CHICAGO--(BUSINESS WIRE)--Fitch Ratings has assigned a 'BBB' rating to Petroleo Brasileiro S.A.'s (Petrobras) proposed senior unsecured notes issuance for USD8.5 billion. The notes, which will have tenures between three and 30 years, will be issued through its wholly owned subsidiary, Petrobras Global Finance B.V. (PGF), and will be unconditionally and irrevocably guaranteed by Petrobras. Proceeds will be used to finance planned capital expenditures and for general corporate purposes.
The expected note issuances are as follows:
--USD3 billion due March 2017;
--USD2 billion due March 2020;
--USD2.5 billion due March 2024;
--USD1 billion due March 2044;
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 long-term Issuer Default Rating [IDR] of '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 as a result of this aggressive capex program in combination with its current trade deficit.
SIGNIFICANT GROWTH POTENTIAL & HIGH CAPEX
Petrobras has significant growth potential in both production and reserves, backed by an ambitious capital investment program of USD220 billion between 2014 and 2018, and recent offshore discoveries. The company has recently affirmed its stated production targets of 3.9 billion barrels of oil equivalent per day (boepd) in 2018 and 5.2 million boepd in 2020. Fitch expects the company to face various challenges to achieve these targets on time, such as securing critical equipment, complying with local content commitments and obtaining significant external financing.
During 2013, Petrobras' production was relatively unchanged from 2012 at an average of 2,539 thousand (m) boepd, and was consistent with Fitch's expectations. Petrobras expects production to increase by 7.5% during 2014 as a result of the new production platforms that recently began operations. The company enjoys a solid asset base reflected in proved oil and gas reserves of 13 billion barrels of oil equivalent (boe) under the U.S. Securities and Exchange Commission definition. In 2013, its three-year reserve replacement ratio (RRR) was 135% and its reserve life was 16 years.
LEVERAGE TO INCREASE, METRICS TO DETERIORATE
Fitch expects the company to have negative free cash flow over the next five years, and to increase leverage as it continues to implement sizable capital investments. The magnitude of such a cash flow deficit will also be affected by domestic pricing policies for refined products, which are currently below international prices. Considering Fitch's price deck, Fitch expects Petrobras' borrowing needs to be above the USD12 billion per year included in the company's business plan. Fitch's Brent price deck is USD96 per barrel for 2014, USD88.5 per barrel in 2015, and USD80 per barrel over the long term.
The company's downstream segment continues to report losses. Although down from those reported during 2012, the refining, transportation and marketing segment reported losses of USD8 billion in 2013. In 2012, Petrobras' metrics were negatively affected by its growing need to import refined products which were sold at prices below its international parity, increasing the company's financing needs. As a result, the company's trade deficit (including refined products and crude oil) grew to USD10.7 billion in 2012, and its refined segment registered a loss before interest and taxes of USD17.5 billion in 2012.
The trade imbalance is expected to persist over the medium term due to the growing domestic demand for refined products, but 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 and eliminate losses in the refining segment. Petrobras could withstand a moderate deterioration of its credit protection measures provided the RRR and reserve-to-production ratio remain strong and the regulatory environment does not weaken. Should the Brent price be above Fitch's price deck, credit metrics could recover before 2017.
During 2013, Petrobras' consolidated EBITDA reached approximately USD29.4 billion, relatively flat from the USD27.6 billion reported during 2012. As of Dec. 31, 2013, Petrobras' total adjusted debt, including adjustments for rental expenses and pension obligations and other employee benefits, was USD186 billion. During 2013, the total adjusted net-debt-to-EBITDAR ratio was 4.1x, net financial debt-to-EBITDA ratio was 3.2x, and EBITDA-to-interest expense coverage ratio was 4.5x. Although credit metrics deteriorated, they remain consistent with Fitch expectations.
Fitch believes Petrobras will face challenges to achieving its production growth targets while maintaining its stated credit metrics targets, 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 further monetizes its large oil reserve base and as domestic and refined products prices are aligned with international prices. In addition, the company's initiatives to reduce and control costs are expected to have a positive impact on its cash generation.
Petrobras' strong liquidity provides some comfort in a temporary scenario of deteriorating credit metrics. As of year-end 2013, Petrobras maintained ample liquidity reflected in USD20 billion of cash. This liquidity compares with a short-term debt of USD8 billion. Liquidity is enhanced by the company's cash generation of USD23 billion in funds from operations (FFO). In 2012, FFO was affected negatively by Petrobras' trade deficit of approximately USD10 billion which was due to the increase in the demand for imported products, particularly refined products.
LINKAGE TO THE SOVEREIGN
Over the last few years, changes in oil and gas regulation highlight the increased participation of the government in the sector through Petrobras, which reinforces the linkage between them. This is 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 in every field, a change from the previous concession regime. The first PSA bidding round took place during the month of October 2013 and a single area, the Libra block, was awarded to a consortium of companies in which Petrobras has a 40% interest. The government's support of Petrobras is reflected in the role of state-owned banks in providing sources of financing for Petrobras. As of December 2012, Petrobras' debt with BNDES represented approximately 16% of its total debt. By law, the federal government must hold at least a majority of Petrobras' voting stock. The government currently owns 63.2% of Petrobras' voting rights and has an overall economic stake in the company of 47.6%.
A negative rating action could result from the downgrade of the sovereign, the perception of a lower linkage between Petrobras and the government, and / or a significant weakening of the standalone credit quality of the company absent government support. A positive rating action on Brazil could lead to a positive rating action on Petrobras.
Additional information is available at 'www.fitchratings.com'.
Applicable Criteria and Related Research:
--'Corporate Rating Methodology' (August 2013);
--'Rating Oil and Gas Production Companies' (August 2012).
Applicable Criteria and Related Research:
Corporate Rating Methodology: Including Short-Term Ratings and Parent and Subsidiary Linkage
Rating Oil and Gas Production Companies