The restructuring of Petrobras: time matters

March 21, 2018

By Edmar de Almeida

In March Petrobras announced the financial result for the year 2017. The company reported a loss of R$ 446 million. Although small compared to the losses of previous years, this new loss is discouraging. This is the company’s fourth year of losses. The accumulated losses in the last four years amount to almost R$80 billion at 2018 prices. During this period of economic adjustment, the shareholders did not receive dividends. Meanwhile, the company’s creditors received a lot of money. Petrobras has become a good source of interest for the company’s debt holders. In the last four years, Petrobras has paid about R$85 billion in debt interest. That is, a good part of the value generated by the company ended up being appropriated by the creditors of the almost R$ 360 billion of the gross debt of the company.

The above numbers draw attention to the following problem. The pace of Petrobras’ adjustment process is important. The longer it takes for Petrobras to undertake its economic restructuring, the more creditors will benefit to the detriment of shareholders, including the Federal Government. Over the last four years, Petrobras has paid on average about U$6.7 billion of annual interest on debt. For comparison, the four largest private oil companies in the world (Exxon, Shell, BP and Chevron) pay an average of U$1.3 billion of interest per year. That is, Petrobras has been paying five times more interest than its international competitors. If the company spends more than six years paying this level of interest, it will have transferred to creditors a staggering sum of about U$67 billion.

It is important to note that at the same time that Petrobras is the largest publicly traded oil company in the world, it is also the company that holds the greatest growth potential of oil production. That is, the financial fragility of Petrobras presents a huge opportunity cost not only for the company’s shareholders, but also for the country. If the U$5 billion worth of overdue interest was invested in production, it would be enough to put one more platform in Pre-salt producing about 150,000 barrels a day every year. That is, the current level of indebtedness of Petrobras delays its potential growth in a very significant way.

Of course, Petrobras does not plan to continue paying long-term interest rates. The company is trying to restructure and reduce debt as quickly as possible. This restructuring has seen a sharp reduction in investments from almost U$50 billion in 2013 to about U$14 billion in 2017 and a huge cost-cutting effort. The cost of extracting the barrel in the pre-salt area decreased from U$ 14 per barrel in 2014 and in the second quarter of 2017 was below U$ 7. In 2014 the company launched the Voluntary Withdrawal Incentive Program (PIDV) through which almost 14,000 employees left.

Another important action by Petrobras was to carry out a process of adjustment in its balance sheet to gain credibility in the market in relation to the real value of the company’s assets. Petrobras made adjustments and write-off of assets that reached the amount of R$ 160 billion reais. These losses reflect losses in the value of assets due to corruption, mismanagement of investments and falling oil prices. With the aforementioned adjustments, it is now necessary to reduce the company’s debt so that Petrobras is ready to return to profit and grow rapidly.

The strategy presented by Petrobras to reduce the level of indebtedness through an ambitious asset sale plan. In 2015, Petrobras announced a restructuring and divestment plan of U$ 57.7 billion by 2019. Of this total, the company was able to implement U$ 18.3 billion by the end of 2017.

This plan has faced several obstacles to be implemented, which has been delaying the process of deleveraging the company. One of the obstacles is the current national economic context, with large national economic groups in a rather complicated financial situation. In particular, large national contractors, which had begun to invest heavily in the oil and gas segment, face major economic difficulties and are not in a position to buy new assets in the industry. On the contrary, these companies are selling their holdings. Another important challenge is the low oil price that reduces the attractiveness of a portion of the sector’s assets.

There are also very important political and bureaucratic barriers. The process of selling assets was significantly delayed due to the challenge of the TCU’s asset sales methodology. The company reached an agreement with the TCU in 2017, and the asset sales process resumed. However, the process faces strong opposition from unions and local governments. These players have been able to hamper the sale of assets through the judicialization of the process. In practically every transaction, Petrobras and the acquiring companies must face lawsuits that seek to paralyze the divestment plan.

Finally, it is important to note that there is a major obstacle in energy policy. The value of Petrobras’ assets in various segments (thermo, natural gas, refineries and mature fields) depends heavily on sectoral policy. The Federal Government has launched an ambitious reform program aimed at creating a competitive business environment, more open to private investment: reform of the natural gas industry (Gas to Grow Program); reorganization of the fuel market (Combustíveis Brasil Program); promotion of onshore exploration (Reate Program); and reform of the electricity sector. However, the political environment of the country makes it difficult for the reform process to proceed. Many investors await the progress of these initiatives to position themselves in relation to Petrobras’ investment plan.

The adjustment and deleveraging of Petrobras does not only depend on the strategies of the company. It will also depend on the evolution of energy policy and sector regulation. In this sense, it is fundamental that the energy authorities and the political agents are aware of the importance for the country of the rapid recovery of Petrobras. The longer the delay in reducing Petrobras’ debt, the greater the delay in taking advantage of Pre-salt’s economic potential. In addition, a strong and healthy Petrobras financial is the best way to promote national interests in the new geopolitics of oil.