• Leverage could increase to 6.5 times with oil at $20/barrel
  • Company is rated junk by Moody's, Fitch and Standard & Poors

Bailing-out state-controlled oil producer Petroleo Brasileiro SA could cost the government as much as $21 billion, according to research from Citigroup Inc.

That would be the amount necessary to plug the company’s cash hole and fix the capital structure on a sustainable basis were oil to fall to $20 for 12 months, Citigroup credit analysts including Eric Ollom wrote in a report Friday. The company, with $127 billion of bonds and loans, could see its ratio of net debt to earnings before items rise to what Citi called an "unsustainable level" of 6.5 times.

Petrobras, as the company is known, slashed its 2015-2019 investment plan by 24 percent last week to cope with the collapse of oil prices amid a sprawling corruption probe at the state-owned oil producer that’s spread to some of the country’s biggest businesses and highest-ranking politicians. The Rio de Janeiro-based company is rated junk by the three major credit rating companies.

"The market is correct to be concerned regarding the potential drain on sovereign credit metrics if nations are required to support their oil and gas quasi-sovereigns under a $20 scenario," the analysts wrote. "Our analysis shows most of the direct impact of such support is mainly limited to Latin America, specifically Brazil, Colombia, and Mexico, but only in Brazil is the amount significant."