Petroleo Brasileiro Petrobras SA (ADR) (NYSE:PBR) Downgraded But Cash Flow Levels Could Improve This Year

State-owned Petroleo Brasileiro Petrobras SA (ADR) (NYSE:PBR) rallied in the market by 5.8% after it was reported that the demand for oil was gaining momentum in the wake of a persistent drop in global oil prices. Crude prices were up in the market after data from Energy Aspects showed that worldwide demand for oil soared to 94 million barrels a day in December, giving optimism that the same could continue in the long-term.

Where do analyst foresee upcoming resistance in PBR?

The rally in the market also came in the wake of Moody downgrading Petroleo Brasileiro Petrobras SA (ADR) (NYSE:PBR)’s long-term debt to Ba2. which now means it is a junk bond. One bad news for bondholders is Moody reiterating that it does not expect any substantial improvement in deleveraging over the medium term.

Despite the company’s share surging in the market, its bonds with the longest maturity dates fell the hardest. The biggest undoing to Petroleo Brasileiro Petrobras SA (ADR) (NYSE:PBR) sentiment in the market has always been its debt although the company is financed by a rich government.

Should the government of Brazil ever force Petroleo Brasileiro Petrobras SA (ADR) (NYSE:PBR) to fend for its self then, the giant oil company is sure to find itself in a tricky position, which should result in its credit rating slipping, even further. Bankruptcy suggestions could creep in, should debt levels outweigh returns from assets. High capital spending in the recent past has sunk the company into deep waters of debt on persistent negative free cash flow.

Newly appointed president Aldemir Bendien has already stated that Petroleo Brasileiro Petrobras SA (ADR) (NYSE:PBR) plans to sell its assets and reduce investments in exploration as one of the ways of regulating its capital spending. Maintenance of prices for refined products in Brazil is on the other hand cushioning Petrobras from the ongoing decline in oil prices

Petroleo Brasileiro Petrobras SA (ADR) (NYSE:PBR) could generate more cash flow this year compared to last year as the downstream business continues to benefit from a large spread between low international oil prices and high domestic refined product prices.

About the Author

Barry is a senior journalist at Us Markets Daily. He reports, shoots and edits many of his own stories by himself.

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