News Column

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

June 27, 2014



CHICAGO--(BUSINESS WIRE)-- 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.

Additional information is available at 'www.fitchratings.com'.

Applicable Criteria and Related Research:

--'Corporate Rating Methodology' (May 2014);

--'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

http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=749393

Rating Oil and Gas Production Companies

http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=682334

ALL FITCH CREDIT RATINGS ARE SUBJECT TO CERTAIN LIMITATIONS AND DISCLAIMERS. PLEASE READ THESE LIMITATIONS AND DISCLAIMERS BY FOLLOWING THIS LINK: HTTP://FITCHRATINGS.COM/UNDERSTANDINGCREDITRATINGS. IN ADDITION, RATING DEFINITIONS AND THE TERMS OF USE OF SUCH RATINGS ARE AVAILABLE ON THE AGENCY'S PUBLIC WEBSITE 'WWW.FITCHRATINGS.COM'. PUBLISHED RATINGS, CRITERIA AND METHODOLOGIES ARE AVAILABLE FROM THIS SITE AT ALL TIMES. FITCH'S CODE OF CONDUCT, CONFIDENTIALITY, CONFLICTS OF INTEREST, AFFILIATE FIREWALL, COMPLIANCE AND OTHER RELEVANT POLICIES AND PROCEDURES ARE ALSO AVAILABLE FROM THE 'CODE OF CONDUCT' SECTION OF THIS SITE. FITCH MAY HAVE PROVIDED ANOTHER PERMISSIBLE SERVICE TO THE RATED ENTITY OR ITS RELATED THIRD PARTIES. DETAILS OF THIS SERVICE FOR RATINGS FOR WHICH THE LEAD ANALYST IS BASED IN AN EU-REGISTERED ENTITY CAN BE FOUND ON THE ENTITY SUMMARY PAGE FOR THIS ISSUER ON THE FITCH WEBSITE.



Fitch Ratings

Primary Analyst

Lucas Aristizabal, +1 312-368-3260

Senior Director

Fitch Ratings, Inc.

70 West Madison Street

Chicago, IL 60602

or

Secondary Analyst

Mauro Storino, +55-11-4504-2625

Senior Director

or

Committee Chairperson

Daniel Kastholm, +1 312-368-2070

Managing Director

or

Media Relations:

Elizabeth Fogerty, +1 212-908-0526

elizabeth.fogerty@fitchratings.com

Source: Fitch Ratings


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