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RIO DE JANEIRO, Dec 9 (Reuters) - Moody's Investors Service cut the debt rating of Petroleo Brasileiro SA Petrobras for the second time this year as weak oil prices and a stalled asset sale program make it harder for the state-run oil company to cut debt and finance expansion needed to pay future obligations.
Moody's downgraded Petrobras, as the company is known, to Ba3 from Ba2. All "Ba" ratings classify the company's debt as non-investment grade, or "junk" and warns investors such investments have "speculative elements" and "substantial risk."
Moody's also put Petrobras on a review for a further downgrade. Benchmark oil prices have fallen by a third since the last downgrade in February and are close to seven-year lows.
"Petrobras' financial strength has weakened and refinancing risk has increased," said Nymia Almeida, a senior credit officer with Moody's in a statement announcing the downgrade. "Free cash flow will remain negative in the foreseeable future as international oil prices remain weak."
Petrobras' plan to raise $15.1 billion from asset sales by the end of 2016 made little progress. Only about three percent of target has been sold and the largest sale faces a court challenge.
As a result, it is unlikely Petrobras will substantially reduce its debt, Moody's said. At nearly $130 billion, it is the largest of any oil company. This, Moody's added, also reduces the chance of significant increases in oil output.
The review for a possible further downgrade will focus on the company's ability to close its funding gap, Moody's said. Petrobras has been cut off from capital markets since a corruption scandal erupted a year ago.
With only about $25 billion of cash on hand $24 billion coming due in 2016 and 2017, Petrobras will need new capital from either asset sales or investors to make capital investments needed for new areas and to maintain existing ones.
Petrobras plans to spend about $19 billion on capital investments in 2016, about half the level of previous years.
Moody's also said its review will focus on how far Brazil's government can back Petrobras if it fails to meet its funding needs on its own. In the middle of the worst recession in at least three decades and its political system deadlocked in a battle over the possible impeachment of President Dilma Rousseff, the government may find its ability to support to Petrobras limited. (Reporting by Jeb Blount; editing by Grant McCool)