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Fitch Ratings has affirmed the international foreign currency and Brazilian national scale ratings of Petróleo Brasileiro S.A.'s (Petrobras) at 'BB-' and 'AAA(bra)'. Both ratings have a Stable Outlook.
The ratings of Petrobras are supported by substantial proved hydrocarbon reserves and increasing upstream output, which includes material international operations and should lead to a potential shift to a net export position by early 2006.
Petrobras further benefits from its leadership position in offshore exploration and production, an international product price environment, successful corporate and industry restructuring, a transition to more transparent financial standards, and dominant domestic market shares.
These factors are tempered by vulnerability to fluctuations in international commodity prices, exposure to political interference, currency risk, domestic-market revenue concentration, a debt structure still heavily weighted in foreign-denominated currencies, and significant medium-term capital-investment requirements.
The sovereign's legally protected majority-voting stock position, however, underscores the government's ability to influence corporate strategy and long-term policy decisions.
The combination of ultimate government control and a significant domestic market focus continues to influence the company's stand-alone rating.
Petrobras' financial profile reflects increased flexibility and strong credit-protection measures, which have recently benefited from the global increase in hydrocarbon and product prices.
Fitch recognizes the positive credit effect of market-oriented measures implemented in the last five years as well as improvements in corporate governance.
The opening to private participation and deregulation, strong management commitment to increased financial transparency, corporate reorganization and modernization, and aggressive upstream production development, coupled with value-chain strategies should strengthen credit fundamentals.
While there has been close coordination of business plans with federal authorities, it does not appear to have affected efforts to improve operational efficiencies, increase upstream production volumes, or to adhere to capital discipline guidelines.
Petrobras is in the process of completing the annual revision of its strategic plan, which should be announced in the coming months.
Petrobras ended 2004 with a total consolidated debt of BRL 55.4 billion, of which 13% was classified as short term, and reported improved coverage of short-term obligations.
The company's sizeable BRL 21.6 billion in cash and equivalents resulted in total net debt of BRL 33.8 billion.
Petrobras' management has indicated its preference to maintain a substantial cash balance going forward to minimize its exposure to international capital market volatility.
Petrobras has been successful in employing a strategy aimed at reducing its cost of capital and extending tenors of its debt in recent years.
In 2005, the company expects to increase production by nearly 14% with new platforms coming on line throughout the year, resulting in increased revenue and cash flow that should limit the company's reliance on external borrowings.
The company's 2005 production goal seems achievable given the ramping up of new platforms and its announced record production of 1.66 million barrels per day in March 2005.
Petrobras reported total debt/EBITDA of 1.5 times (x) and EBITDA/interest expense of 13.6x under Brazilian GAAP for 2004, slightly higher than 2003 measures, reflecting improved EBITDA partially offset by higher average debt levels and interest expense.
These ratios do not incorporate significant cash and equivalents of BRL 21.6 billion related to the company's financial strategy to minimize near-term liquidity constraints.
Results for 2004 were characterized by stable production levels, increased imports, and lagging increases in domestic prices, which averaged $33.49/bbl (vs. average Brent price of $38.21/bbl).
Petrobras is one of the 20 largest oil companies in the world and remains Brazil's dominant domestic upstream producer, generating 96% of domestic oil production.
Petrobras is an integrated international oil and gas company engaged in the exploration, development and production of hydrocarbons and in the refining, marketing, transportation, and distribution of oil and a wide range of petroleum products, petroleum derivatives, petrochemicals, and liquid petroleum gas.
By law, the federal government must hold a majority of Petrobras' voting stock, and since 2001 has retained 40% of Petrobras's total capital and 58% of its voting capital.
Fitch Ratings
www.fitchratings.com
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