Fitch Affirms Petrobras' IDRs at 'BBB' and National Scale Rating at
BUENOS AIRES, Argentina -- March 26, 2013
Fitch Ratings has affirmed the foreign and local currency Issuer Default
Ratings (IDRs) and outstanding debt ratings for Petroleo Brasileiro S.A.
(Petrobras) and subsidiaries as follows:
--Foreign currency IDR at 'BBB
--Local currency IDR at 'BBB'
--National long term rating at 'AAA (bra)'
Petrobras International Finance Company (PIFCO)
--Foreign currency IDR at 'BBB'
--International debt issuance at 'BBB'
Petrobras Global Finance B.V. (PGF)
--Foreign currency IDR at 'BBB'
--International debt issuance at 'BBB'
Petrobras Argentina S.A.
--Guaranteed notes at 'BBB'.
The ratings affect USD 31 billion of issued debt, including debt issued by
PIFCO and PGF, which is unconditionally and irrevocably guaranteed by
Petrobras. The Outlook for all the ratings is Stable.
KEY RATING DRIVERS
Petrobras' ratings are supported by its leadership position in the Brazilian
domestic energy market, its recognized expertise in offshore exploration and
production (E&P), and its strategic importance to Brazil. Fitch's long-term
Issuer Default Rating (IDR) for Brazil is 'BBB' with a Stable Outlook.
Petrobras' ratings are tempered by its aggressive capex program; exposure to
local political interference; and vulnerability to fluctuations in
international commodity prices, currency risk and domestic market revenue
concentration. Petrobras' credit metrics are expected to deteriorate over the
next two to three years due to its aggressive capex program in combination
with its current trade deficit.
SIGNIFICANT GROWTH POTENTIAL & HIGH CAPEX
Petrobras has significant growth potential both in production and reserves,
backed by an ambitious capital investment program of USD236.7 billion between
2013 and 2017, and recent offshore discoveries. The company has recently
affirmed its stated production targets of 3.4 billion barrels of oil
equivalent per day (boepd) in 2017 and 5.2 million boepd in 2020. Fitch
expects the company to face various challenges to achieve these targets on
time such as securing critical equipment, complying with local content
commitments and obtaining significant external financing.
In 2012 Petrobras' production was relatively unchanged from 2011 at 2,598
thousand (m) boepd, and consistent with Fitch's expectations. Petrobras
expects production to vary by +/- 2% in 2013, which will be impacted by the
concentration of scheduled maintenance on several platforms, and to increase
by 4-6% per annum in 2014 to 2017 as new platforms begin operations. The
company enjoys a solid asset base reflected in proved oil and gas reserves of
12.9 billion barrels of oil equivalent (boe) under the U.S. Securities and
Exchange Commission definition. In 2012, its three-year reserve replacement
ratio (RRR) was 126% and its reserve life was 14.6 years.
LEVERAGE TO INCREASE, METRICS TO DETERIORATE
Fitch expects the company to have negative free cash flow over the next five
years, and to increase leverage, as it continues to implement sizable capital
investments. The magnitude of such cash flow deficit will also be influenced
by domestic pricing policies for refined products, which are currently below
international prices. Considering Fitch's price deck, Fitch's expects
Petrobras borrowing needs to be above the USD12.0 billion per year included in
the company's business plan. Fitch's Brent price deck is USD 100 per barrel in
2013, USD 92 per barrel in 2014, USD 85 per barrel in 2015 and USD 75 per
barrel over the long term.
In 2012, Petrobras' metrics were negatively impacted by its growing need to
import refined products which were sold at prices below its international
parity, increasing the company's financing needs. As a result, the company's
trade deficit (including refined products and crude oil) increased to USD10.7
billion in 2012, up from USD4.9 billion in 2011 and its refined segment
registered a loss before interest and taxes of USD17.5 billion in 2012 from
USD8.5 billion in 2011. The trade imbalance is expected to persist over the
medium term due to the growing domestic demand of refined products, and will
be partially mitigated with the expansion of Petrobras' refining capacity.
Although positive, recent refined product price increases are not enough to
align domestic and international prices and eliminate losses in the refining
segment. Petrobras could stand a moderate deterioration of its credit
protection measures provided the reserve replacement ration (RRR) and reserve
to production ratio remain strong and that the regulatory environment does not
weaken. Should Brent price be above Fitch's price deck, credit metrics could
recover before 2017.
In 2012, the weak performance of the downstream segment in combination with
the depreciation of the Real resulted in a decrease in consolidated EBITDA to
USD27.5 billion in 2012 from USD36.9 billion in 2011. As of December 2012,
Petrobras' total adjusted debt, including adjustments for rental expenses and
pension obligations, was USD158.1 billion. In 2012, total
adjusted-net-debt-to-EBITDAR ratio was 3.5 times (x), net debt to EBITDA ratio
was 2.6x, and EBITDA to interest expense coverage ratio of 4.7x. These ratios
compare to total adjusted-net-debt-to-EBITDAR ratio of 2.2x, net debt to
EBITDA ratio was 1.5x, and EBITDA to interest expense coverage ratio of 6.3x
in 2011. Although credit metrics deteriorated, they remain consistent with
Fitch expectations and current ratings.
Fitch believes Petrobras will face challenges to achieve its production growth
targets while maintaining its stated credit metrics targets, including a
maximum net debt-to-capitalization ratio of 35% and a net debt-to-EBITDA ratio
of 2.5x. Credit metrics are expected to recover once the company increasingly
monetizes its large oil reserve base and as domestic products refined products
are aligned with international prices. In addition, the company's initiatives
to reduce and control costs are expected to positively impact its cash
Petrobras' strong liquidity provides some comfort in a temporary scenario of
deteriorating credit metrics. As of December 2012, Petrobras maintained an
ample liquidity reflected in USD23.7 billion of cash in hand and USD20.9
billion of government securities. This liquidity compares with a short-term
debt of USD7.5 billion. Liquidity is enhanced by the company's cash generation
of USD24.3 billion [funds from operations (FFO)]. In 2012, FFO was negatively
impacted by Petrobras trade deficit of approximately USD10 billion due to the
increase in the demand for imported products, particularly refined products.
LINKAGE TO THE SOVEREIGN
Over the last few years, changes in oil and gas regulation highlight an
increased participation of the government in the sector through Petrobras,
which reinforces the linkage between them. This is reflected in the production
sharing agreements (PSA) for the pre salt areas and in the increase in the
government's voting rights in Petrobras. In the new pre salt areas, Petrobras
is obliged to be the sole operator with a minimum 30% participation of every
field, a change from the previous concession regime. The government's support
of Petrobras is reflected in the role of state owned banks in providing
sources of financing for Petrobras. As of December 2012, Petrobras' debt with
BNDES represents approximately 25% over its total debt. By law, the federal
government must hold at least a majority of Petrobras' voting stock. The
government currently owns 63.2% of Petrobras' voting rights and has an overall
economic stake in the company of 47.6%.
A negative rating action could result from the downgrade of the sovereign, the
perception of a lower linkage between Petrobras and the government, and / or a
significant weakening of the standalone credit quality of the company absent
government support. A positive rating action on Brazil, could lead to a
positive rating action on Petrobras.
Fitch has affirmed the following debt instruments of Petrobras and its
subsidiaries: PIFCO and PGF:
--Senior unsecured notes USD750 million due 2013 at 'BBB';
--Senior unsecured notes USD600 million due 2014 at 'BBB';
--Senior unsecured USD1.25billion notes due 2015 at 'BBB';
--Senior unsecured USD2.5 billion notes due 2016 at 'BBB';
--Senior unsecured USD399 million notes due 2016 at 'BBB';
--Senior unsecured JPY35 billion notes due 2016 at 'BBB';
--Senior unsecured USD1.75 billion notes due 2017 at 'BBB';
--Senior unsecured USD1.75 billion notes due 2018 at 'BBB';
--Senior unsecured USD750 million notes due 2018 at 'BBB';
--Senior unsecured EUR1.25billion notes due 2018 at 'BBB';
--Senior unsecured USD2.75 billion notes due 2019 at 'BBB''
--Senior unsecured USD2.5 billion notes due 2020 at 'BBB';
--Senior unsecured USD2.5 billion notes due 2021 at 'BBB';
--Senior unsecured EUR600 million notes due 2022 at 'BBB';
--Senior unsecured GBP700 million notes due 2026 at 'BBB';
--Senior unsecured USD1.5 billion notes due 2040 at 'BBB';
--Senior unsecured USD2.25 billion notes due 2041 at 'BBB';
--Senior unsecured EUR1.3 billion notes due 2019 at 'BBB';
--Senior unsecured EUR700 million notes due 2023 at 'BBB';
--Senior unsecured GBP450 million notes due 2029 at 'BBB';
Additional information is available at 'www.fitchratings.com'. The ratings
above were unsolicited and have been provided by Fitch as a service to
Applicable Criteria and Related Research:
--'Corporate Rating Methodology' (Aug. 8, 2012);
--'Rating Oil and Gas Exploration and Production Companies' (April 5 2011).
Applicable Criteria and Related Research
Corporate Rating Methodology
Rating Oil and Gas Production Companies
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