PETROBRAS RATING BA2

MOODY'S - August 23, 2019 -- Moody's Investors Service (Moody's) affirmed the Ba2 corporate family rating of Petroleo Brasileiro S.A. - PETROBRAS (Petrobras). Simultaneously, Moody's raised the company's baseline credit assessment (BCA) to ba2 from ba3. The actions were triggered by the company's continued success in improving its credit metrics and liquidity position. The rating outlook is stable.

RATINGS RATIONALE

The actions on Petrobras' ratings and BCA (which is a measure of a company's standalone credit profile regardless of support considerations) reflect the company's sustained improvement in its credit metrics and liquidity position, which Moody's expects will continue to strengthen in the foreseeable future. Petrobras has achieved its refinancing and debt reduction targets of 2018 and is in line to achieve its 2019 and 2020 goals as well (the company expects its net debt/EBITDA to be at 1.5 times at the end of 2020). Despite changes in government and management in the last 12 months, Petrobras has shown operating and financial policies stability as well as discipline in competing profitably in the local fuel market. Particularly noteworthy was the company's ability to refinance debt and push forward maturities over the past few years as well as contract robust and long-term revolving credit facilities to the point of reducing its liquidity risk significantly; its revolving credit facilities now amount to $9.2 billion, from $6 billion in 2018.

Since 2015, Petrobras has sold about $30 billion in assets, with proceeds directed mainly to reduce debt. More recently, Petrobras has changed its business strategy to focus primarily on Exploration and Production (E&P) and increase the return on capital employed. Petrobras is focused on selling midstream and downstream businesses. Moody's estimates that, after 2021, the E&P contribution to EBITDA will increase to about 90% from 79% in June 2019. While an integrated oil and gas business model is less risky than a pure E&P one, by reducing its refining asset base Petrobras will become less vulnerable to potential adverse government policies, especially those connected to fuel prices.

In early 2019 Petrobras completed the payments related to the settlements with the SEC and the DoJ associated to the Lava Jato bribery investigation. The investigation is still in progress by Brazilian authorities and additional relevant information may come to light that could have negative effect on its financial position. In addition, the company still faces a number of civil proceedings in the US, Europe and Latin America. Nevertheless, we consider very small the probability that Petrobras is fined an amount that would significantly affect its liquidity position.

Petrobras' ba2 BCA and Ba2 ratings are supported by the company's dominance in the Brazilian oil industry and its importance to the Brazilian economy. Furthermore, the ratings reflect the company's sizeable reserves equivalent to over 11 years of life, its renowned high technological offshore expertise and potential for continued growth in production over the long-term. However, Petrobras' ratings are constrained by still high debt and financial expenses levels vis-a-vis cash generation, business plan execution risk and potential government interference contrary to the business and financial interest of the company. Petrobras' Ba2 ratings also consider Moody's joint-default analysis for the company as a government-related issuer; Petrobras' ratings reflect the assumption for moderate support and dependence from the Government of Brazil (Ba2 stable) based on the government's weak fiscal accounts but limited dependence on foreign currency funding, the high level of diversification of the Brazilian economy, and the country's limited reliance on local production of fuel.

Petrobras' liquidity position is good. Moody's expects that the company's cash generation in the next two years will be more than enough to cover mandatory cash obligations plus annual capital expenditures of about $11 billion, allowing it to reduce debt further, even without asset sales. Historically, Petrobras has held a solid amount of cash on hands, at around $21-25 billion; although the company plans to reduce the amount of cash on hand to around $6-7 billion, sizable committed revolver credit facilities support its liquidity position. In addition, refinancing risk has declined in the last couple of years given successful liability management efforts: the next significant debt maturity is scheduled for 2022, in the amount of close to $6 billion.

The stable outlook on Petrobras' ratings incorporates Moody's view that the company's credit profile will continue to gradually improve in the foreseeable future. Moody's believes that Petrobras is in line to achieve its goal of reported net debt/EBITDA of 1.5x in 2020 by selling assets and generating robust cash flow.

An upgrade of Petrobras' Ba2 rating would require further improvement in its overall credit metrics, continued financial discipline, evidence of lower exposure to adverse government influence, and a stable energy regulatory environment in the country. In addition, an upgrade of Petrobras' ratings would consider Moody's ratings on the government of Brazil.

Negative actions on Petrobras' rating could result from a deterioration in operating performance or external factors that increase liquidity risk or debt leverage from current levels. Downgrades could also be prompted if negative developments from the litigations against Petrobras appear to have the potential of significantly affecting the company's liquidity or financial profile or if the rating on the government of Brazil is downgraded.

The methodologies used in these ratings were Global Integrated Oil & Gas Industry published in October 2016, and Government-Related Issuers published in June 2018. Please see the Rating Methodologies page on www.moodys.com for a copy of these methodologies.

Petrobras is an integrated energy company, with total assets of $252 billion as of June 30, 2019. The company dominates Brazil's oil and natural gas production, as well as downstream refining and marketing. Petrobras also holds a significant stake in petrochemicals and a position in sugar-based ethanol production and distribution. The Brazilian government directly and indirectly owns about 42.9% of Petrobras' outstanding capital stock and 60.4% of its voting shares.

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