Fitch: Petrobras Corruption Scandal Pressuring Credit Quality
Recent allegations of corruption scandals in Petroleo Brasileiro S.A.’s (Petrobras) contracting practices hold the potential to affect its credit quality to the extent it slows production growth, affects access to debt capital markets, and receives monetary penalties according to Fitch Ratings.
Petrobras’ credit quality is sensitive to its production growth to bolster cash flow generation and reduce leverage while access to debt capital markets is also critical in the medium term, given Petrobras’ reliance on them to fund investments and to refinance debt
Production growth is necessary in order to maintain current rating. Petrobras’ rating case assumes production will grow to 3.5 million barrels of oil equivalent per day (boed) by 2018 from current 2.78 million boed yet below the company’s 3.9 million boed target for 2018. Future production is highly dependent on incorporating 37 new production units between 2013 and 2018. Petrobras’ ratings incorporate a six-month delay in future production units’ deliveries. Every additional six-month delay reduces 2018 estimates by around 300,000 boed and an average 12-18 month delay could result in a negative rating action
Capex is rigid in the short term and will pressure Petrobras’ ratings if cash flow generation does not improve and if it continues issuing debt to fund capex. Capex for 2014-2018 is projected to amount to USD207 billion-USD221 billion of which USD176 billion has been committed and is under implementation. At the beginning of 2014, approximately USD45 billion of this capex was still under bidding process or under evaluation and related to projects for 2017 and 2018.
Petrobras’ credit quality could deteriorate should it fail to adjust prices to reflect movement in the foreign exchange rate (FX) and/or international crude prices. The company is exposed to FX risk, as revenues are mostly linked to BRL and most debt is in USD. Fitch’s rating case includes an exchange rate of BRL to 2.5-2.6 per USD. A severe devaluation, for example to 4 BRL per USD, that is not matched with price increases could prolong downstream losses and high leverage. FX risk is somewhat mitigated by BRL denominated capex.
As Petrobras is exposed to international hydrocarbon price downturns, its ability to implement rapid domestic price increases to offset sharp changes to either international oil prices or movements in the FX rate is limited. This limitation results from the political pressure, especially during high inflationary pressure or electoral periods. Petrobras recently announced 3% and 5% price increases to gasoline and diesel, respectively, the only price increase in 2014. This was not enough to offset the 14% BRL devaluation experience this year. A sustained Brent price below USD65 could pressure the company’s ratings.
Source: Fitch Ratings – Fitch: Petrobras Corruption Scandal Pressuring Credit Quality
