Fitch Ratings has assigned a 'BB(EXP)' rating to Petroleo Brasileiro
S.A.'s (Petrobras) proposed USD notes reopening. The notes reopened are
part of Petrobras Global Finance B.V. (PGF) 2021 and 2026 notes and will
be unconditionally and irrevocably guaranteed by Petrobras. Proceeds
will be used to refinance existing debt and for general corporate
purposes.
Linkage to the Sovereign
Petrobras' ratings continue to reflect its close linkage with the
sovereign rating of Brazil due to the government's control of the
company and its strategic importance to Brazil as its near-monopoly
supplier of liquid fuels. By law, the federal government must hold at
least a majority of Petrobras' voting stock. The government currently
owns 60.5% of Petrobras' voting rights, directly and indirectly, and has
an overall economic stake in the company of 46%.
Government Support
Petrobras' credit linkage to the sovereign is evidenced by supporting
domestic fuel prices above international levels as well as by the
lending commitments offered by Banco do Brasil and Caixa Economica
Federal during first-half 2015 to bolster Petrobras' liquidity. Absent
implicit and explicit government support, Petrobras' credit metrics are
not consistent with the assigned rating. As of March 31, 2016 the
company reported total financial debt of USD126.4 billion and Fitch
defined gross leverage was 6.1x.
Cash Flow Remains Under Pressure
Petrobras' cash flow generation is expected to remain under pressure,
despite the recent price increase and the company's efforts to reduce
capex. Petrobras is expected to generate enough cash flow from
operations (CFFO) to cover capex and will rely on its access to the debt
capital markets to refinance its upcoming maturities. Any future debt
reduction will depend highly on divestitures, which are uncertain and
difficult to predict. The company expects its divestment plan for 2015
and 2016 to amount to USD15.1 billion, of which USD727 million where
completed in 2015 and year to date approximately USD1.38 billion worth
of divestments have been approved or closed negotiations and/or are
pending board approval.
Credit Metrics to Remain Weak
Fitch expects Petrobras' leverage, as measured by total debt/EBITDA, to
remain above 5.0x over the medium term and for leverage to decline only
if the company's divestiture program is successful. As of March 31, 2016
the company reported total financial debt of approximately USD126.4
billion. As of year-end 2015 total proved reserves (1P) were
approximately 10.5 billion barrels of oil equivalent (boe) and proved
developed (PD) reserves were 5.2 billion boe, under SEC criteria. This
translates into debt/1P of USD12/boe and debt/PD reserves of USD24.5/boe.
Decreased Growth Potential
Petrobras' production growth potential has decreased as a result of the
corruption scandal surrounding the company and forced reductions in
capex from stagnant cash flow generation and low oil prices. Fitch's
rating case assumes Petrobras' gross production to increase to
approximately 3.1 million barrels of oil equivalent per day (boed) over
the next two to three years and then to remain relatively flat over the
ensuing two years.
RATING SENSITIVITIES
A negative rating action on Petrobras could result from a downgrade of
the sovereign and/or the perception of a lower linkage between Petrobras
and the government.
A positive rating action on Brazil, could lead to a positive rating
action on Petrobras.
The sovereign rating sensitivities include:
--Failure to arrest the pace of increase in the government debt burden
and crystallization of material contingent liabilities;
--A deeper and more prolonged recession that further undermines
government debt dynamics and stokes political and social instability;
--Erosion of international reserves and deterioration in government debt
composition.
The sovereign's Rating Outlook is Negative. Consequently, Fitch's
sensitivity analysis does not currently anticipate developments with a
high likelihood of leading to a positive rating change. Future
developments that could individually, or collectively, result in a
stabilization of the Outlook include:
--An improvement in the political environment that is conducive to
improved policy implementation and supports confidence, growth and
reform prospects;
--Fiscal consolidation that leads to greater confidence in the capacity
of the government to achieve debt stabilization;
--Improved investment and growth environment and a reduction in
macroeconomic imbalances.
LIQUIDITY
Petrobras' liquidity position is currently supported by robust cash and
marketable securities, stable cash flow generation and most recently by
increasing lines of credit. As of March 31, 2016, Petrobras reported
USD22.6 billion of cash and marketable securities. This liquidity is
considered adequate when compared with short-term debt of USD17.4
billion. The company's liquidity is also supported by its funds from
operations (FFO) of approximately USD20 billion, which is expected to be
used to cover capex of approximately USD18 billion to USD20 billion per
year.
As of the LTM ended March 31, 2016, FFO totaled approximately USD20
billion. Petrobras' FFO has benefitted from the declining global
hydrocarbon prices, unlike other oil and gas producers that have
suffered from the steep decrease in prices. This benefit is not expected
to be sustainable in the long term. Petrobras' liquidity will also
benefit from an expected line of credit of USD10 billion with China
Development Bank, for which the two entities executed a term sheet on
Feb. 26, 2016, but the final terms are still pending.
FULL LIST OF RATING ACTIONS
Fitch currently rates Petrobras as follows:
Petroleo Brasileiro S.A. (Petrobras)
--Long-Term Foreign-Currency IDR 'BB'; Outlook Negative;
--Long-Term Local-Currency IDR 'BB'; Outlook Negative.
Petrobras International Finance Company (PIFCO)
--International debt issuances 'BB'.
Petrobras Global Finance B.V. (PGF)
--International debt issuances 'BB'.
Petrobras Argentina S.A.
--International debt issuances 'BB'.
Date of Relevant Rating Committee: Oct. 14, 2015
Additional information is available at 'www.fitchratings.com'.
ALL FITCH CREDIT RATINGS ARE SUBJECT TO CERTAIN LIMITATIONS AND
DISCLAIMERS. PLEASE READ THESE LIMITATIONS AND DISCLAIMERS BY FOLLOWING
THIS LINK: HTTP://FITCHRATINGS.COM/UNDERSTANDINGCREDITRATINGS.
IN ADDITION, RATING DEFINITIONS AND THE TERMS OF USE OF SUCH RATINGS ARE
AVAILABLE ON THE AGENCY'S PUBLIC WEBSITE 'WWW.FITCHRATINGS.COM'.
PUBLISHED RATINGS, CRITERIA AND METHODOLOGIES ARE AVAILABLE FROM THIS
SITE AT ALL TIMES. FITCH'S CODE OF CONDUCT, CONFIDENTIALITY, CONFLICTS
OF INTEREST, AFFILIATE FIREWALL, COMPLIANCE AND OTHER RELEVANT POLICIES
AND PROCEDURES ARE ALSO AVAILABLE FROM THE 'CODE OF CONDUCT' SECTION OF
THIS SITE. FITCH MAY HAVE PROVIDED ANOTHER PERMISSIBLE SERVICE TO THE
RATED ENTITY OR ITS RELATED THIRD PARTIES. DETAILS OF THIS SERVICE FOR
RATINGS FOR WHICH THE LEAD ANALYST IS BASED IN AN EU-REGISTERED ENTITY
CAN BE FOUND ON THE ENTITY SUMMARY PAGE FOR THIS ISSUER ON THE FITCH
WEBSITE.
View source version on businesswire.com: http://www.businesswire.com/news/home/20160707006226/en/
Copyright Business Wire 2016
