Fitch Unlikely to Alter Petrobras Credit Rating

RIO DE JANEIRO - Brazilian state-run energy giant Petrobras is borrowing heavily to develop massive new oil fields, but the investments should result in a cash surge that offsets any concerns about the recent rise in the company's debt levels, said Ana Paula Ares, senior director of corporate finance at Fitch Ratings.

Petrobras's finances have come under increasing scrutiny after a series of billion-dollar losses in the company's refining unit, which has been hurt by subsidized imports of gasoline and diesel fuel. The company sells the expensive imported fuels at a loss in the domestic market because of government reluctance to raise fuel prices for fear of stoking inflation.

The losses have undermined Petrobras's earnings and called into question the company's ability to carry out ambitious plans to spend $237 billion through 2016 developing some of the largest oil discoveries made in the past 20 years. With Petrobras spending more than it makes, net debt jumped more than 30% in 2012 from 2011 while the company's cash on hand--once flush with proceeds from a $70 billion share offer in 2010--fell more than 20% to $13.5 billion.

Still, "the deterioration was pretty much in line with what we were expecting," Ms. Ares said in an interview. "At this point, it doesn't impact the rating." Petrobras is in the midst of a significant exploration and investment program, so the increased leverage isn't necessarily a red flag, she added.

Fitch rates Petrobras triple-B with a stable outlook, two notches into investment grade and the same as Brazil's sovereign credit rating. While Ms. Ares doesn't anticipate any changes to the rating over the next 12 to 18 months, a change in the outlook for Brazil's sovereign rating to negative or an unexpected event could lead Fitch to re-evaluate Petrobras, she said.

Part of the credit-rating agency's confidence in Petrobras is based on its potential to quickly boost crude-oil production and reserves in coming years, Ms. Ares said. Petrobras's long history of exploration success, especially the discovery of multibillion-barrel oil fields buried under a thick layer of salt off Brazil's coast, make the company unique among its state-run and private-sector peers, she said.

Petrobras is "able on a yearly basis to replace in reserves the volume it has produced," Ms. Ares noted. Petrobras said that it ended 2012 with reserves of 12.3 billion barrels of oil-equivalent under Securities and Exchange Commission criteria, enough to keep Petrobras pumping oil for 15 years if it never discovered another drop. But the reserve figures currently include only a fraction of the newfound fields and should grow dramatically in coming years.

Petrobras is counting on the new fields to more than double current output to 4.2 million barrels per day by 2020. Fitch, meanwhile, expects crude oil production to start picking up in 2015, which should lead to a recovery in the company's finances as the new output generates cash, according to Ms. Ares.

The political tussle over domestic fuel prices, however, has Fitch watching closely, Ms. Ares said. Fuel-price increases granted in January and last year aren't enough to reverse Petrobras's losses on imports, but the hikes do suggest that the government is paying attention to Petrobras's losses, she said.

"There is a strong incentive for the government to have Petrobras performing and repaying its debt because of the significant financing resources Petrobras will need in coming years to fund its investments," Ms. Ares said.

Petrobras has faced similar situations where it lost money on imports in the past, only to later reap the rewards of selling local fuels at higher prices when international crude oil and fuel prices fell, she noted. The government's focus on fighting inflation, however, means future price hikes are uncertain.

"How politics play out this year will decide whether those price increases will come or not," Ms. Ares said.

Copyright (c) 2012 Dow Jones & Company, Inc.

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