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Pedro Parente became CEO of Brazilian state oil producer Petrobras (Latin America's largest company) in May last year and has slahsed debt dramatically. (Photo: Petrobras)
Wednesday, April 5, 2017

Brazil: Petrobras Debt Outlook Improves

New CEO on right track with debt reduction, but Petrobras still faces challenges.

Inter-American Dialogue 

Brazil’s federal auditing court, known as the TCU, on March 15 overturned a ruling that had frozen state-run oil company Petrobras’ asset sales since December, allowing the company to proceed with plans to alleviate its debt load by selling $21 billion in assets by the end of 2018. Executives have said selling the target amount of assets is crucial for the state-run oil company’s survival, as it works to pay down its $123 billion in debt. Will Petrobras have any luck selling its assets while global oil prices remain relatively low? Are executives right in saying that the asset sale will be a boon for the company’s debt-reduction? What else should Petrobras do to turn its financial situation around?

Edmar Luiz Fagundes de Almeida, professor and member of the Energy Economics Group at the Universidade Federal do Rio de Janeiro: The agreement with Brazil’s federal auditing court, the TCU, represents an important achievement for Petrobras to push forward its disinvestment plan. The TCU’s decision to halt the process of asset sales by Petrobras created important uncertainties regarding the feasibility of the disinvestment plan. Petrobras has negotiated and signed deals totaling $13.6 billion. However, a significant portion of these deals was waiting for TCU approval. Several other deals are under negotiation, including two strategic partnerships, one with Total and another one with Statoil. It is also worth mentioning the intention to sell the control of BR Distribuidora, the largest fuel distribution company in the country. The recent improvement of the international oil market, and the efforts by the new Brazilian government to improve the business environment in the Brazilian upstream, contributed to increasing the market interest in Brazilian upstream assets. This is very good news for Petrobras, which has a large number of assets in the upstream to offer.

Therefore, there is a favorable prospect for Petrobras to meet its target in the disinvestment plan. Even though Petrobras’ debt is much larger than the amount the company can raise through asset sales, its ability to proceed with the divestment plan will not only bring new cash for the company, but more importantly, will increase market confidence in its ability to repay debt in the long run. At this moment, trust is what can add more value to the company.

Alexis Arthur, independent energy analyst: That Brazil’s Petrobras missed its divestment target in 2016 is unsurprising. Of course, staggering debt is not Petrobras’ only problem. The national oil company has been at the center of the ongoing investigation into bribery and kickbacks that has consumed much of Brazil’s business and political elite. Still, there is clearly some interest in what the Brazilian company has to offer. Petrobras formed a ‘strategic alliance’ with Total last December, which included the sale of $2.2 billion in assets. This followed a $2.5 billion deal with Statoil in July. And the company was only $1.5 billion off its two-year,$15 billion divestment target. Whether it will have more luck in the next round remains unclear. While oil prices are low, they are not historically low. Indeed, they have recovered to a level more in line with historic trends after the abnormal, four-year, $100+ per barrel high from 2011 to 2014. The subsequent price collapse has been less harmful to the industry than many feared.

That being said, oil prices have remained stubbornly at around $50 per barrel, lower than what many analysts predicted. Just as the historic price peak opened areas that were previously economically unviable, the drop has pushed more expensive, complex projects (such as presalt and other deepwater areas) back to the sidelines. Global pressure to reduce fossil fuel production and the urgency of climate action is also important in terms of the long-term upstream landscape. Still, Petrobras has much to offer, with a diverse portfolio of upstream and downstream assets to choose from. It may not be the best time for Petrobras to be selling, but political and financial pressures have left the Brazilian national oil company with little room to maneuver.

Francisco Ebeling Barros, Berlin-based independent energy consultant: From the moment he took office as the new CEO of Petrobras, Pedro Parente announced that his first and foremost goal was to cut back the company’s massive debt. To achieve it, he put some of Petrobras’ oil fields, the shares the company held in Braskem, a part of Petrobras’ biofuels division, gas pipelines and other assets up for sale. However, he has been blamed by his critics for opening the ‘Petrobras bazar,’ which is arguably a shameless sell-off of Brazil’s public patrimony.

Brazil’s federal auditing court, the TCU, was called upon to rule whether selling $21 billion in assets by the end of 2018 was legal or not. Recently, it decided that Parente can go forward with his sales plans. As a rule of thumb, I like to think that business plans have to be evaluated, and that Parente’s approach, which is that there is no alternative to his plan, would merit an evaluation. Take the more recent case of the P-59 and P-60 oil rigs, which Parente wants to sell for 5.6 percent of their original value. Considering the recent tendency toward industrial concentration in the oil field service market, it is reasonable to assume that in the midterm, Petrobras will probably lose money by renting equipment it once owned. Although the oil industry had been doomed to die somewhere between 2014 and 2016, this will be a very slow death. Thus, Petrobras will still be able to make money by increasing the production of the presalt fields and will almost naturally reduce its debt load. For Parente’s successor, it will be mandatory to be much more strategic vis-à-vis the realpolitik of the ‘End of Oil’ age, and much less obsessed with the reduction of the debt burden.

Republished with permission from the the Inter-American Dialogue's weekly Energy Advisor



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