Fitch Rates Petrobras' USD6B Proposed Notes 'BBB'

BUENOS AIRES, Argentina--(BUSINESS WIRE)--Fitch Ratings has assigned a 'BBB(exp)' rating to Petrobras International Finance Company's (PifCo) proposed senior unsecured global notes due in 2015, 2017. Fitch has also assigned a 'BBB(exp)' rating to Pifco's proposed add-on issuance of senior unsecured note in a reopening of its 5.375% notes due in 2021 and of its 6.750% notes due in 2041 to new and existing investors.

The total amount of the issuances should be approximately USD6 billion. The notes will be unconditionally and irrevocably guaranteed by Petroleo Brasileiro S.A. (Petrobras). Proceeds will be used to fund Petrobras' capital expenditure program and for general corporate purposes.

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. Fitch's long-term Issuer Default Rating (IDR) for Brazil is 'BBB' with a Stable Outlook. The rating also incorporates Petrobras' sustained production growth track record, as well as significant growth prospects for the company's reserves, after substantial discoveries in recent years.

The ratings are tempered by Petrobras' exposure to local political interference and its significant medium-term capital-investment program, along with vulnerability to fluctuations in international commodity prices, currency risk, and domestic market revenue concentration. Petrobras' growth strategy is considered aggressive and could prove challenging. Also, credit metrics are expected to deteriorate as a result of an incremental increase in leverage. Petrobras' ample liquidity, its proven access to the financial markets, and the expectation that credit metrics will recover once the company significantly monetizes its large oil reserve base somewhat mitigates these risks.

Petrobras reported EBITDA and funds from operations (FFO) of approximately USD37.7 billion and USD31.9 billion, respectively, for the last 12 months ended September 2011. Total financial debt as of Sept. 30, 2011 increased to USD77.9 billion from USD69.7 billion as of December 2010, with a total adjusted debt (including adjustments for rental expenses and pension obligations) of USD139.3 billion. As of September 2011, liquidity was USD29.2 billion versus short-term debt of USD10.3 billion. Credit metrics remain within Fitch's expectations, with a total adjusted debt-to-EBITDAR ratio of 3.1 times (x), net debt-to-EBITDA of 1.3x and EBITDAR-to-interest and rental expense of 3.6x. Capital expenditures remain high for the company, amounting to approximately USD43 billion over the last 12 months (LTM) ended Sept. 30, 2011.

The company's credit metrics are expected to be pressured by aggressive capital investments to increase production, supported by recent discoveries. Petrobras expects to invest USD225 billion between 2011 and 2015 to increase production to 4 million barrels of oil equivalent per day (Mboe/d) in 2015 from 2,610 Mboe/d as of October 2011. Fitch believes that Petrobras will face challenges in meeting these goals within the aforementioned timeframe, while maintaining its stated credit metrics targets. These include a maximum net debt-to-capitalization of 35% and a net debt-to-EBITDA ratio of 2.5x. Petrobras will require external funding to fully implement its investment program. Fitch sees in 2015 net debt-to-EBITDAR and fixed-charge coverage in excess of Petrobras' targets but anticipates that the incremental increase in cash flow from investments will gradually improve credit metrics after 2015.

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 company's medium-term focus on investment.

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. As of December 2010, the company had proved reserves of approximately 12.7 billion barrels of oil equivalent (boe), 14 years of reserves, and had improved its reserve replacement ratio to 212%.

Additional information is available at 'www.fitchratings.com'. The ratings above were solicited by, or on behalf of, the issuer, and therefore, Fitch has been compensated for the provision of the ratings.

Applicable Criteria and Related Research:

--'Corporate Rating Methodology', dated Aug. 12, 2011;

--'Rating Oil and Gas Exploration and Production Companies', dated April 5, 2011;

--'Parent and Subsidiary Rating Linkage', dated Aug. 12, 2011.

Applicable Criteria and Related Research:

Corporate Rating Methodology

http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=647229

Rating Oil and Gas Exploration and Production Companies

http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=645090

Parent and Subsidiary Rating Linkage

http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=647210

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