Fitch Rates Petrobras' Euro3.05B and GBP600MM Proposed Notes 'BBB'
CHICAGO -- January 7, 2014
Fitch Ratings has assigned a 'BBB' rating to Petroleo Brasileiro S.A.'s
(Petrobras) proposed senior unsecured notes with aggregate amounts of Euro3.05
billion and GPB600 million. The notes, which will have tenures between 4 and
20 years, will be issued through its wholly owned subsidiary, Petrobras Global
Finance B.V. (PGF), and will be unconditionally and irrevocably guaranteed by
Petrobras. Proceeds will be used to refinance upcoming maturities and for
general corporate purposes.
The expected note issuances are as follows:
--Euro1.5 billion due Jan. 15, 2018;
--Euro750 million due Jan. 14, 2021;
--Euro800 million due Jan. 14, 2025;
--GBP600 million due Jan. 16, 2034.
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 long-term
Issuer Default Rating [IDR] of '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 as a result of this aggressive capex program in combination with
its current trade deficit.
SIGNIFICANT GROWTH POTENTIAL & HIGH CAPEX
Petrobras has significant growth potential in both 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.
During the first nine months of 2013, Petrobras' production was relatively
unchanged from 2012 at an average of 2,542 thousand (m) boepd, and was
consistent with Fitch's expectations. Petrobras expects production to vary by
+/- 2% in 2013, which will be influenced 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 a cash flow deficit will also be affected
by domestic pricing policies for refined products, which are currently below
international prices. Considering Fitch's price deck, Fitch expects Petrobras'
borrowing needs to be above the USD12 billion per year included in the
company's business plan. Fitch's Brent price deck is USD96 per barrel for
2014, USD88.5 per barrel in 2015, and USD80 per barrel over the long term.
The company's downstream segment continues to report losses. Although down
from those reported during 2012, the refining, transportation and marketing
segment reported losses of USD8.5 billion for the last 12 months (LTM) ended
Sept. 30, 2013. In 2012, Petrobras' metrics were negatively affected 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) grew to
USD10.7 billion in 2012, and its refined segment registered a loss before
interest and taxes of USD17.5 billion in 2012.
The trade imbalance is expected to persist over the medium term due to the
growing domestic demand for refined products, but 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 withstand a moderate deterioration of its credit protection measures
provided the RRR and reserve-to-production ratio remain strong and the
regulatory environment does not weaken. Should the Brent price be above
Fitch's price deck, credit metrics could recover before 2017.
During the LTM ended Sept. 30, 2013, Petrobras' consolidated EBITDA reached
approximately USD28.3 billion, relatively flat from the USD27.5 billion
reported during 2012. As of Sept. 30, 2013, Petrobras' total adjusted debt,
including adjustments for rental expenses and pension obligations and other
employee benefits, was USD198.1 billion. During the LTM ended September 2013,
the total adjusted net-debt-to-EBITDAR ratio was 4.2x, net debt-to-EBITDA
ratio was 3.1x, and EBITDA-to-interest expense coverage ratio was 8.7x.
Although credit metrics deteriorated, they remain consistent with Fitch
Fitch believes Petrobras will face challenges to achieving 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 further
monetizes its large oil reserve base and as domestic and refined products
prices are aligned with international prices. In addition, the company's
initiatives to reduce and control costs are expected to have a positive impact
on its cash generation.
Petrobras' strong liquidity provides some comfort in a temporary scenario of
deteriorating credit metrics. As of September 2013, Petrobras maintained ample
liquidity reflected in USD26 billion of cash. This liquidity compares with a
short-term debt of USD8.2 billion. Liquidity is enhanced by the company's cash
generation of USD28.2 billion in funds from operations (FFO). In 2012, FFO was
affected negatively by Petrobras' trade deficit of approximately USD10 billion
which was 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 the
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 in every
field, a change from the previous concession regime. The first PSA bidding
round took place during the month of October 2013 and a single area, the Libra
block, was awarded to a consortium of companies in which Petrobras has a 40%
interest. 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 represented approximately 25% of 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.
Additional information is available at www.fitchratings.com.
Applicable Criteria and Related Research:
--'Corporate Rating Methodology' (Aug. 2013);
--'Rating Oil and Gas Production Companies' (Aug. 2012).
Applicable Criteria and Related Research:
Corporate Rating Methodology: Including Short-Term Ratings and Parent and
Rating Oil and Gas Production Companies
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Lucas Aristizabal, +1-312-368-3260
Fitch Ratings, Inc.
70 West Madison Street
Chicago, IL 60602
Mauro Storino, +55-11-4504-2625
Daniel Kastholm, +1-312-368-2070
Elizabeth Fogerty, +1-212-908-0526
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