Press Release: Fitch: Real's Depreciation to Pressure Petrobras' Cash Flow Generation Absent Price Increase
4:52 pm ET August 10, 2015 (Dow Jones)
The following is a press release from Fitch Ratings:
Fitch Ratings-Chicago-10 August 2015: Petrobras' EBITDA could fall from an annualized rate of approximately USD27.9 billion for the first half of 2015 (1H15) to an annualized rate of USD23.6 billion for 2H15 at the current exchange rate of BRL3.5 per dollar, according to Fitch Ratings. The company reported total financial debt of approximately USD134 billion. Fitch expects company leverage to remain above 5x should the current exchange rate prevail throughout 2H15 and the company keeps liquid fuel prices unchanged.
Although the company reported positive free cash flow (FCF) during 1H15, FCF is expected to be negative during 2H15 as cash flow from operations would be lower at the current exchange rate and capex will be higher in order to reach the USD28 billion in investments planned for the year. Capital expenditures during 1H15 were low at approximately USD12 billion as the company slowed down investments while it dealt with Lava-Jato-related issues. Negative FCF can be covered with cash on hand of approximately USD29.5 billion as of June 30, 2015.
Some mitigating factors for the exchange rate impact are the decrease in Brent prices; this as the company continues being a net importer and has not revised domestic gasoline and diesel prices since November 2014. The company has also stated that a portion of its capex is denominated in Brazilian Reals. Nevertheless, Fitch believes these mitigating factors could be dwarfed by the foreign exchange impact on cash flow from operations if prices are to be maintained at current levels.
Fitch has previously noted as negative rating sensitivities the failure to lower total debt-to-EBITDA to below 5x over the medium term and a lessening in the perception of government support as for Petrobras' ratings. With the possibility of leverage staying above 5x for 2015 and potentially for 2016 if exchange rate and hydrocarbon prices remain bearish, Petrobras' ratings will be largely based on Fitch's current perception of continued strong government support. Petrobras' deleveraging process will rely heavily on the company's expected divestiture process given that organic FCF could remain under pressure during 2015 and 2016.
Petrobras' ratings of 'BBB-'/ 'AAA (bra)', with a Negative Outlook continue to reflect its close linkage with the sovereign rating of Brazil due to the government's control of the company and its strategic importance to Brazil as its near-monopoly supplier of liquid fuels. Absent implicit and explicit government support, Petrobras' credit metrics are not consistent with other large, integrated private sector oil and gas companies that are rated investment grade. The credit linkage of Petrobras to the sovereign is evidenced by the lending commitments offered by Banco do Brasil and Caixa Economica Federal during 1H15 in order to bolster Petrobras' liquidity, as well as maintaining domestic fuel prices above international levles. By law, the federal government must hold at least a majority of Petrobras' voting stock. The government currently owns 60.5% of Petrobras' voting rights, directly and indirectly, and has an overall economic stake in the company of 46%. Petrobras' cash position is strong and sufficient to meet its short-term funding needs.
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