BUENOS AIRES, Argentina--(BUSINESS WIRE)--Fitch Ratings has upgraded the following ratings of Petrobras Argentina S.A. (PESA):
--Foreign currency Issuer Default Rating (IDR) to 'BB' from 'BB-';
--Senior Unsecured Notes due 2013 to 'BB' from 'BB-'.
In conjunction with this action, Fitch has affirmed the following ratings:
--Local currency IDR at 'BB';
--Guaranteed notes due 2017 at 'BBB'.
The Outlook for all the ratings is Stable.
PESA's ratings are supported by solid credit metrics, an integrated business profile and a competitive cost structure. The two-notch differentiation from Argentina's country ceiling rating of 'B' incorporates support from PESA's majority shareholder, Petroleo Brasiliero S.A. (Petrobras; rated 'BBB' by Fitch), strong internal cash flow generation, dollar-denominated export revenues that cover all senior unsecured debt, and its right to maintain up to 70% of export revenues offshore.
PESA is a subsidiary of Petrobras Participaciones SL (Spain) which in turn is 100% owned by Petrobras. Petrobras does guarantee USD300 million notes through Petrobras International Finance Co. (PIFCO) and although it has no legal tie or cross-default clause with PESA's senior unsecured debt, Fitch believes that it is likely that Petrobras would support PESA to meet its debt obligations in the event of the imposition of transfer and convertibility (T&C) restrictions by the Argentine government. This would minimize any negative implications for Petrobras should one of its key subsidiaries default.
Key credit concerns center on the Argentine government's interference in the energy sector, the prevailing weak regulatory framework, PESA's asset and revenue concentration in the domestic market and declining production and reserve levels.
Petrobras Argentina's credit quality is underpinned by the operating flexibility and synergies of its vertically integrated model, a competitive cost structure, and strong diverse downstream assets in retail gas stations, electric assets in Argentina, and petrochemicals. As of December 2010, the refining business contributed USD1,845 million of revenues and USD96 million of EBITDA, upstream activities had USD920 million of revenues and USD474 million of EBITDA, out of total consolidated revenues of USD3,651 million and total consolidated EBITDA of USD686 million. This favorably compares with total consolidated revenues of USD3,170 million and EBITDA of USD613 million as of December 2009 mainly due to improved prices at the pump and their positive effect on both upstream and downstream operations. The continuation of price increases at retail gas stations is uncertain as it depends on government approval.
In April 2011, the company executed various asset sales that will significantly reduce the export flows from Argentina to approximately USD200 million from nearly USD360 million as of December 2010. Positively, those sales will help to reduce operating costs and capex needs, as PESA's refining capacity will be in line with its production levels. In addition, the liquidity buffer created by those asset sales, including Refineria San Lorenzo and other related distribution assets for USD36 million (representing approximately half of PESA's refining capacity) and Innova for USD332 million (located in Brazil, representing near 10% of total revenues) will allow the company to continue deleveraging its capital structure.
As of December 2010, the company's reserves-to-production (R/P) ratio was seven years, with total combined proved reserves of 250 million barrels of oil equivalent (BOE), of which 57% were developed. As of December 2010, PESA's total reserves declined by 14%; over the last two years the decline was almost 50%. That sharp decrease in reserves has to do with the divestures in Peru, Ecuador and Colombia. Over the coming years, PESA's operating risk will be determined by the negotiation of key concession contracts. Consequently, Fitch expects declining reserve and production levels to continue for a couple of years, while capex will be constrained at low levels until concession contracts are renegotiated. PESA's moderate level of production compared to reserves and competitive cost structure compared to industry peers indicates the company's ability to generate cash flows.
Fitch's expectation of leverage for PESA incorporates that net debt to EBITDA will be below 1.0x. At March 31, 2011, (last 12 months basis), net debt-to-EBITDA was 1.2 times (x), and EBITDA-to-interest expense was 5.5x, which compared to 1.8x and 4.8x, respectively, for the same period in 2010. For this period, total debt amounted to USD1300 million, of which USD587 million is debt issued in the capital markets. PESA holds USD200 million of senior unsecured debt at the capital markets due 2013, and USD300 million in secured notes due 2017 supported by a stand-by purchase agreement by PIFCO. Scheduled maturities are comfortably covered by PESA's liquidity position, including expected free cash flow generation and cash balances.
The company's liquidity position is strong. As of March 31, 2011, cash balances reached USD557 million on top of cash from operations during 2010 of USD591 million. Free cash flow is expected to remain strong until the company negotiates key concession contracts due 2015/2016. Low leverage mitigates any cash shortfall should price trends reverse or capex needs rise above current levels.
Petrobras Argentina is an integrated energy company, engaged in oil and gas exploration and production, refining, petrochemicals, electricity generation, transmission and distribution, and hydrocarbon marketing and transportation. PESA is an Argentine corporation with operations concentrated in Argentina.
Additional information is available at 'www.fitchratings.com'
Applicable Criteria and Related Research:
--Corporate Rating Methodology (Aug. 13, 2010);
--'Parent and Subsidiary Rating Linkage - Fitch's Approach to Rating Entities within a Corporate Group Structure' (July 14, 2010);
--Rating Corporates Above the Country Ceiling (5 Jan. 2011).
Applicable Criteria and Related Research:
Corporate Rating Methodology - Amended
http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=546646
Parent and Subsidiary Rating Linkage Criteria Report
http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=534826
Rating Corporates Above the Country Ceiling
http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=594985
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