SAO PAULO--(BUSINESS WIRE)--Fitch Ratings has assigned 'BBB' ratings to the following Petroleo Brasileiro S.A. (Petrobras) proposed notes:
--USD 1.25 billion, 2% notes due 2016;
--USD 1 billion floating rate notes due 2016;
--USD 2 billion, 3% notes due 2019;
--USD 1.5 billion floating rate notes due 2019;
--USD 3.5 billion, 4.375% notes due 2023;
--USD 1.75 million, 5.625% notes due 2043.
The notes will be issued through Petrobras' wholly owned subsidiary, Petrobras Global Finance B.V. (PGF), and will be unconditionally and irrevocably guaranteed by Petrobras. Petrobras is expected to use the proceeds from the debt issuance to fund its capital expenditure program and for general corporate purposes.
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 Issuer Default Rating (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.
Significant Growth Potential & High Capex
Petrobras has significant growth potential both in production and reserves, backed by an ambitious capital investment program of USD236.9 billion between 2013 and 2017, and recent offshore discoveries. The company has recently affirmed its stated production targets of 3.4 billion barrels of oil equivalent per day (boepd) in 2017 and 5.2 million boepd in 2020. Fitch expects the company to face various challenges to achieve these targets on a timely basis, due to challenges in securing critical equipment, complying with local content commitments and obtaining significant external financing.
In 2012, Petrobras' production was relatively unchanged from the prior year at 2,598 thousand boepd, which was in line with Fitch's expectations. Petrobras expects production to vary by +/- 2% in 2013, influenced by the concentration of scheduled maintenance stoppages of platforms, and to increase by 4-6% per annum starting in 2014 through 2017 as several new production platforms come on line. In the first quarter of 2013, production decreased to 2.310 thousand boepd, as expected. The company enjoys a solid asset base reflected in proved oil and gas reserves of 12.9 billion barrels of oil equivalent (boe) (under the Securities Exchange Commission definition). In 2012, its three-year reserve replacement ratio (RRR) was 126% and its reserve life was 14.6 years.
Leverage Increases, Credit Metrics Deteriorate
Fitch expects the company to have negative free cash flow over the next five years as it continues to implement its sizable capital investment program., which will be funded by debt and increase leverage. The magnitude of the cash flow deficit will be influenced by international crude prices as well of the price of refined products in the domestic market, which are currently below international prices. Considering Fitch's price deck, Fitch's expects Petrobras' borrowing needs to be above USD12 billion per year. Fitch's Brent price deck is USD 100 per barrel in 2013, USD 92 per barrel in 2014, USD 85 per barrel in 2015 and USD 75 per barrel thereafter.
In 2012, Petrobras' metrics were negatively impacted by its growing need to import refined products which were sold at prices below international parity, increasing the company's financing needs. As a result, the company's trade deficit (including refined products and crude oil) increased to USD10.7 billion in 2012, up from USD4.9 billion in 2011 and its refined segment registered a loss before interest and taxes of USD17.5 billion in 2012 from USD8.5 billion in 2011. The trade imbalance is expected to persist over the medium term due to the growing domestic demand of refined products, and 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. Petrobras could stand a moderate deterioration of its credit protection measures provided the reserve replacement ration (RRR) and reserve to production ratio remain strong and that the regulatory environment does not weaken. Should the Brent price be above Fitch's price deck, the recovery of credit metrics could be seen earlier than 2017.
In 2012, the weak performance of the downstream segment in combination with the depreciation of the Real resulted in a decrease in consolidated EBITDA to USD27.5 billion in 2012 from USD36.9 billion in 2011. As of December 2012, Petrobras' total adjusted debt, including adjustments for rental expenses and pension obligations, was USD158.1 billion. In 2012, total adjusted-net-debt-to-EBITDAR ratio was 3.5 times (x), net debt to EBITDA ratio was 2.6x, and EBITDA to interest expense was 4.7x. These ratios compare to total adjusted-net-debt-to-EBITDAR of 2.2x, net debt to EBITDA ratio of1.5x, and EBITDA to interest expense of 6.3x in 2011. Although credit metrics deteriorated, they remain consistent with Fitch expectations and consistent was current ratings.
Fitch believes Petrobras will face challenges to achieve its production growth targets while maintaining all its stated credit metrics, including a maximum net debt-to-capitalization ratio of 35% and a net debt-to-EBITDA ratio of 2.5x. Credit metrics are expected to recover once the company increasingly monetizes its large oil reserve base and as domestic products refined products are aligned with international prices. In addition, the company's initiatives to reduce and control costs are expected to positively impact its cash generation.
Strong Liquidity
Petrobras' strong liquidity provides some comfort in a temporary scenario of deteriorating credit metrics. As of March 2013, Petrobras maintained an ample liquidity reflected in USD23.1 billion of cash and marketable securities. This liquidity compares with a short term debt of USD7.2 billion. Liquidity is enhanced by the company's cash generation. In 2012, FFO was negatively impacted by Petrobras trade deficit of approximately USD10 billion due to the increase in the demand for imported products, particularly refined products.
Linkage to the Sovereign
Recent regulation of the oil and gas sector highlights the increasing intervention into the sector by the Brazilian government, and the tighter credit linkage between them. Higher levels of government intervention into the sector are 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 of every field, a change from the previous concession regime. The government currently owns 63.2% of Petrobras' voting rights and has an overall economic stake in the company of 47.6%, which was increased a couple of years ago in the pre-salt rights transfer.The government's support of Petrobras is also reflected in the role of state owned banks in providing sources of financing for Petrobras. As of December 2012, Petrobras' debt with BNDES represents approximately 25% over its total debt. By law, the federal government must hold at least a majority of Petrobras' voting stock.
RATING SENSITIVITIES
A negative rating action could result from the downgrade of the sovereign or the perception of a lower level of credit support for Petrobras by the Brazilian government and/or a significant weakening in credit fundamentals beyond current expectations and without the government's expressed support for the company. A positive rating action on Brazil, could lead to a positive rating action on Petrobras with the continued expectations of government support for the company.
Additional information is available at 'www.fitchratings.com'.
Applicable Criteria and Related Research:
--'Corporate Rating Methodology', Aug. 8, 2012;
--'Rating Oil and Gas Exploration and Production Companies', April 9, 2012.
Applicable Criteria and Related Research
Rating Oil and Gas Production Companies
http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=682334
Corporate Rating Methodology
http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=684460
Additional Disclosure
Solicitation Status
http://www.fitchratings.com/gws/en/disclosure/solicitation?pr_id=791114
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