S&P/Odebrecht Oleo e Gas Ratings Lowered To ‘BB-‘ From ‘BB+’ On Petrobras’ Weaker Stand-Alone Credit Profile

S&P/Odebrecht Oleo e Gas Ratings Lowered To ‘BB-‘ From ‘BB+’ On Petrobras’ Weaker Stand-Alone Credit Profile

Publication date: 24-Mar-2015 13:56:02 EDT
  • On March 23 2015, we affirmed our ‘BBB-‘ corporate credit rating on Brazil-based integrated oil and gas company, Petrobras, and revised downward our stand-alone credit profile (SACP) on the company to ‘b+’ from ‘bb’.
  • Petrobras’ SACP reflects our expectations for weaker cash flow generation and a more leveraged balance sheet in 2015 and 2016 due to its at least temporarily restricted market access to international financing, a delayed production curve, and the recent Brazilian real devaluation.
  • As a result, we downgraded Brazilian oil and gas drillship provider OOG to ‘BB-‘ from ‘BB+’ and revised downward the SACP on the company to ‘b+’ from ‘bb’. The outlook is stable.
SAO PAULO (Standard & Poor's) March 24, 2015--Standard & Poor's Ratings 
Services lowered the corporate credit rating on Odebrecht Oleo e Gas S.A. 
(OOG) to 'BB-' from 'BB+'. At the same time, we lowered the issue-level rating 
on the company's perpetual bonds to 'BB-' from 'BB+' and revised downward the 
SACP to 'b+' from 'bb'. The outlook is stable.

"Our ratings on OOG are based on its ability to meet financial obligations at 
the holding level thanks to dividend distributions coming from its operating 
subsidiaries," said Standard & Poor's credit analyst Candela Macchi. The 
downgrade on the company follows the revision on Petroleo Brasileiro S.A. - 
Petrobras' (Petrobras) SACP, which in turn reflects a deterioration in the 
quality of OOG's cash flows. Petrobras chartered all of the vessels owned by 
OOG under long-term contracts with tenors that range between seven and 10 
years. We believe these contracts constitute the key driver of the credit 
quality of its operating assets. Therefore, given the deterioration of the 
counterparty, we have revised our assessment of OOG's quality of cash flow 
(QCF) to "moderately stable and predictable" from "highly predictable," which, 
given our unchanged expectations for OOG's financial metrics, result in OOG's 
'b+' SACP. The 'BB-' rating on OOG incorporates its 'b+' SACP and a one-notch 
uplift due to potential support from the Odebrecht S.A. group (OSA; not 
rated). The potential support continues to stem from our assessment of the 
somewhat strategic role that OOG plays in the group, the incentives for the 
parent company to support the subsidiary under distress, and the financial 
flexibility that the group provides to the subsidiary. We believe OOG is 
unlikely to be sold in the near term.

The 'BBB-' corporate credit rating on Petrobras now incorporates its 'b+' SACP 
and our view of the "very high likelihood" of support from the government in 
the event of financial distress. We equalized the counterparty risk of OOG's 
operating projects to Petrobras' SACP, and not to the credit rating on it, 
because, in our view, the SACP reflects the risk associated with the nature of 
these contractual obligations. Although we believe the sovereign will provide 
extraordinary support to Petrobras (for example, through liquidity injections, 
loans from government-owned banks, or other types of facilities), this 
extraordinary support won't necessarily flow on a timely basis to meet the 
drillship suppliers' liabilities.

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