Petro Rio S.A.

The stable outlook incorporates our view that despite higher projected leverage in 2020, with debt to EBITDA between 4.0x-4.5x, the company's recent acquisitions should contribute to a significant increase in revenues and EBITDA in 2021 as volumes increase and the company improves fields' operating efficiencies, reducing debt to EBITDA to 2.0x-3.0x. We could lower the ratings in the next 12 months if the company's production and sales deviate significantly from our current projections, or if oil prices remain below our current expectations for a sustained period and the company is unable to reduce costs, resulting in lower EBITDA. This would lead to debt to EBITDA consistently above 4.0x. We could raise the ratings in the next two years if the

...Petro Rio's credit quality reflects its small scale and operations in a volatile industry, partly mitigated by expected growth and leverage reduction in 2021. We view Petro Rio as a small player, with expected EBITDA of about R$800 million in 2020 and increasing to R$1.6 billion-R$1.8 billion in 2021 considering the company's latest acquisitions and successful implementation of its planned investments. The expected increase in cash flow generation supports our view that absent any significant additional acquisition, the company will be able to reduce its debt to EBITDA to below 3.0x in 2021 from the forecasted 4.0x-4.5x in 2020. The rating also incorporates our expectation of a comfortable liquidity position assuming the successful placement of the proposed notes. The company has very low asset and product diversification and average reserves size when compared to peers. This already considers the increase in production and reserves through recent acquisitions. Considering pro-forma figures,...

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