Petrobras Cut by Moody’s as Oil Slump Dims Debt Outlook

Petroleo Brasileiro SA, the most indebted publicly-traded oil company, had its rating lowered by Moody’s Investors Service as lower prices and local currency weakness inhibit its capacity to rein in leverage levels.

The classification was reduced one step to Baa2, the second-lowest investment grade and in line with the rating for Brazil’s government debt. The outlook is negative, Moody’s said today in a statement.

The Rio de Janeiro-based producer’s debt increased $25 billion in the first half of this year to $170 billion, pushing the ratio of total debt to adjusted earnings to 5.3 times, Moody’s said. The company’s earnings are hampered by its inability to raise local prices for oil products, Moody’s said.

“In this case the company was caught in a lower price environment with very high leverage,” Moody’s analyst Nymia Almeida said in a telephone interview from Mexico City. “It’s going to take more time, in a nutshell, to reduce leverage.”

Leverage is only likely to decline after 2016, longer than Moody’s original estimates, because of lower international oil prices and high capex commitments, Moody’s said in a statement.

Weaker Real

“It’s a reflexion of the company’s balance sheet,” Paula Kovarsky, an analyst at Itau BBA, said in a phone interview from Sao Paulo. “We are seeing an increase in leverage levels each quarter.”

A weaker real “is a very high risk” for Petrobras because about 70 percent of its debt is in U.S. dollars, Almeida said. Brazil’s real in the last three months has lost 11 percent against the U.S. dollar, more than all other major currencies tracked by Bloomberg.

“There is a real chance the oil price stays at a $85 level for a long time,” Auro Rozenbaum, equity analyst at Bradesco BBI said in a phone interview from Sao Paulo. “It affects Petrobras and the whole industry.”

Petrobras has had success increasing output from the so-called pre-salt region in deep waters that holds Brazil’s biggest discoveries, Almeida said.

“We’re giving them the benefit of the doubt on production because of good performance in the pre-salt,” Almeida said. The company is still “far from” losing its investment grade, she said.

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