Fitch: Brazil's Proposed Regulation May Increase Petrobras' Credit Risk

According to Fitch Ratings, proposed regulation by the Brazilian government for the oil and gas industry could increase the credit risk for Petroleo Brasileiro S.A. (Petrobras), Brazil's national oil company. In a special report issued on Sept. 25, Fitch stated that if the regulation is enacted it would likely increase key risks for Petrobras' credit quality including increasing leverage and political intervention. Petrobras' Rating Outlook is Stable and is not expected to change if the regulation passes.

"While the increase in capitalization of Petrobras appears to be a positive outcome from the proposal, the Brazilian government's non-cash 'equity' contribution of up to five billion boe for Petrobras' common shares does not decrease important credit metrics," said Jose Luis Villanueva, Director at Fitch. "An important leverage measure in the oil and gas sector includes total debt per barrel of proven developed reserves which will likely increase over the medium term as Petrobras increases capital expenditures and possibly funds this with debt to develop these new reserves."

Positively, minority holder's execution of their preemptive rights would help finance the incremental capex requirements as new equity money would come into the company. If the 5 billion boe are valued at US $2.5 per barrel, Petrobras could raise nearly US $20 billion in cash in the secondary public offering.

According to the report, the risk of a potential rating action as a result of the proposed regulations and transfer of deep water reserves from the government to Petrobras holds more downside risk than upside from a credit perspective over the medium-term. Nevertheless, the eventual impact on Petrobras' ratings of the proposed regulation depends on the source of funding of the incremental investment requirements in exploration and production, the pace of the development in the assigned fields, and the valuation of the capitalization of the company.