Petrobras Oil Delays Seen by Fitch as Possible Rate-Cut Trigger

Petrobras Oil Delays Seen by Fitch as Possible Rate-Cut Trigger

By Sebastian Boyd Peter Millard

12:17 PM BRT
March 26, 2015

(Bloomberg) — Petroleo Brasileiro SA, the biggest oil producer in deep waters, risks losing its investment-grade credit rating if it fails to complete deep-water production vessels fast enough to accelerate output, said Joe Bormann, head of Latin American corporates at Fitch Ratings.

Delivering on production growth is more important for the state-controlled oil company’s ratings than fluctuations in oil prices or the value of the local currency, Bormann said in an interview Wednesday at Bloomberg’s Santiago offices. Fitch is tracking Rio de Janeiro-based Petrobras’ progress in getting floating, production, storage and offloading vessels, or FPSOs, delivered on schedule, he said.

“One of the key drivers to putting the company on a sustainable path is increased volumes, principally, output of 3.5 million barrels a day by 2018,” Bormann said. “If we felt that problems at the shipyards might threaten the completion of the FPSOs, that could be a trigger for a downgrade.”

The oil producer has blocked more than 20 suppliers that have been cited in a corruption probe from competing for new contracts. The company is also slashing investments while the graft investigations have all but shut it from credit markets.

Production was 2.8 million barrels a day of oil and natural gas in February, including 2.15 million barrels of crude from Brazilian fields.

Audited Earnings

Petrobras had the outlook on its BBB- credit rating cut by Standard & Poor’s to negative from stable on Monday, a month after Moody’s Investors Service chopped its rating on the state-run oil producer by two levels to junk grade.

Fitch has Petrobras at BBB- with a negative rating watch, meaning it may be lowered to junk in the next 12 months. A downgrade, which Oppenheimer & Co. emerging-market corporate analyst Omar Zeolla predicted last month, would see Petrobras evicted from bond indexes that require investment grades from at least two of the three top raters.

The company is the second-biggest borrower in Bloomberg’s USD Emerging Market Corporate Bond Index after Petroleos Mexicanos.

The oil industry’s most indebted company is grappling with how to calculate graft-related costs that have prevented it from publishing audited financial results since the second quarter of 2014. There could be an acceleration of payments on some of its debts if it doesn’t release audited results before a grace period expires at the end of May.

The board is meeting in Rio Thursday.

Fitch would probably shift Petrobras to a negative outlook, extending the deadline for a decision to between 18 months and two years, should creditors opt not to accelerate its debt payments, Bormann said.

“There wouldn’t be an automatic downgrade if they missed the deadline,” Bormann said.