Moody's Cuts Brazil Petrobras Outlook to Negative

RIO DE JANEIRO - Credit-ratings agency Moody's Investors Service said late Monday it has cut its credit outlook for Brazilian state-run energy giant Petroleo Brasileiro SA, citing rising debt levels and growing uncertainty over how quickly the oil company can bring new production on stream.

Moody's changed the outlook for Petrobras to "negative" from "stable" and also questioned how quickly Petrobras can boost cash flow given the company's massive investment plan, rising costs and losses in its refining operations. Petrobras did not respond to requests for comment on the change.

The revised outlook by Moody's comes as the company embarks on a $237 billion spending plan to develop recently discovered offshore oil fields. The potential loss of Petrobras's A3 investment-grade credit rating would increase funding costs amid the capital intensive development of the subsalt, a series of ultra-deepwater oil discoveries made off the country's southeast coast.

While Petrobras holds one of the world's best long-term oil production growth profiles, Moody's said the company has been spending more than it makes and crude oil production has fallen short of targets. Heavy gasoline and diesel imports have sparked losses as Petrobras doesn't pass along increases in international oil prices to consumers at the pump, Moody's also noted.

Petrobras could face a ratings downgrade if the company suffers further production delays, fails to adjust its spending plan or sees financial metrics such as debt-to-cash flow rise, Moody's said. "In the medium-term, the company's ability to reduce costs and manage rising financial leverage will be key to a stable outlook," Moody's said. The company's total debt stood at $91.9 billion at the end of the third quarter.

Moody's shift was not a surprise given Petrobras's recent string of disappointing earnings, said Joao Pedro Brugger, who oversees about $100 million in equities investments at Leme Investimentos. "The questions Moody's raised about government interference, fuel prices and heavy investment spending in coming years have already been in the market for some time," Mr. Brugger said.

Moody's review is "positive" as it may force Petrobras to bolster profitability and cut down on debt, Mr. Brugger added.

In August, Petrobras officials said the company was reviewing investment projects to ensure returns that would help maintain its investment-grade credit rating.

The Brazilian government's increasing role in offshore development and use of Petrobras as a development vehicle via stringent requirements to boost the use of local goods and services also is a concern, Moody's said.

Investors shrugged off the change, pushing Petrobras shares nearly 1% higher in late afternoon trade as Brazil's blue-chip Ibovespa stocks index advanced on optimism over a budget deal in the U.S.


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