OREANDA-NEWS. Although Petrobras' new 2017 to 2021 investment plan reduction may help the company's deleveraging efforts, material reductions in debt will continue to hinge on its ability to execute its divestitures plan, according to Fitch Ratings.

Fitch's base case assumptions is that the company will likely remain highly levered, rely on external financing to meet principal payments, and that debt reductions will come from divestitures, which are uncertain and difficult to predict. Petrobras' new business plan reduces the company's investment goals for the next five years by approximately 25% to USD74.1 billion, or roughly USD15 billion per year, from the previous business plan investment goal of USD98.4 billion, or approximately USD20 billion per year.

The new business plan aims at reducing net leverage by almost 50% to 2.5x by 2018 from 4.8x as of June 2016. This implies a reduction in debt of approximately USD50 billion over the next two years assuming current EBITDA and cash levels stay constant. This level of debt reduction compares with total divestiture expectations of USD35 billion during this period, which highlights the need for Petrobras to generate significant free cash flow to achieve its goal. Petrobras' divestiture plan has so far generated USD4.6 billion; USD727 million in 2015 and USD3.9 billion year to date 2016. Petrobras' previous business plan proposed a net leverage reduction to 3.0x by 2018 and 2.5x by 2020.

The company's investment reduction plan is not expected to impact production growth as most of the decreases are supported by operating efficiencies. Fitch's rating case assumes Petrobras' gross production to increase to approximately 3.1 million barrels of oil equivalent per day (boed) over the next two to three years and then to remain relatively flat over the ensuing two years. Petrobras has reported material operating efficiencies in the recent developments of its pre-salt, deep water assets. These efficiencies have been demonstrated by faster than initially expected drilling times as well as high initial production rate from a new well, which has required fewer wells per production platform when compared with the company's original expectations. Petrobras's new business plan estimates total production to grow from approximately 2.6 million boed to 3.4 million boed by 2021, down from the previous estimate of 3.7 million boed by 2020 under the previous business plan.

Fitch believes Petrobras' FCF will be limited, as cash flow from operations (CFFO) is projected to narrowly cover capex and interest expenses. As a result, Fitch expects the company to continue relying on its access to debt capital markets to refinance upcoming principal maturities absent divestitures. As of the last-12-months (LTM) ended June 30, 2016, the company reported funds from operations (FFO) of approximately USD18 billion, which Fitch expects to remain relatively stable given the company's domestic price controls and lower exposure to international markets as import requirements have significantly diminished.

Fitch currently rates Petrobras as follows:

Petroleo Brasileiro S. A. (Petrobras)

--Long-Term Foreign-Currency IDR 'BB'; Outlook Negative;

--Long-Term Local-Currency IDR 'BB'; Outlook Negative.

Petrobras International Finance Company (PIFCO)

--International debt issuances 'BB'.

Petrobras Global Finance B. V. (PGF)

--International debt issuances 'BB'.