Fitch Affirms Petrobras Argentina At 'BB-'; Outlook Stable

BUENOS AIRES, Argentina--(BUSINESS WIRE)--Fitch Ratings has affirmed Petrobras Argentina S.A. (formerly Petrobras Energia S.A.) (PESA) Issuer Default Ratings (IDRs) and outstanding debt ratings as follows:

--Foreign currency IDR at 'BB-';

--Local currency IDR at 'BB';

--Senior unsecured notes due 2011 at 'BB-' ;

--Senior unsecured notes due 2013 at 'BB-' ;

--Guaranteed notes due 2017 at 'BBB'.

The Rating Outlook is Stable for all ratings.

PESA's ratings are supported by solid credit metrics, an integrated business profile, and a competitive cost structure. The two-notch differential between the foreign currency IDR and Argentina's country ceiling reflects PESA's strong parent support from Petroleo Brasiliero S.A. (Petrobras; IDR rated 'BBB' by Fitch), reliable sound internal cash flow generation, high level of dollar-denominated revenues relative to long-term debt maturities which mitigates its exposure to currency mismatch, and its right to maintain up to 70% of export revenues offshore which mitigates transfer and convertibility risk.

Key credit concerns center on the Argentina's government interference in the energy sector, the prevailing regulatory framework, PESA?s asset and revenue concentration in the domestic market, declining production and reserve levels in recent years, and its exposure to commodity price volatility.

Through 2009 and first-quarter 2010, PESA?s financial profile improved, as reflected by a positive free cash flow generation and stronger credit metrics. Free cash flow generation was US$260 million in the latest twelve months (LTM) ended March 2010 compared to US$160 million in fiscal year-end (FYE) 2009. Leverage (FFO adjusted Leverage) remains moderate at 2.3 times (x) and is in line with PESA?s target. Expected solid credit metrics and reduced debt levels are critical to maintain sufficient financial flexibility to offset current weak operating upstream metrics.

At March 31, 2010 (last 12 months basis), net debt to EBITDA was 1.8x, and EBITDA to interest expense was 4.8x, which compared to 2.0x and 5.2x, respectively, for the same period in 2009. Exports and sales outside Argentina (generating revenues in hard currency) reached almost US$1 billion, or 54% of total financial debt. The liquidity buffer created by various asset sales, including PESA's stake in PVIE for US$619 million in April 2009 and the Fertilizers business unit for US$80 million to Bunge in January 2010, covers 2010 debt maturities of US$467 million. As of July, 2010, PESA fully paid US$349 million of senior unsecured notes with internal cash generation. Scheduled maturities are comfortably covered by PESA?s liquidity position, including expected free cash flow generation and cash balances.

PESA benefits from Petrobras' leadership position in both upstream and downstream operations and its brand name awareness in Latin America. While PESA operates fairly autonomously and has ready access to the international capital markets, it benefits from the financial strength of its majority shareholder, Petrobras. PESA?s US$300 million notes rating is supported by a stand-by purchase agreement by Petrobras International Finance Co. (PIFCO).

As of December 2009, PESA's reserves-to-production (R/P) ratio was 6.9 years , with total combined proved reserves of 290 million barrels of oil equivalent (BOE), of which 59% were developed. As of December 2009, PESA's total reserves declined by 30% mainly due to the effect of the divestment of Lote X in Peru (70.6 million BOE) and on a minor extent due to the mature portfolio of upstream assets in Argentina. While leverage metrics measured by debt/boe appear to be higher than its peers in Argentina, moderate production levels compared to reserves indicates the ability of PESA to generate sustainable cash flows to service its debt balances.

Recent Events:

In May 2010 PESA?s Board decided the sale of its majority stake in Refineria San Lorenzo and 360 gas stations to Oil Combustibles S.A., an Argentine corporation. The price, including inventories for US$74 million, is US$110 million. While these assets represent almost half of PESA?s refining and distribution resources, operating margins are likely to improve as a result of the convergence of PESA?s refining capacity with its production levels, assuming refining prices will keep an upward trend. As PESA?s crude oil production gradually dropped to 50 thousands bpd from more than 100 thousands bpd, the company needed to either buy crude oil at higher prices or maintain a low utilization of its refining capacity. After several years of negative operating results due to capped prices at the gas stations, the refining and distribution business unit showed in fiscal year 2009 positive cash flow generation as prices started to recover somewhat.

Petrobras Energia 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 in Argentina, Bolivia, Brazil, Ecuador, Mexico and Venezuela. As of Dec. 31, 2009, approximately 80% of total assets, net sales, proved oil and gas reserves and combined crude oil and gas production were concentrated in the domestic market.

The ratings reflect the application of the following criteria reports, available at 'www.fitchratings.com':

--Rating Corporates Above the Country Ceiling (Aug. 12, 2005);

--'Liquidity Considerations for Corporate Issuers' (June 12, 2007);

-- Parent and Subsidiary Rating Linkage?(June 19, 2007);

--'Corporate Rating Methodology' (Nov. 24, 2009);

-- Rating Oil and Gas Exploration and Production Companies (April 6, 2010);

-- Corporate Pensions Criteria- EMEA and Asia-Pacific (April 15, 2010).

Additional information is available at 'www.fitchratings.com'

Related Research:

Rating Corporates Above the Country Ceiling

http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=246654

Liquidity Considerations for Corporate Issuers

http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=328666

Parent and Subsidiary Rating Linkage Criteria Report

http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=534826

Corporate Rating Methodology

http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=489018

Rating Oil and Gas Exploration and Production Companies: Sector Credit Factors

http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=509845

Corporate Pensions Criteria - EMEA and Asia-Pacific

http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=513665

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