(Fitch, 22.Feb.2021) — On 19 Feb. 2021 Brazil’s Ministry of Mines and Energy requested that Petroleo Brasileiro S.A.’s (Petrobras) board of directors replace the company’s CEO. Fitch Ratings views this change as potentially negative for the company’s cash flow generation and standalone credit profile (SCP), which Fitch currently assesses as ‘bbb’, but neutral for the company’s ratings. Petrobras’ ratings (BB-/Negative) are linked to Brazil’s sovereign ratings (BB-/Negative) as a result of the influence the government may have over the company’s strategies and investments.
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The government’s request to replace Petrobras’ CEO coincides with mounting social pressure over domestic diesel prices, demonstrating the impact of political risk on the company’s strategy. Fitch previously incorporated this risk into Petrobras’ ratings by linking them to Brazil’s sovereign ratings despite recent material improvements in the company’s SCP. Petrobras’ cash flow generation, including cost of funding, could deteriorate if the company’s new administration implements a pricing policy for gasoline and diesel that deviates from import parity, as has occurred in the past.
Petrobras’ ratings reflect its strategic importance to the country and Brazil’s very strong incentives to support the company should the need arise. Fitch considers the linkage between Petrobras and the government to be strong as a result of the government’s majority ownership and control of the company, as well as the evidence of a strong support track record. The Negative Outlook for Petrobras’ foreign currency and local currency Long-Term IDRs reflects the same Outlook for Brazil’s sovereign rating.
Petrobras’ ‘bbb’ SCP reflects the company’s strong capital structure, production growth (excluding divestitures), and declining debt levels. Petrobras reduced its total financial debt by more than $60 billion to $57 billion as of September 2020 from $126 billion in 2015 by using internal cash flow generation, proceeds from divestitures and cash on hand. Fitch expects Petrobras to continue deleveraging after the market downturn in 2020 caused leverage to increase marginally from 2019 levels.
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