast to average USD113/bbl thisyear and USD113.50/bbl next year.Geopolitical supply risks will continue to pose upside risksto the market going into next year as tensions in the Middle East persist with Iran and Syria atthe epicenter.Though economists see global growth improving next year,albeit modestly,downside risks remain in the form of a worsening Eurozone sovereign crisis,fiscaluncertainty in the US and potential deterioration in Chinese economic data.,Deutsche Bank Securities Inc.,Page 3,27 November 2012,Oil Emerging Market Corporates,Financial resultsBelow we present a summary of the latest financial results of LatAms major quasi-sovereignOil&Gas companies in a comparative framework.The companies have already reported3Q12 earnings with the exception of PDVSA,which has not released any results since its fullyear 2011 release.The fundamental operating and financial summaries presented here anddiscussed at greater length in each companys section in the following pages and in the chartannex at the end of the report,are intended to serve as a complement to the Z-Scorevaluation analysisFigure 1:LatAm Quasi sovereign Oil&Gas comps table(LTM figures),Ecopetrol S.A.,PDVSA*,Pemex,Petrobras,Financials(USDm),RevenuesEBITDAEBITDA MarginGross Interest ExpenseCash and Cash EquivalentsS-T DebtTotal DebtFree Cash FlowBroad Free Cash Flow,33,112.515,818.547.8%(232.1)3,613.9248.23,141.84,354.84,804.4,124,754.048,763.039.1%(3,633.0)10,324.02,396.034,892.013,411.011,985.0,123,562.088,049.871.3%(5,566.6)8,890.47,991.157,890.0(8,495.6)(9,338.6),144,605.629,619.520.5%(5,152.6)25,967.27,570.692,062.8(25,066.9)(26,570.4),Summary Ratios,Total Debt/EBITDANet Debt/EBITDAS-T Debt/Total DebtCash/S-T DebtEBITDA/Int ExpenseLTM OCF/Total Debt,0.20 x-0.03x7.9%14.56x68.14x596.8%,0.72x0.50 x6.9%4.31x13.42x106.6%,0.66x0.56x13.8%1.11x15.82x138.3%,3.11x2.23x8.2%3.43x5.75x32.9%,Operational DataProduction Volume,Crude Oil(kbpd)Natural Gas(kboepd),584109,2,9911,228,2,5415,626,2,046471,Exports Volume,Crude Oil(kbpd)Crude Oil Products(kbpd)Crude Oil Basket Price(USD/b),42654101.4,1,916553100.1,1,26916699.8,375176101.8,Domestic Sales Volume,Crude Oil Products(kboepd),273,NA,1,820,2,350,Imports,Crude Oil Products(kboepd),80,NA,574,437,Reserves*,1P Reserves(bn boe)Replacement Ratio,1.9164%,298NA,13.8101%,12.9114%,*As of December 31,2011;*As of January,2012Source:Deutsche Bank,Company data,Page 4,Deutsche Bank Securities Inc.,27 November 2012,Oil Emerging Market CorporatesEcopetrol SA 3Q12 results(unconsolidated)Revenues were mixed,mainly pressured by lower sales volumesTotal sales reached COP14.2tn(USD7.9bn),3.8%lower qoq and 0.7%higher yoy.Thesequential fall was driven by a drop of both domestic and export sales volume,attributable tolower availability of crude oil and natural gas as a result of a decrease in crude production anda fall in the natural gas available to be repurchased from royalty payments.Domestic salesdeclined by 4.7%qoq and by 3.2%yoy,while exports declined by 7.4%qoq and 3.5%yoy,both explained mainly by the reduction of natural gas sales in both local and export markets.Ecopetrols crude oil export basket price remained relatively stable sequentially atUSD101.4pb,compared to USD100.7pb in 2Q12 but was 5.3%higher yoy vs USD96.3pb in3Q11.Despite a sequential decline in production,2012 guidance was reaffirmedCrude oil production in 3Q12 declined 2.3%qoq but increased 1.5%yoy to 584kbpd.Thedrop was driven by delays in the approval of environmental licenses and by an interruption inthe Ocensa pipeline,which affected 3Q12 production by 70kbpd as mentioned in thequarterly conference call.Gas production declined 2.9%qoq and increased 6.3%yoy to108.7kboepd.Despite of the production struggles in 3Q12,Ecopetrols managementconfirmed the companys 2012 production target of 730kboepd and 780kboepd for theconsolidated group(both reduced by 20kboepd in 2Q12 due to vandalism issues).Management expects the increase to be driven by a significant rebound in 4Q12 productionfrom key fields such as Castilla,Chichimene and Rubiales.Operating performance weakens due to higher costs and maintenanceEcopetrols EBITDA in 3Q12 declined by 11.7%qoq and 12.9%yoy to COP6.2tn driven bysofter top line results and a surge in COGS,which increased 5.5%qoq and 20.3%yoy toCOP8.8tn on the back of higher maintenance expenses in wells,transportation,and in theBarrancabermeja refinery,higher use of materials,project expenses and increased utilizationof contracted services.COGS in 3Q12 represented close to 62%of total revenues vs 56%in2Q12,52%in 3Q11 and 55%on an LTM basis.As a result,EBITDA margin contracted390bps qoq and 685bps yoy to 43.8%-the lowest level since 2Q10 and below the averageof 47.4%since 1Q10.Ecopetrols balance sheet remains healthiest among LatAm peers,in our viewEcopetrols total debt remained stable on a sequential basis and declined 13.8%yoy toCOP5.7tn(-1.5%qoq and-7.6%yoy to USD3.1b),mainly driven by a 6.8%appreciation ofthe COP against the USD.The companys cash and cash equivalents increased by a steep39.5%qoq and 40%yoy to COP6.5tn(USD3.6b)due to stronger operational cashgeneration.As a result of its strong cash position,Ecopetrol posted negative net debt ofCOP850m(net positive cash versus total debt)in 3Q12,which in turn led to a negative NetDebt to EBITDA of 0.3x compared to positive 0.3x in 2Q12 and a 0.1x in 3Q11.Furthermore,the company has scheduled the payment of the extraordinary dividend tranche worthCOP1.34tn and the third installment of the ordinary dividend payment to the government,ofCOP2.56tn,both to be paid in 4Q12.Finally,we note S&P upgraded Ecopetrols creditoutlook to positive from stable on August 16,2012 after upgrading the ColombianGovernments outlook to positive,reflecting the governments control of Ecopetrol and thestrong sovereign link.,Deutsche Bank Securities Inc.,Page 5,Yield(%),5,4,3,2,1,27 November 2012,Oil Emerging Market Corporates,Figure 2:Ecopetrols EBITDA and EBITDA margin trend,Figure 3:Ecopetrols Net debt and Net leverage trend,1086420,49.9%7.03Q11,45.8%7.34Q11,51.4%7.91Q12,48.2%7.12Q12,43.0%6.13Q12,52%50%48%46%44%42%40%38%,3.01.50.0-1.5-3.0-4.5-6.0,0.07x1.73Q11,0.02x0.64Q11,(5.1)-0.17x1Q12,0.03x1.02Q12,(0.8)-0.03x3Q12,0.100.050.00-0.05-0.10-0.15-0.20,EBITDA(COPtn)Source:Deutsche Bank,Company data,EBITDA margin(%),Net debt(COPtn)Source:Deutsche Bank,Company data,LTM Reported Net leverage(x),Ecopetrol has stood out from the pack among LatAm Oil&Gas quasi-sovereign peers overthe past several years due to the companys solid operating execution eroding morerecently and its sound financial position.These trends and the relative scarcity of bondsupply has been reflected in Ecopetrols bond valuations,including zscores as illustrated inFigure 6,which underscores the fact that this zscore has been in negative standard deviationterritory since July 10th,and has only approached the zero level three times since then,currently standing at-0.71.Recently,Ecopetrols 7.625%19s have tended to out-performtheir sovereign benchmark but have not reached levels to warrant switching our outstandingHold recommendation to Sell.,Figure 4:Ecopetrols 7.625 19 Z-Scores(1 weekevolution),Figure 5:Ecopetrol and sovereign yield vs durationcurve,Date,Sov Spread(bps),Z-Score,COLREP27,Nov 26,2012Nov 23,2012Nov 21,2012Nov 20,2012,84.9084.4682.9282.89,-0.71-0.74-0.85-0.86,ECOPET 19COLREP16,COLREP19,COLREP33COLREP24COLREP21,COLREP37,COLREP41,Nov 19,2012Nov 16,2012Nov 15,2012,85.6390.9589.13,-0.67-0.29-0.42,COLREP17,COLREP20,Nov 14,2012,89.10,-0.42,0,2,5,8,11,14Duration,Source:Deutsche BankFigure 6:Selected Ecopetrols bond Z-Score(6 monthperiod),2.01.00.0,Source:Deutsche BankFigure 7:Selected Ecopetrols bond Z-Score(1 yearperiod),3.02.01.0,0.0-1.0-1.0,-2.0-3.0-4.0,-2.0-3.0-4.0,26-May,26-Jun,26-Jul,26-Aug,26-Sep,26-Oct,26-Nov,26-Nov,26-Jan,26-Mar,26-May,26-Jul,26-Sep,26-Nov,Source:Deutsche BankPage 6,ECOPET 7.625 19,Source:Deutsche Bank,ECOPET 7.625 19Deutsche Bank Securities Inc.,27 November 2012,Oil Emerging Market Corporates,Figure 8:Ecopetrol summary financials,Operational DataCCrude Oil(kbpd)NNatural gas(kboepd)CCrude oil purchase volume(kbpd)PNatural gas purchase volume(kbpd)Income Statement(USDm)Total RevenuesCOGSGross ProfitGross MarginGross interest expenseSG&ACash Flow(USDm)EBITReported EBITDAEBITDA MarginChange in WCChange in Adj WC*Change in Net WAChange in Adj Net WA*Broad OCF(w chg in NWA)Broad OCF(w chg in Adj NWA)*Net Interest paidNet capexCash dividends paidBroad Free Cash Flow(FCF w chg in Adj NWA)*Broad Free Cash Flow(FCF w chg in NWA)Free cash Flow(FCF)Adjusted Free cash Flow(FCF)*Net change in debtNet cash generationAdjusted Net cash generation*Balance Sheet(USDm)S-T DebtL-T DebtTotal DebtCash and cash equivalentsAdjusted Cash and cash equivalents*Net DebtAjusted Net Debt*Credit RatiosInterest CoverageEBITDA-Capex/InterestS-T Debt/Tot DebtCash/S-T DebtAdjusted Cash/short term debt*Run-rate Gross leverageLTM Total debt/Reported EBITDA(x)Run-rate Net LeverageLTM Net debt/Reported EBITDA(x)LTM Adjusted Net debt/Reported EBITDA(x)*LTM OCF/Total DebtWorking Capital turnover(days)Adjusted Working Capital turnover(days)*CAPEX(%)Revenues,3Q11575.2102.3190.87.53Q117,863.3(4,054.8)3,808.648.4%(30.9)(318.2)3Q113,490.43,982.450.6%2,060.02,060.02,097.92,097.91,884.51,884.5(30.9)(1,444.1)(1,109.6)(1,847.7)(1,847.7)(1,809.7)(1,809.7)(223.6)(2,033.4)(2,033.4)3Q11407.42,988.53,395.92,512.22,5