Fitch Ratings has affirmed the foreign currency Issuer Default Rating (IDR) of Petroleo Brasileiro S.A. (Petrobras) at 'BBB'. The rating affects USD 12.1 billion of issued debt. Fitch has also affirmed the local currency IDR at 'BBB+' and the national long-term rating at 'AAA(bra)'. The Outlook for all these ratings is Stable.
Petrobras' ratings are supported by its leadership position in the Brazilian domestic energy market, its recognized expertise in offshore exploration and production and its strategic importance to Brazil whose Issuer Default Rating (IDR) is 'BBB-' with a Positive Outlook by Fitch. Also, the rating incorporates Petrobras' sustained production growth track record as well as reserves growth prospects after significant discoveries in recent years.
The ratings are tempered by Petrobras' exposure to local political interference, significant medium-term capital-investment program, vulnerability to fluctuations in international commodity prices, currency risk, domestic market revenue concentration. Petrobras growth strategy is considered aggressive and could prove challenging. Also, credit metrics will deteriorate as a result of incremental leverage. However, mitigants to this situation include Petrobras' ample liquidity, proved access to the financial markets, and the expectation that credit metrics will recover once the company increasingly monetizes its large oil reserve base.
Petrobras' Outlook remains Stable. The Rating Outlook is likely to be revised to Negative if global oil and natural gas demand and/or prices decline sharply or for a long period, which delays the recovery of its credit metrics, or if debt funded capex is significantly above Fitch's current expectations. A Positive Outlook revision is rather unlikely given the medium term focus on investment.
Significant Growth in Capex:
Petrobras has set an aggressive growth strategy which is reflected in its $224 billion investment program between 2010 and 2014, supported by recent discoveries. As of December 2009, the company had proved reserves of 12.1 billion barrels of oil equivalent (boe), 13.1 years of reserves and had improved its reserve replacement ratio to 205%. Petrobras is targeting an annual 9.4% increase in production volume which would reach 3,907 thousand boe per day (Mboe/d) in 2014, which is significantly above the 3% annual growth rate observed between 2006 and 2010. Fitch believes that Petrobras will face challenges in meeting these goals in the aforementioned timeframe while maintaining its stated credit metric targets. These include a maximum net debt to capitalization of 35% and a Net debt to EBITDA of 2.5x. In addition, the company will have to ensure the supply and availability of critical equipment and of qualified personnel. Positively, the company has already commissioned 26 additional deep water drilling rigs that will begin operations between 2010 and 2013, and Petrobras and the government has joint efforts to train new industry specialists.
Higher Leverage, Strong Financial Support, Good Liquidity:
Petrobras will require funding from external sources to implement its investment program as roughly 50% of internal cash generation will meet the company's funding needs, in Fitch's base case scenario. The remaining will be covered with additional financing and with the proceeds from the recent capitalization. Fitch's 2011 base case price deck is $75/barrel (bbl) for crude oil (NYMEX-West Texas Intermediate [WTI]), $/bbl 65 for 2012 and $/bbl 60 for the long term. As a result, Fitch sees in 2014 net debt to EBITDAR and fixed charge coverage in excess of Petrobras' targets, which are weak metrics for the current rating category. Fitch anticipates the incremental cash flow from investments in prior years to improve credit metrics after 2014. Also, should prices be above Fitch's price deck, these metrics could significantly improve before 2014.
Fitch anticipates Petrobras will continue to benefit from a strong financial support from the local financial community including Brazilian Development Bank (BNDES) and the international capital markets, while it maintains a healthy liquidity. As of September 2010, Petrobras total debt was $66.9 billion, total adjusted debt (including adjustements for rental expenses and pension obligations) was $111.1billion. Total liquidity of $34.2 billion, includes $27.5 billion raised from minority shareholder in the recent capitalization. The capitalization was positive as it brought new funds to support future capex; although such funds roughly represent 50% of 2011 estimated investments.
Increased/Stronger Linkage with the Government:
The government's greater degree of intervention in the oil and gas sector likely suggests a move towards a tighter link between Petrobras and the government. With the new regulatory framework approved by Congress on Dec. 1, 2010, Petrobras would take a more active role in the oil and gas sector in Brazil and the government would increase its control of the industry. The change from the current concession regime to a production sharing agreement (PSA) scheme where Petrobras would become the sole operator with a minimum 30% participation of every field in the pre-salt layers and other strategic areas will be reflected in incremental capex. In addition, Petrobras will invest to develop the five billion barrels of oil equivalent (boe) received following the transfers of rights in 2010. These incremental capex has not been included in Petrobras' $224 billion investment plan and could potentially result in an increase in leverage above the expected levels and a move to rate Petrobras at the same level as the government of Brazil.
Petrobras is an integrated international oil and gas company engaged in the exploration, development and production of hydrocarbons and in the refining, marketing, transportation and distribution of oil and a wide range of petroleum products, petroleum derivatives, petrochemicals and liquid petroleum gas. Petrobras is also an integrated power company with operations in electric power generation, transmission and distribution. By law, the federal government must hold at least a majority of Petrobras' voting stock.
Fitch has affirmed the following debt instruments of Petrobras and its subsidiaries:
-Senior unsecured notes USD1434.5 million due 2011 at 'BBB';
--Senior unsecured notes USD750 million due 2013 at 'BBB';
--Senior unsecured notes USD600 million due 2014 at 'BBB';
--Senior unsecured USD500 million notes due 2016 at 'BBB';
--Senior unsecured USD399 million notes due 2016 at 'BBB';
--Senior unsecured Yen35 billion notes due 2016 at 'BBB';
--Senior unsecured USD1750 million notes due 2018 at 'BBB';
--Senior unsecured USD750 million notes due 2018 at 'BBB';
--Senior unsecured USD2750 million notes due 2019 at 'BBB'
--Senior unsecured USD2500 million notes due 2020 at 'BBB';
--Senior unsecured USD1500 million notes due 2040 at 'BBB';
--Second issuance of debentures for USD750 million due 2012 at 'AAA(bra)'.
Petrobras Argentina S.A.:
--Guaranteed USD300 million nnotes due 2017 at 'BBB'.
Additional information is available at 'www.fitchratings.com'.
Applicable Criteria and Related Research:
--Corporate Rating Methodology, Aug. 13, 2010.
--Rating Oil and Gas Exploration and Production Companies, April 6 2010
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