* 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 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
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
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
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
(Editing by Todd Benson and Alden Bentley)