June 7, 2013 / 8:11 PM / in 5 years

UPDATE 2-Petrobras expects its asset base to uphold debt rating

* CEO Foster expects “investment grade” rating to stick

* Petrobras sees weaker currency as temporary problem

* Company preparing for new oil auctions in Oct., Nov.

By Jeb Blount and Sabrina Lorenzi

RIO DE JANEIRO, June 7 (Reuters) - The solid and expanding assets of Brazilian oil company Petroleo Brasileiro SA will be enough to uphold the company’s investment-grade debt rating, Chief Executive Officer Maria das Graças Foster told reporters on Friday.

The outlook for debt at Petrobras, as the company is known, along with other Brazilian corporate bond issuers and Brazil’s government, was downgraded to “negative” from “stable” Thursday by Standard & Poor’s rating service.

S&P cited weak Brazilian growth and confusion about the direction of government economic policy as reasons for the downgrade. Petrobras’ debt is rated BBB by S&P. On March 31 Petrobras had net debt, or debt minus cash, of $74.8 billion. Most of its debt, 96 percent, is long-term, or due in more than one year.

Petrobras debt is soaring as it tries to finance a $237 billion, five-year expansion plan, the world’s largest corporate investment program, as production declines and the government forces it to subsidize domestic fuel prices.

In December debt levels jumped above its own internal “limit” of 2.5 times cash flow as measured by earnings before interest, taxes, depreciation and amortization, or EBITDA.

“We are confident that whatever happens we will maintain our investment-grade rating,” Foster told reporters after an event in Rio de Janeiro.

She also said she is not very concerned about the Brazilian real’s 4.2 percent weakening against the dollar this year, a slide that forces the company to generate more local currency to pay for each dollar of foreign debt and increases the cost of imports and subsidies of gasoline, diesel and cooking gas.

“The devaluation causes a momentary concern, and I say that knowing that it also has some good impacts on other aspects of the economy,” she said, adding that the company’s 2013-2017 investment plan foresees an average exchange rate of 1.85 reais to the dollar.

On Thursday, the real traded at 2.1359 reais to the dollar on Tuesday, 13 percent less than Petrobras’ long-term outlook. Most of the company’s debt, 79 percent, is in dollars, indexed to the dollar or in other foreign currencies.

The fuel subsidies are the result of the government refusing to let Petrobras raise fuel prices in line with world prices, part of an effort to rein in inflation which reached 6.5 percent in May, Brazil’s statistics agency said on Thursday.

The assets behind Foster’s confidence in her company’s debt rating and ability to pay its obligations include existing and new oil fields, refineries and expected revenue from the sale of foreign operations. The company plans to bring seven offshore oil production platforms on line this year, boosting output capacity.

This new output, plus three new production platforms coming on line in 2014 and 2015, will boost output by about a third to 2.75 million barrels a day in 2015, making the company’s cash-flow positive, she said.

While the company cannot formally count recently discovered resources as commercially viable assets, she said the company’s reserves are likely to double to 31.5 billion barrels soon.

“This is a company with so much potential, I can’t see how we won’t succeed,” she said.


Foster also said the company is in the midst of planning for the next two oil and natural gas rights auction scheduled for Brazil in October and November.

An oil auction scheduled for October will sell the country’s first ever production-sharing contract. The contract will give rights to the giant Libra prospect in Brazil’s Subsalt Polygon near Rio de Janeiro. The field is believed to hold up to 12 billion barrels of recoverable oil.

The Subsalt Polygon is a legal region where all future oil contracts will be given to producers offering the Brazilian government the largest share of oil from the area to sell on its own account.

The Polygon covers most of Brazil’s Campos and Santos basins, home to more than 80 percent of the country’s current oil output. Santos is also home to several giant discoveries far beneath the seabed below a thick layer of salt rock.

Under the auction rules, Petrobras will be required to take a minimum 30 percent stake in the group that wins Libra, pay 30 percent of all investment costs and serve as the area’s operator.

Petrobras is also looking at ways to bid for a larger portion of the blocks and seeking partners for the auction, Foster said. Even if its group loses, it will have to take the minimum 30 percent stake.

The company is also preparing for a natural gas auction scheduled for November. The areas on offer will be on-shore fields and include many shale-gas prospects.

Petrobras’ biggest task is looking at ways to transport and use any gas discovered in areas it wins at auction, she said.

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