RIO DE JANEIRO & CHICAGO--(BUSINESS WIRE)--Fitch Ratings has downgraded Petrobras Argentina S.A.'s (PESA) long-term foreign and local currency Issuer Default Ratings (IDRs) to 'B+' from 'BB'. The rating action applies to the company's approximately USD200 million of senior unsecured notes due 2013. The agency has simultaneously affirmed PESA's guaranteed notes rating at 'BBB'. The Rating Outlook is Stable.
KEY RATING DRIVERS
PESA's ratings downgrade reflects Fitch perception of a weaker strategic tie between the company and its main shareholder, Petroleo Brasileiro (Petrobras; rated 'BBB'), coupled with PESA's heightening standalone credit risk. Fitch's overall assessment of PESA and Petrobras linkage remains strong considering other reputational, operational and financial ties between them and this is reflected in the two notch differentiation above Argentina's country ceiling of 'B-'.
Over the last couple of years, PESA lost its earnings geographical diversification following the sale of the company's sizable portfolio of upstream and downstream assets. Other credit issues include the potential for high capex to boost production and reserve growth, and the uncertain regulatory atmosphere for the industry in Argentina.
Uncertainty From Concessions Renewals Undermine Upstream Metrics
Fitch notes that the company's reserve base at year-end 2012, which amounted to 215 million barrels of oil equivalent (boe), has been decreasing over time due to divestures of certain assets and a prevailing portfolio of mature fields. PESA's leverage as measured by exploration and production debt to proven developed reserve remains relatively unchanged at $4.4/boe as of Dec. 31, 2012. Nevertheless, the company's reserve life has shortened over time to six year as of year-end 2012. PESA's bulk of oil concession contracts are due in 2015-2016. Fitch identifies the on-going negotiations of key concession contracts as a determining factor for next year's performance. Fitch expects selective capex and declining reserve and production levels to continue until these contracts are redefined.
Financial Performance As Expected
PESA's credit metrics for the latest 12-month (LTM) ending March 31, 2013 continued to be robust. At the end of the first quarter, funds from operations (FFO) adjusted leverage was approximately 0.9 times (x) same as reported at the LTM ending March 31, 2012. The company's FFO fixed charge coverage ratio was also kept at solid levels (11.4x over the same period). LTM free cash flow (FCF) was negative USD159 million after capex of USD653 million - including the acquisition of Petrolera Entre Lomas for USD249 million - and dividends of USD49 million while operating cash flows for the period was USD543 million.
Capex has been moderate to aggressive over the last couple of years at USD653 million as of March 2013 and USD635 million during the fiscal year 2012 following a period of divestures during years 2009-2011. Cash proceeds from these sales have been used to build up cash balances, reduce debt and to finance capex including exploration ventures in non-conventional gas. Production of non-conventional gas still represents a minor portion of total production. The abovementioned asset divesture resulted in reduction of export flows to approximately USD200 million per annum. The assets involved include petrochemical assets in Brazil (Innova sold to Petrobras) and upstream divestures in Peru and Ecuador.
Low Leverage Levels To Persist
Fitch's Base Case indicates PESA's net debt to EBITDA ratio to remain below 1.0x at year-end 2013. At March 31, 2013, the company's debt to LTM EBITDA was flat at 0.8x same as in 2012. Total debt decreased significantly compared to 2011-2009 levels. As of March 31, 2013, PESA had USD200 million of senior unsecured notes due 2013 and USD300 million of secured notes due 2017 supported by a stand-by purchase agreement from Petrobras. PESA's 2017 guaranteed notes include a change of control clause which states the obligation of PESA to repurchase the notes at 101% upon a change of control event.
PESA's liquidity as of March 31, 2013 was USD259 million of cash balances that should be consider solid to its financial needs.
RATING SENSITIVITIES
A positive rating action seems limited at the time given the rating level and several challenges PESA has to sort out in the near term. In contrast, a negative rating action could occur as a result of any industry regulation or legal change or any changes in Petrobras' credit quality or further changes in its strategic or operational factors that could lead to diminished support to PESA.
Additional information is available at 'www.fitchratings.com'.
Applicable Criteria and Related Research:
--'Corporate Rating Methodology' (Aug. 8, 2012);
--'Parent and Subsidiary Rating Linkage' (Aug. 10, 2012);
Applicable Criteria and Related Research:
Corporate Rating Methodology
http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=684460
Parent and Subsidiary Rating Linkage
http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=685552
Country Ceilings
http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=685029
Rating Corporates Above the Country Ceiling -- Effective Jan. 5, 2011 to Jan. 27, 2012
http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=594985
Additional Disclosure
Solicitation Status
http://www.fitchratings.com/gws/en/disclosure/solicitation?pr_id=797156
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