Petrobras: cashing out

Mar 18 2015 at 10:50 AM

Petrobras: cashing out

lex

Protests across Brazil were held this week against President Dilma Rousseff’s government with many protesters calling for her impeachment. A massive corruption scandal at Brazil’s state-owned oil company Petrobras has rocked the government and Dilma’s approval ratings are now around 23 per cent. Getty Images

by Lex

Petrobras, the Brazilian state oil company, has a serious image problem (and not just the recent scandal). The market simply loathes the company. Credit Suisse surveyed 160 portfolio managers and found that 60 per cent were underweight the stock; most dislike the recent management changes; almost a fifth think the company will never (never!) generate free cash flow. Radical action is required. The core problem is cash burn. In the nine months to September 2014 (the most recent available figures) the outflow was nearly R$13bn ($5.4bn) after capital spending. Given lower oil prices the deficit is likely to be worse this year, despite promises to cut capital spending to R$90bn this year from more than R$100bn the year before.

Most companies would borrow to fill such a gap. But indebtedness at Petrobras is already dangerously high following big investments in refineries and offshore fields. Net debt is R$261bn, four times the estimated 2014 earnings before interest, tax, depreciation and amortisation. No surprise Moody’s downgraded the company last month.

Heaping on more debt is, therefore, not the way back into investors’ hearts. It merely defers the real problem. Asset sales are the next option. The company wants to sell R$10bn of assets this year, about a quarter of its longer term target. If it can do so, that will help. But a cash outflow of at least R$25bn would remain. The next option is equity issuance. Even issuing just enough equity to close this year’s deficit and prevent debt from rising could increase the share base by a fifth.

Then the hard work begins: making sure that the deficits do not reoccur. In the absence of a big recovery in oil prices, this means taking an axe to investment – ultimately, cutting it by as much as half.

This is all very aggressive. But Petrobras is close to becoming a market pariah. Its other option is a full state bailout.

Financial Times

One comment

  1. Petrobras is a bully. Their “access to Capital” is not their biggest problem. They will find some sucker to give them the money. However, it won’t make much difference. In school I learned to definition of “hubris” It fits Petrobras to a “tee”. All the way through the company, along with IBP. Arrogance, arrogance, arrogance. Unfortunately, they “bullied” some of the world’s largest public companies. Very foolish. The country of Brazil will pay the price for this.

    It’s almost impossible to “cancel” a sanctioned, Deepwater project. They have extremely long lead times and their scale is used to demonstrate the future upside to the market. So, either officially or unofficially, some of these projects are being slowed. This is more dangerous for Petrobras than any other company. At Quest we are spending a lot of time with the Majors tracking this affect on the Deepwater Supply Chain. It is disrupting the normal flow and is creating future “pinch points” which, when faced, will carry a high price.

    So we have Deepwater installation vessels parked at the docks. All the work that they would normally be completing is still going to happen. We are just pushing everything forward. The Supermajors know this and are preparing for it. They realize they may have to “dig deep” on one or more “project components”. These contractors would prefer to work for anyone else than Petrobras, their capacity will be needed by companies who actually have the capital to invest. Petrobras will lose any bidding war for any service or supply to almost every other Oil Company. Of course, Petrobras is really the only “game in town” for Deepwater suppliers in Brazil.

    Petrobras is dead, stick a fork in it. Because they are directly tied to who prints the Real, they may not “classically” fail, but then again, that’s a whole other issue. Garbage doesn’t start stinking less over time.

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