Petrobras’ Cost Of Capital Set To Rise After Moody’s Downgrade

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Petroleo Brasileiro

Credit ratings firm, Moody’s, recently stripped Petrobras (NYSE:PBR) of its investment grade rating. Citing increasing concerns about corruption investigations and liquidity pressures that could arise from extended delays in publishing audited financial statements, the ratings agency lowered the Brazilian oil giant’s credit rating by two notches from Baa3 to Ba2. The global credit ratings firm primarily attributed the change in its stance to corruption allegations and related investigations that have triggered the auditors, in this case PricewaterhouseCoopers (PwC), to delay the signing off on Petrobras’ annual financial statements. Moody’s believes that this delay, which already restricts the company’s access to the debt capital markets, could potentially lead to a call for accelerated repayment by its bondholders because of a covenant breach, which would significantly increase its financial risk. Moody’s also lowered Petrobras’ baseline credit assessment, which reflects the standalone financial strength of the company excluding any extraordinary support from the Brazilian government, to B2 from Ba2. [1] This basically implies that analysts at Moody’s see substantial credit risk in Petrobras without the extraordinary support from the Brazilian government. This is expected to increase the state-owned oil company’s cost of capital significantly and result in the lowering of its intrinsic value, which was also reflected in bond market activity soon after the announcement, as yield spreads on Petrobras’ international bonds widened by as much as 50 basis points. [2] We currently have a $13/share price estimate for Petrobras, which we will soon update to reflect the change in the company’s cost of capital and our revised medium-term outlook for global crude oil prices.

See Our Complete Analysis For Petrobras

Petrobras is a vertically integrated oil and gas company, which operates in both the upstream and downstream segments of the industry. The Brazilian multinational energy giant is one of the largest companies in Latin America by annual sales revenue. Its operations account for a large majority of the total oil and gas production in Brazil. In 2013, Petrobras’ average daily oil production in Brazil was 1,931.4 thousand barrels per day (MBD), an estimated 90.9% of Brazil’s total oil production.

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Notes:
  1. Moody’s downgrades Petrobras’ ratings to Ba2; maintains review for downgrade, moodys.com []
  2. Petrobras Spreads Blow Out After Moody’s Downgrade, reuters.com []