Fitch Rates Petrobras' USD11B Proposed Notes 'BBB'

  Fitch Rates Petrobras' USD11B Proposed Notes 'BBB'

Business Wire

SAO PAULO -- May 14, 2013

Fitch Ratings has assigned 'BBB' ratings to the following Petroleo Brasileiro
S.A. (Petrobras) proposed notes:

--USD 1.25 billion, 2% notes due 2016;

--USD 1 billion floating rate notes due 2016;

--USD 2 billion, 3% notes due 2019;

--USD 1.5 billion floating rate notes due 2019;

--USD 3.5 billion, 4.375% notes due 2023;

--USD 1.75 million, 5.625% notes due 2043.

The notes will be issued through Petrobras' wholly owned subsidiary, Petrobras
Global Finance B.V. (PGF), and will be unconditionally and irrevocably
guaranteed by Petrobras. Petrobras is expected to use the proceeds from the
debt issuance to fund its capital expenditure program and for general
corporate purposes.

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 USD236.9 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 a
timely basis, due to challenges in securing critical equipment, complying with
local content commitments and obtaining significant external financing.

In 2012, Petrobras' production was relatively unchanged from the prior year at
2,598 thousand boepd, which was in line with Fitch's expectations. Petrobras
expects production to vary by +/- 2% in 2013, influenced by the concentration
of scheduled maintenance stoppages of platforms, and to increase by 4-6% per
annum starting in 2014 through 2017 as several new production platforms come
on line. In the first quarter of 2013, production decreased to 2.310 thousand
boepd, as expected. 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 Securities Exchange Commission definition). In 2012, its three-year
reserve replacement ratio (RRR) was 126% and its reserve life was 14.6 years.

Leverage Increases, Credit Metrics Deteriorate

Fitch expects the company to have negative free cash flow over the next five
years as it continues to implement its sizable capital investment program.,
which will be funded by debt and increase leverage. The magnitude of the cash
flow deficit will be influenced by international crude prices as well of the
price of refined products in the domestic market, which are currently below
international prices. Considering Fitch's price deck, Fitch's expects
Petrobras' borrowing needs to be above USD12 billion per year. 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 thereafter.

In 2012, Petrobras' metrics were negatively impacted by its growing need to
import refined products which were sold at prices below 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. 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 the Brent price be
above Fitch's price deck, the recovery of credit metrics could be seen earlier
than 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 was 4.7x. These ratios compare to
total adjusted-net-debt-to-EBITDAR of 2.2x, net debt to EBITDA ratio of1.5x,
and EBITDA to interest expense of 6.3x in 2011. Although credit metrics
deteriorated, they remain consistent with Fitch expectations and consistent
was current ratings.

Fitch believes Petrobras will face challenges to achieve its production growth
targets while maintaining all its stated credit metrics, 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
generation.

Strong Liquidity

Petrobras' strong liquidity provides some comfort in a temporary scenario of
deteriorating credit metrics. As of March 2013, Petrobras maintained an ample
liquidity reflected in USD23.1 billion of cash and marketable securities. This
liquidity compares with a short term debt of USD7.2 billion. Liquidity is
enhanced by the company's cash generation. 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

Recent regulation of the oil and gas sector highlights the increasing
intervention into the sector by the Brazilian government, and the tighter
credit linkage between them. Higher levels of government intervention into the
sector are 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 currently owns 63.2% of Petrobras'
voting rights and has an overall economic stake in the company of 47.6%, which
was increased a couple of years ago in the pre-salt rights transfer.The
government's support of Petrobras is also 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.

RATING SENSITIVITIES

A negative rating action could result from the downgrade of the sovereign or
the perception of a lower level of credit support for Petrobras by the
Brazilian government and/or a significant weakening in credit fundamentals
beyond current expectations and without the government's expressed support for
the company. A positive rating action on Brazil, could lead to a positive
rating action on Petrobras with the continued expectations of government
support for the company.

Additional information is available at 'www.fitchratings.com'.

Applicable Criteria and Related Research:

--'Corporate Rating Methodology', Aug. 8, 2012;

--'Rating Oil and Gas Exploration and Production Companies', April 9, 2012.

Applicable Criteria and Related Research

Rating Oil and Gas Production Companies

http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=682334

Corporate Rating Methodology

http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=684460

Additional Disclosure

Solicitation Status

http://www.fitchratings.com/gws/en/disclosure/solicitation?pr_id=791114

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Contact:

Fitch Ratings
Primary Analyst
Ricardo Carvalho, +55-11-4503-2627
Fitch Ratings Brasil Ltda.
Alameda Santos, 700 - 7o. andar - Sao Paulo - SP - CEP: 01418-100
or
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Director
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or
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Managing Director
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