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Rating Action:

Moody's downgrades Petrobras long-term debt ratings to Baa1

 The document has been translated in other languages

03 Oct 2013

New York, October 03, 2013 -- Moody's Investors Service downgraded Petrobras S.A.'s (Petrobras) global foreign currency and local currency debt ratings to Baa1 from A3. The downgrade reflects Petrobras's high financial leverage and the expectation that the company will continue to have large negative cash flow over the next few years as it pursues its capital spending program. The outlook remains negative.

"We see Petrobras's leverage to be nearing peak levels in 2013 and 2014, significantly higher than those of its industry peers and only likely to decline in 2015 and beyond. Successful execution on its ambitious capital program and delivery on aggressive production targets will be key to reducing leverage in the next few years and to stabilizing the rating outlook," said Thomas Coleman, Senior Vice President.

Downgrades:

..Issuer: Petrobras Argentina S.A.

....Senior Unsecured Regular Bond/Debenture May 15, 2017, Downgraded to Baa1 from A3

..Issuer: Petrobras Global Finance B.V.

....Multiple Seniority Shelf Aug 28, 2015, Downgraded to (P)Baa1 from (P)A3

....Multiple Seniority Shelf Aug 28, 2015, Downgraded to (P)Baa2 from (P)Baa1

....Senior Unsecured Regular Bond/Debenture May 20, 2016, Downgraded to Baa1 from A3

....Senior Unsecured Regular Bond/Debenture Jan 15, 2019, Downgraded to Baa1 from A3

....Senior Unsecured Regular Bond/Debenture Oct 1, 2029, Downgraded to Baa1 from A3

....Senior Unsecured Regular Bond/Debenture May 20, 2016, Downgraded to Baa1 from A3

....Senior Unsecured Regular Bond/Debenture Jan 15, 2019, Downgraded to Baa1 from A3

....Senior Unsecured Regular Bond/Debenture May 20, 2023, Downgraded to Baa1 from A3

....Senior Unsecured Regular Bond/Debenture May 20, 2043, Downgraded to Baa1 from A3

....Senior Unsecured Regular Bond/Debenture Apr 1, 2019, Downgraded to Baa1 from A3

....Senior Unsecured Regular Bond/Debenture Oct 2, 2023, Downgraded to Baa1 from A3

..Issuer: Petrobras International Finance Company

....Multiple Seniority Shelf Aug 28, 2015, Downgraded to (P)Baa1 from (P)A3

....Multiple Seniority Shelf Aug 28, 2015, Downgraded to (P)Baa2 from (P)Baa1

....Multiple Seniority Shelf, Downgraded to (P)A3 from (P)A2

....Multiple Seniority Shelf, Downgraded to (P)Baa1 from (P)A3

....Multiple Seniority Shelf, Downgraded to (P)Baa2 from (P)Baa1

....Senior Unsecured Regular Bond/Debenture Mar 1, 2018, Downgraded to Baa1 from A3

....Senior Unsecured Regular Bond/Debenture Feb 6, 2015, Downgraded to Baa1 from A3

....Senior Unsecured Regular Bond/Debenture Jan 27, 2021, Downgraded to Baa1 from A3

....Senior Unsecured Regular Bond/Debenture Feb 6, 2017, Downgraded to Baa1 from A3

....Senior Unsecured Regular Bond/Debenture Jan 27, 2041, Downgraded to Baa1 from A3

....Senior Unsecured Regular Bond/Debenture Dec 10, 2018, Downgraded to Baa1 from A3

....Senior Unsecured Regular Bond/Debenture Dec 14, 2026, Downgraded to Baa1 from A3

....Senior Unsecured Regular Bond/Debenture Mar 15, 2019, Downgraded to Baa1 from A3

....Senior Unsecured Regular Bond/Debenture Jan 20, 2020, Downgraded to Baa1 from A3

....Senior Unsecured Regular Bond/Debenture Jan 20, 2040, Downgraded to Baa1 from A3

....Senior Unsecured Regular Bond/Debenture Sep 15, 2014, Downgraded to Baa1 from A3

....Senior Unsecured Regular Bond/Debenture Jan 27, 2016, Downgraded to Baa1 from A3

....Senior Unsecured Regular Bond/Debenture Jan 27, 2021, Downgraded to Baa1 from A3

....Senior Unsecured Regular Bond/Debenture Jan 27, 2041, Downgraded to Baa1 from A3

....Senior Unsecured Regular Bond/Debenture Oct 6, 2016, Downgraded to Baa1 from A3

....Senior Unsecured Regular Bond/Debenture Mar 7, 2022, Downgraded to Baa1 from A3

....Senior Unsecured Regular Bond/Debenture Mar 7, 2018, Downgraded to Baa1 from A3

..Issuer: Petroleo Brasileiro S.A. - PETROBRAS

.... Issuer Rating, Downgraded to Baa1 from A3

....Multiple Seniority Shelf Aug 28, 2015, Downgraded to (P)Baa1 from (P)A3

....Multiple Seniority Shelf Aug 28, 2015, Downgraded to (P)Baa2 from (P)Baa1

....Multiple Seniority Shelf Aug 28, 2015, Downgraded to (P)Baa3 from (P)Baa2

....Multiple Seniority Shelf, Downgraded to (P)Baa1 from (P)A3

....Multiple Seniority Shelf, Downgraded to (P)Baa1 from (P)A3

....Multiple Seniority Shelf, Downgraded to (P)Ba1 from (P)Baa3

....Multiple Seniority Shelf, Downgraded to (P)Baa2 from (P)Baa1

Outlook Actions:

..Issuer: Petrobras Argentina S.A.

....Outlook, Remains Negative

..Issuer: Petrobras Global Finance B.V.

....Outlook, Remains Negative

..Issuer: Petrobras International Finance Company

....Outlook, Remains Negative

..Issuer: Petroleo Brasileiro S.A. - PETROBRAS

....Outlook, Remains Negative

With the largest capital program among its peers, Petrobras's spending in 2013 could be almost double its internally generated cash flow. The company's total debt liabilities increased in the first half of 2013 by $16.3 billion, or $8.36 billion net of cash and marketable securities, and should increase again in 2014, based on an outlook for negative cash flow through 2014 and into 2015.

Leverage metrics have increased steadily and are elevated, with Total Debt/EBITDA of 3.8x, Debt/Proved Reserves of $11.25/BOE, and Debt/Daily Production approaching $64,000/BOE, the highest among its peer group of integrated and national oil companies.

CEO das Gracas Foster is leading a revised capital program focused on project execution and delivery, as well as cost controls that will help contain capital increases and realize production growth. The program includes new production units coming onstream in 2013 and 2014, the staged delivery of a fleet of drilling rigs to advance exploration and development in both the post and pre-salt zones, and major refinery expansions.

While noting the company's progress in bringing new units online to increase production, it also will continue to face significant execution risk on a plan targeting production to reach 3 million BOE/day in 2016 and 5.2 MM BOE/day in 2020. In addition to the inherent geological and technological challenges of the deepwater, the company faces staging, delivery and delay risks on drilling and development, which could be exacerbated by mandates to meet local content requirements.

Petrobras's funding needs and leverage will also be pressured by continuing losses in its downstream operations. Petrobras's refineries are running at higher rates and are increasing output in 2013, reducing the need for product imports, and the government has granted a series of price increases on regulated product prices. Still, the downstream is generating sizeable losses and it is not clear whether sufficient further price increases will be forthcoming, given political pressures on the government and its focus on controlling inflation.

Petrobras's Baa1 ratings are supported by its large-scale reserve base and dominance in the Brazilian oil industry with a leading position in one of the industry's most prospective offshore areas, and by its sizeable new pre-salt discoveries and technological expertise. In addition, the company's focus on project execution and cost reduction should ease some of the cost overrun issues and delays it has experienced in the past.

Petrobras's Baa1 rating reflects government support and the impact of joint-default analysis. Underlying the ratings downgrade, Moody's has lowered Petrobras's baseline credit assessment to baa2 from baa1, reflecting its rising leverage profile and execution risk. We are maintaining assumptions of high support from the government of Brazil (rated Baa2 with a stable outlook) and moderate dependence, or default correlation between Petrobras and the government.

While government support continues to provide one notch of uplift, we note increasing linkages between Petrobras and the sovereign. The government is playing a larger oversight role in Petrobras's strategic direction and offshore development, and is promoting local content and other initiatives that will have an impact on its development program. Petrobras's financing arrangements include strong ties to BNDES, the state development bank, which is also closely involved as a holder in Sete Brasil, the new entity charged with overseeing development of the Brazilian based offshore rig fleet that will be contracted to Petrobras.

We are maintaining a negative outlook on Petrobras's ratings to assess the company's execution on its capital program and achievement of targeted production growth, as well as the trend in leverage, which should begin to decline after 2014.

The ratings could be downgraded as result of limited progress adjusting and finding flexibility in the capital program, if financial leverage increases and is sustained with Debt/EBITDA above 4x, or if production growth falls short of targets. Increased government linkages could also result in the convergence of the ratings with the sovereign rating.

We do not see momentum for an upgrade in the near-to-medium term. In the longer-term it could be upgraded as it delivers on rising and profitable production and reserves growth, with a decline in the leverage profile, in conjunction with a higher rating on Brazil's government debt.

The principal methodology used in this rating was the Global Integrated Oil & Gas Industry Methodology published in November 2009. Other methodologies used include the Government-Related Issuers methodology published in July 2010. Please see the Credit Policy page on www.moodys.com for a copy of these methodologies.

REGULATORY DISCLOSURES

For ratings issued on a program, series or category/class of debt, this announcement provides certain regulatory disclosures in relation to each rating of a subsequently issued bond or note of the same series or category/class of debt or pursuant to a program for which the ratings are derived exclusively from existing ratings in accordance with Moody's rating practices. For ratings issued on a support provider, this announcement provides certain regulatory disclosures in relation to the rating action on the support provider and in relation to each particular rating action for securities that derive their credit ratings from the support provider's credit rating. For provisional ratings, this announcement provides certain regulatory disclosures in relation to the provisional rating assigned, and in relation to a definitive rating that may be assigned subsequent to the final issuance of the debt, in each case where the transaction structure and terms have not changed prior to the assignment of the definitive rating in a manner that would have affected the rating. For further information please see the ratings tab on the issuer/entity page for the respective issuer on www.moodys.com.

For any affected securities or rated entities receiving direct credit support from the primary entity(ies) of this rating action, and whose ratings may change as a result of this rating action, the associated regulatory disclosures will be those of the guarantor entity. Exceptions to this approach exist for the following disclosures, if applicable to jurisdiction: Ancillary Services, Disclosure to rated entity, Disclosure from rated entity.

Regulatory disclosures contained in this press release apply to the credit rating and, if applicable, the related rating outlook or rating review.

Please see www.moodys.com for any updates on changes to the lead rating analyst and to the Moody's legal entity that has issued the rating.

Please see the ratings tab on the issuer/entity page on www.moodys.com for additional regulatory disclosures for each credit rating.

Thomas S Coleman
Senior Vice President
Corporate Finance Group
Moody's Investors Service, Inc.
250 Greenwich Street
New York, NY 10007
U.S.A.
JOURNALISTS: 212-553-0376
SUBSCRIBERS: 212-553-1653

Steven Wood
MD - Corporate Finance
Corporate Finance Group
JOURNALISTS: 212-553-0376
SUBSCRIBERS: 212-553-1653

Releasing Office:
Moody's Investors Service, Inc.
250 Greenwich Street
New York, NY 10007
U.S.A.
JOURNALISTS: 212-553-0376
SUBSCRIBERS: 212-553-1653

Moody's downgrades Petrobras long-term debt ratings to Baa1
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