RPT-Fitch: Assignment of Surplus Volume to Pressure Petrobras' Cash Flow

Fri Jun 27, 2014 9:22am EDT

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June 27 (Reuters) - (The following statement was released by the rating agency)

The Brazilian government's decision to assign the production of the excess volume of the transfer of right areas to Petrobras will further pressure the company's cash flow generation ability and weaken its stand-alone credit quality, according to Fitch Ratings. The government's decision calls for a BRL2 billion bonus payment to the government during 2014 and anticipation of BRL13 billion of profits to the government between 2015 and 2018, significantly before any oil is produced from the assigned areas. These payments will put additional burden on Petrobras' already negative free cash flow resulting from its aggressive capex program.

These payments, coupled with the expected downstream losses for this year and moderate production growth during 2014, would negatively impact the company's internal cash flow generation and increase reliance on borrowings. Considering Fitch's price deck, Fitch expected that at the beginning of this year Petrobras' borrowing needs would be around USD15 billion, on average, over the medium term. These recent developments could increase the company's needs for external funding beyond this estimate.

Factors that could result in a negative action on Petrobras' ratings, independent of a sovereign downgrade, include the perception of a lower linkage between Petrobras and the government, together with a sustained weakening of the stand-alone credit metrics. Qualitative factors that could pressure Petrobras' ratings include a sustained increase in leverage to a total debt/EBITDA ratio of more than 5.0x. Also, lack of capital market access to fund negative FCF would be detrimental, as well as failure to increase production over the medium term.

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