ANALYSIS-Petrobras woes deepen as debt rises, outlook cut
* Moody's put Petrobras on downgrade watch Monday
* CEO Foster has had little success in first year
* Debt limit broken, investment grade at risk - source
By Jeb Blount and Leila Coimbra
RIO DE JANEIRO, Dec 18 (Reuters) - The decision on Monday by Moody's Investors Service to put Petrobras on watch for a possible debt downgrade is the latest sign that the problems at Brazil's state-led oil company are going from bad to worse.
It is also evidence that Chief Executive Maria das Graças Foster, appointed nearly a year ago, has had little success in her push for a more efficient and profitable approach to the company's politically charged and financially undisciplined plan to become one of the world's top four oil producers by 2020.
Rather than cutting spending, Foster boosted the company's five-year investment plan, already the world's largest, by 5.3 percent to $237 billion in June. In the second quarter, Petrobras posted its first loss in 13 years.
Her response to that loss: a cost-control plan to cut "up to $7.8 billion" that is short on specifics. Since reaching an 11-month high in February only days after she took office, the company's most-traded shares have lost 14 percent.
Other emergency efforts are also faltering. There have been few offers for the non-Brazilian oil fields and refineries Petrobras wants to sell, bankers told Reuters earlier this month. Nor is there much chance the assets will fetch the $14 billion Petrobras says they are worth.
"Cost cutting and asset sales are slow and difficult," said Oswaldo Telles, oil and gas company analyst with Espirito Santo Investment Bank in Sao Paulo. "With Petrobras' financial situation getting worse, the only thing that will provide certain relief is a fuel price rise."
Blocked from raising fuel prices by a government trying to keep inflation in check, Petrobras' refining unit has racked up more than $8 billion in losses this year. Revenue has been further hurt by falling oil output as older fields decline and new fields fall behind schedule or go over budget.
INVESTMENT GRADE AT RISK
As a result, for the first time in more than a decade, Petrobras faces problems with its debt, something it will depend on until large scale offshore output and revenue comes on stream in 2015 or 2016.
This year, Petrobras will borrow about $25 billion, 56 percent above its planned annual average of $16 billion, the company said Dec. 10. Debt is now above the company's self-imposed limit of 2.5 times EBITDA, or earnings before interest taxes depreciation an amortization.
"Debt has broken the ceiling and is already at 2.6 times EBITDA," a source with direct knowledge of the company's finances told Reuters. "Next year it could go to three times EBITDA and Petrobras could lose its investment grade rating."
"Every time Foster requests a fuel price increase at a board meeting, Mantega dismisses it with a 'give it a rest, this is not the proper forum for that,'" the source said, referring to Finance Minister Guido Mantega, who is also chairman of Petrobras' board.
Brazil's finance ministry did not immediately respond to requests for comment.
The loss of an investment grade credit rating would force many investors to sell Petrobras bonds and drive up its borrowing costs, making an already difficult situation worse. Since reaching an all-time low of 4.83 percent on Oct 19, the yield on Petrobras dollar bonds due 2040 have jumped 38 basis points to 5.21 percent.
"We hope that (Moody's) decision to lower the outlook on Petrobras debt will alert the company and the government to the risk of an actual ratings downgrade and impact on the company's borrowing costs," Eduardo Velho and other oil analysts at Planner Corretora in Sao Paulo said in a report Tuesday.
FUEL HIKE NEEDED
In other words, a fuel price rise is essential.
"Refineries are at 98 percent capacity, fuel demand is rising and we have to import more and more gasoline to meet demand," the Petrobras source, who asked for anonymity because of his access to sensitive company data. "We can't do that and continue to finance our expansion plan."
The government, though, is already going ahead with plans to make Petrobras invest. The government owns a majority of voting stock in the Rio de Janeiro-based company, which is traded on the Sao Paulo and New York stock exchanges.
The government considers oil and gas to be the cornerstone of a plan to catapult Brazil to developed-nation status. After Petrobras found an oil bonanza in 2007, the government changed the country's oil law in 2010 to give it and Petrobras more control of the industry and limit foreign influence.
After four years of stagnation, the country's first oil rights auctions in more than four years are expected in 2013. A frontier area concession auction open to all is expected in May and the first-ever auction of prime "subsalt" areas under new production-sharing contracts is expected by November.
Under the subsalt production-sharing rules, Petrobras will have to own at least 30 percent of the area and operate all the drilling and production. Others can be financial partners only.
SHARE SALE OPTION
The New York-state-sized subsalt area may hold up to 100 billion barrels of oil, enough to supply all U.S. needs for more than 14 years, according to Brazil's National Petroleum and Gas Institute at the State University of Rio de Janeiro.
"Brazil has hitched the development of its main oil reserves to a single company, and that company is already stretched to the financial limit," said Christopher Garman Latin American director of the Eurasia Group in Washington. "This problem is not going to go away, and we are probably in for a period of reduced production."
With debt already beyond limits, restrictions on the activities of foreign oil companies, and a fuel price increase unlikely in the near future, Petrobras and the Brazilian government will have few choices, Telles said.
"If they don't get an increase, Petrobras will probably have to do what investors fear the most -- a capitalization," he said. "The government will have to buy stock and dilute the minority investors." (Editing by Todd Benson and Alden Bentley)
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