Fitch Affirms Petrobras' IDRs at 'BBB' and National Scale Rating at 'AAA(bra)'; Outlook Stable

  Fitch Affirms Petrobras' IDRs at 'BBB' and National Scale Rating at
  'AAA(bra)'; Outlook Stable

Business Wire

CHICAGO -- March 26, 2014

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:

Petrobras

--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'.

The ratings affect USD47 billion of issued debt, including debt issued by
PIFCO and PGF, which Petrobras unconditionally and irrevocably guarantees. The
Rating 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 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. This should
result in a further increase in the linkage between its credit profile and
that of the sovereign.

LINKAGE TO THE SOVEREIGN

Petrobras' ratings reflect its linkage to the credit quality of the sovereign
of Brazil, which is supported by government control, the strategic importance
for Brazil as its leading supplier of liquid fuels, as well as the
government's support of Petrobras through financing. As of December 2013,
Petrobras' debt with BNDES represented approximately 16% of its total debt. By
law, the federal government must hold at least a majority of Petrobras' voting
stock. The government currently owns directly and indirectly 60.5% of
Petrobras' voting rights and has an overall economic stake in the company of
48.9%.

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.

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 around USD15 billion, on average, over the medium term.
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. This might be the
case going forward absent price increases that tighten or eliminate the
difference between domestic and international prices. Although down from those
reported during 2012, the refining, transportation and marketing segment
reported losses of USD8 billion in 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 its reserve replacement ratio (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 2018.

During 2013, Petrobras' consolidated EBITDA reached approximately USD29.4
billion, relatively flat from the USD27.6 billion reported during 2012. As of
Dec. 31, 2013, Petrobras' total adjusted debt, including adjustments for
rental expenses and pension obligations and other employee benefits, was
USD186 billion. During 2013, the total adjusted net-debt-to-EBITDAR ratio was
4.1x, net financial debt-to-EBITDA ratio was 3.2x, and EBITDA-to-interest
expense coverage ratio was 4.5x. Although credit metrics deteriorated, they
remain consistent with Fitch expectations.

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, which the company already exceeds. 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.

SIGNIFICANT GROWTH POTENTIAL & HIGH CAPEX

Petrobras has significant growth potential in both production and reserves,
backed by an ambitious capital investment program of USD220 billion between
2014 and 2018, and recent offshore discoveries. The company has recently
affirmed its stated production targets of 3.9 billion barrels of oil
equivalent per day (boe/d) in 2018 and 5.2 mmboe/d 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 2013, Petrobras' production was relatively unchanged from 2012 at an
average of 2,539 thousand (m) boe/d, and was consistent with Fitch's
expectations. Petrobras expects production to increase by 7.5% during 2014 as
a result of the new production platforms that recently began operations. The
company enjoys a solid asset base reflected in proved oil and gas reserves of
13 billion barrels of oil equivalent (boe) under the U.S. Securities and
Exchange Commission definition. In 2013, its three-year RRR was 128% and its
reserve life was 16 years.

STRONG LIQUIDITY

Petrobras' strong liquidity provides some comfort in a temporary scenario of
deteriorating credit metrics. As of year-end 2013, Petrobras maintained ample
liquidity reflected in USD20 billion of cash. This liquidity compares with a
short-term debt of USD8 billion. Liquidity is enhanced by the company's cash
generation of USD23 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.

RATING SENSITIVITIES

A negative rating action could result from a 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 to a
leverage level measure as total financial debt to EBITDA of more than 5.0x
over a sustained period. 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' (August 2013);

--'Rating Oil and Gas Production Companies' (August 2012).

Applicable Criteria and Related Research:

Corporate Rating Methodology: Including Short-Term Ratings and Parent and
Subsidiary Linkage

http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=715139

Rating Oil and Gas Production Companies

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

Additional Disclosure

Solicitation Status

http://www.fitchratings.com/gws/en/disclosure/solicitation?pr_id=825112

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Contact:

Fitch Ratings
Primary Analyst
Lucas Aristizabal,+1 312-368-3260
Senior Director
Fitch Ratings, Inc.
70 West Madison Street
Chicago, IL 60602
or
Secondary Analyst
Mauro Storino,+55-11-4504-2625
Senior Director
or
Committee Chairperson
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Managing Director
or
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Elizabeth Fogerty, +1 212-908-0526
elizabeth.fogerty@fitchratings.com
 
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