Wednesday, 4 February 2009

Is Petrobras Capable of Managing Extra Leverage in Coming Years? Moody's Thinks So

Gabrielli: For now, his debt strategy
isn't drawing much criticism ... for now ...

Moody's Investors Service said Petrobras's Baa1 ratings won't be modified nor revised following the company's increase in its five-year spending plan and its substantial projected debt financing needs in the next two years. Petrobras recently announced a revised long-term capital plan for 2009-2013 totaling $174.4 billion, a 55 percent increase over the prior plan.

The company is projecting that funding needs may reach more than $18 billion per year in each of 2009 and 2010, including debt amortizations and new debt incurred.
''We believe that a large portion of the debt increase can be accommodated within the company's current budget,´´ said Moody's. Part of that debt increase will be obtained with support via long-term BNDES financing. The problem is ramping up capital and upstream/downstream projects spending in a highly uncertain oil and gas pricing environment: capital spending is budgeted at approximately $28 billion in 2009 and higher in 2010.

''The cash flow deficits and implied financing needs will be large and well in excess of our earlier estimates of $8-$10 billion in incremental debt financing for Petrobras in 2009,´´
says Moody's. According to the ratings company, the additional debt could push Petrobras's proforma total debt to capitalization ratio to over 40 percent by year-end 2010 from about 20 percent now.

''The potential leverage increase is substantial and Petrobras faces sizable challenges both in arranging financing and relating to geology, technology, access to materials, rigs and services, staging of development, and the political environment,´´ the report said. However, ''the company has the flexibility to adjust capital spending and other means to manage leverage in response to changing industry conditions.´´

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