NEW YORK, NY, Feb. 1, 2001 Moody’s Investors Service has assigned a preliminary Aaa.br (national scale) rating to five-year secured debentures to be issued by Companhia Petrolifera Marlim (Marlim).
The rating outlook is stable. Moody’s is issuing this preliminary rating in advance of the final sale of the debentures described in this rating release, based on information and legal documentation received as of January 26, 2001.
Marlim’s Aaa.br rating is supported by low project completion and operating risks, and by relatively strong coverage of debt service from Marlim’s share of project cash flows under reasonable stress scenarios.
The rating also reflects contractual support provided by Petroleo Brasileiro (Petrobras), including its obligation to cover shortfalls in Marlim’s cash flow, and the pledge of certain collateral, including oil production. The importance of the project to Brazil and to Petrobras lends further support to the Aaa.br rating. In Moody’s opinion, these positive factors help to mitigate the risk that the project’s oil output will begin to decline once it achieves peak production rates in 2002, and that Marlim’s equity capital base is expected to decline over time. Moody’s also notes that, under the project agreements, Petrobras has no direct obligations to the holders of Marlim’s debentures.
The Marlim project involves the development of the Marlim field, a large oil field located in the Campos Basin off the coast of the State of Rio de Janeiro, Brazil. Petrobras and Marlim have formed a consortium to jointly manage and fund the project. Petrobras holds the concession to develop the Marlim field and has been the operator of the field since 1991, when the field first began producing oil.
With proved oil reserves of about 2.4 billion barrels, the Marlim field is Brazil’s largest producing oil field. It accounts for about one-third of oil reserves in the Campos Basin, which supplies 81% of the total oil production of Petrobras.
The purpose of the Marlim project is to expand daily oil production from the Marlim field from approximately 290,000 barrels to 535,000 barrels by 2002. Through September 2000, production averaged 444,000 barrels per day. Thus far, 97 wells (64 production wells and 33 water injection wells) have been drilled in the Marlim field and are in operation. To reach desired production levels, the project will involve the drilling of 32 additional wells (19 production wells and 13 water injection wells). All production units required for the expansion have been installed and are in operation.
Under the Consortium Agreement, Petrobras is responsible for implementing the project, for operating the field, and for marketing the field’s oil production. The oil produced from the Marlim field will continue to be processed by Petrobras at its refineries, mainly for domestic consumption. To date, Petrobras has invested approximately U.S.$3 billion in the Marlim field, and has committed to providing future investment.
The total investment required to complete the development of the Marlim field, after Marlim’s incorporation in 1998, is estimated at approximately U.S.$2.09 billion. Marlim’s share of project costs is U.S.$1.5 billion, or about 72% of the total additional investment, while Petrobras’ share is approximately U.S.$586 million, plus any cost overruns.
To date, actual project costs have been under budget, and future investments required to complete the project total approximately U.S.$400 million. Petrobras is responsible for all operating expenses associated with the project.
In exchange for its investment in the Marlim field, Marlim has the right to receive up to 30% of the revenue generated from the sale of oil produced by the field at market prices, except in 2002 when such participation may increase up to 70%. Marlim uses a portion of such revenues to service its financing obligations.
Thus far, Marlim has relied on equity contributions from its parent, a loan from BNDES, global medium term notes, and short-term promissory notes to fund its share of project costs. Marlim intends to use the proceeds from the debenture offering to refinance its short-term promissory notes.
The Aaa.br rating assumes that all of Marlim’s debt will continue to be issued at the operating company level. Marlim’s parent, Marlim Participacoes, has issued U.S.$200 million of equity, the proceeds of which were contributed to Marlim and used to finance project costs. Capital return and capital redemption payments are subordinated to principal and interest on senior debt. Moody’s notes that Marlim’s capital is scheduled to decline during the life of the debentures through capital redemption payments.
Petrobras does not guarantee directly Marlim’s debt service payments. However, in the event that Marlim’s share of project revenues is not sufficient to cover debt service and operating expenses, Petrobras is obligated under the Support Agreement to make payments to Marlim to cover any shortfalls. Thus, Petrobras has assumed all of the oil price, production, and interest rate risks associated with the project. Petrobras is also obligated to cover any deficiencies resulting from foreign exchange movements.
Certain Petrobras Events of Default under the Support Agreement add structural support to the debentures, including cross-default with other Petrobras indebtedness in excess of U.S.$50 million, and failure of the Brazilian government to retain control of Petrobras, unless waived by Marlim’s debtholders.
The debentures will rank pari passu with all of Marlim’s other senior debt. The debentures will be secured by a pledge of Marlim’s shares and assets, and by a pledge of at least 70% of the oil produced from the Marlim field (Petrobras is allowed to pledge up to 30% of the oil to finance its share of project costs). However, unlike Marlim’s medium term notes and the BNDES loan, the debentures will not be secured by a pledge of Marlim’s accounts held by the Collateral Agent. However, Moody’s believes that the value of any amounts held in such accounts is not significant when compared to the value of the remaining collateral, including the pledged crude oil. Moody’s notes that the pledge of oil is limited to 720 days of production from the date of the occurrence of an Event of Default under the Support Agreement. Nevertheless, Moody’s believes the amount of pledged production would be sufficient to repay principal and interest on the notes, assuming reasonable price and volume scenarios.
Marlim is subject to certain covenants designed to provide additional protection to debt holders, including a limitation on indebtedness (U.S.$1.3 billion), limitations on the use of proceeds, and limitations on distributions. A debt service reserve (the “Secured Amount”) equal to 10% of principal outstanding and 12 months’ interest must be maintained in the Collateral Account by Petrobras. Moody’s notes, however, that the debt service reserve is required to be fully funded only on certain dates. At all other times, the minimum balance that Petrobras must maintain in the Collateral Account is 50% of the Secured Amount.
Debt service on the debentures will be paid from Marlim’s share of the field’s revenues. Debt service coverage (using Marlim’s share of revenues) appears to be very robust, even under conservative price and/or production assumptions. Moody’s notes that the Marlim field production rates assumed in the base case projections are based on Petrobras estimates that were confirmed by an independent reserve engineer in 1998. Actual production from the field has exceeded original estimates.
Project completion risk and operating risk are largely mitigated by the advanced stage of the project and the significant volumes currently being produced by the Marlim field. Completion risk and operating risk are reduced further by Petrobras’ considerable experience in deepwater technology and its proven track record in developing and operating the field. Petrobras is also the operator of nine other large oil fields in the deep waters of the Campos Basin, which currently supplies over 70% of Brazilian oil production.
Completion of the project will be instrumental to the growth plans of Petrobras, as well as to the Brazilian government’s plans to reduce the country’s reliance on imports, which currently supply about 25% of Brazil’s crude oil and petroleum product requirements. The participation of BNDESPAR in Marlim in the form of equity contributions (as a 30% owner of Marlim Participacoes) and of BNDES in the form of a R$240 million secured loan are indicative of the Brazilian government’s support for the project.
The credit quality of Petrobras is supported by its status as Brazil’s largest oil company, its vast oil and gas reserves, its technological expertise in deepwater exploration and production, and its dominant position in refining and wholesale distribution of petroleum products in Brazil. However, these positive factors are tempered by the potential for the Brazilian government to interfere with the operations of Petrobras, as well as the company’s high percentage of domestic currency revenues, its significant foreign-currency debt, its large capital requirements (especially for the development of its oil and gas reserves), and its growing off-balance-sheet liabilities.
The project agreements are structured such that Petrobras has direct obligations to Marlim, but its obligations to the holders of Marlim’s debentures are indirect. Under the Support Agreement, Petrobras has agreed to indemnify the secured creditors, including the holders of the debentures, in the event that it breaches any representations, warranties, and other obligations under the project agreements.
Marlim is a limited liability corporation headquartered in the city of Macae, State of Rio de Janeiro, Brazil.