Petrobras (PBR) 3Q Statement Exacerbates Uncertainties - Fitch

Petroleo Brasileiro (NYSE: PBR) [BBB/ Stable]) third-quarter financial statement release without assets write-offs prevented the oil company from violating some debt covenants. The decision to delay recording an impairment does not have an immediate credit impact according to Fitch Ratings, although it does prolong the uncertainty surrounding the company's ability to make the necessary adjustments to comply with covenants that require it to report audited year-end financials within 120 days of the period's end, plus a 60-day grace period. The decision to delay also highlights the difficulties of estimating the magnitude of the corruption overpayments and fair value of fixed assets.

The potential magnitude of assets write downs as a result of the scandal could be significant but will not impact the company's cash or cash flow generation. Dividend payment policy could change once the asset write down takes place but will not provide a meaningful reduction in cash outflows as the bulk of the company's negative free cash flow generation results from its large capex plans. Initial estimates reveal a net overpayment of approximately BRL61 billion, or approximately 10% of Petrobras' fixed assets, yet this amount includes both the overpayments related to the corruption scandal as well as other impaired asset charges possibly due to cost overruns associated with inefficiencies of the projects.

Although Fitch expected Petrobras to release its third-quarter results with the impairments, the agency still believes the company would take the necessary steps to comply with its covenant requirements, namely the requirement to release year-end audited financial statements. The corruption scandal surrounding Petrobras' contracting practices holds the potential to negatively affect its credit quality and ratings to the extent that it effects the company's operations and liquidity or should it receive monetary penalties associated with the scandal.

The corruption scandal may affect the company's operations to the extent it affects delivery of production units or the availability of key equipment, namely offshore drilling rigs. The latter risk has been heightened by the company's decision to ban all business groups associated with the scandal from contracting and participating in bids, given that this affects most offshore drilling rig contractors. The company's operations will suffer under a prolonged ban that makes it difficult for Petrobras to procure key equipment for its operations.

Significant uncertainty surrounds potential monetary penalties the company could incur as a result of the scandal, namely as a result of a class action lawsuit against the company initiated by U.S. equity investors. Nevertheless, Petrobras' ability to withstand significant monetary penalties is limited, given the company's weakening capital structure.

For more on this topic please see our report titled, "What Investors Want to Know: Petrobras; Scandal Could Affect Credit Quality," which is available on our website www.fitchratings.com

Contact:

Lucas Aristizabal
Senior Director
Corporates
Fitch Ratings
+1 312 368 3260
70 West Madison Street
Chicago, Illinois

Mauro Storino
Senior Director
Corporates
+55 21 4503-2625

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