Ratings firms fret over cost of Petrobras' new Brazil oil rights

RIO DE JANEIRO, June 27 Fri Jun 27, 2014 12:48pm EDT

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RIO DE JANEIRO, June 27 (Reuters) - Ratings firms expressed concern on Friday about a Brazilian government decision to sell billions of dollars worth of offshore oil rights to Petrobras, saying the move will weigh on the state-run oil company's cash flow and credit-worthiness.

Petroleo Brasileiro SA, as the company is formally known, was awarded on Tuesday the rights to explore four offshore fields off Brazil's southeast coast believed to contain an estimated 5 billion to 9 billion barrels of oil.

In return, it will pay the government 15 billion reais ($6.85 billion) through 2018. Of that amount, 2 billion reais are going to the Treasury's coffers this year, which will help it try to achieve its fiscal goals despite a weakening economy.

"These payments will put additional burden on Petrobras' already negative free cash flow resulting from its aggressive capex program," Fitch Ratings said in a statement, referring to Petrobras' massive 2014-2017 investment program worth $221 billion.

Fitch said the decision may increase Petrobras' borrowing needs beyond the $15 billion the ratings firm had initially estimated at the beginning of the year.

Under President Dilma Rousseff's government, Petrobras has become the world's most indebted and least-profitable major oil company.

Competing ratings firm Moody's Investors Service said the additional cash demand is "credit negative" for Petrobras, diverting funds the company needs for its investment program and "placing further strain on its credit profile at a time of already high leverage."

Moody's noted that Petrobras remains highly leveraged, with a reported debt/EBITDA ratio of four times as of March. The agency has a negative outlook on Petrobras' rating, which at Baa1 stands three notches into investment grade territory.

Fitch warned it could take negative action on Petrobras' ratings if, for example, its debt/EBITDA ratio grows to more than five times. Fitch currently rates the oil company at BBB-minus, one notch above junk level.

It is crucial for Petrobras to maintain its investment-grade rating to curb interest paid on its huge debt load.

($1 = 2.19 Brazilian reais) (Reporting by Walter Brandimarte; Editing by Paul Simao)

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