Petrobras on the Rebound

Petrobras headquarters in Rio de Janeiro. The state oil giant's net debt dropped from $106 billion in 2014 to $69 last year and could fall to $55 billion next year.  (Photo: Petrobras)

The company’s finances improve significantly, continued progress expected.

BY CLAUDIA PESSAGNOIS

Petrobras, the national oil company of Brazil, has undergone a major strategic shift the last several years. Its strict focus on capital discipline and portfolio rationalization in recent years has significantly improved its financial condition, and its shift toward more robust financial health will continue into the next decade, according to new analysis from IHS Markit.

Petrobras’ transition to greater financial stability started in earnest in 2015, and given the details of its latest strategic business plan, which includes ongoing asset sales and asset rationalization, as well as further restrained capital spending during the 2019 to 2023 period, we believe Petrobras—which until recently bore the notorious moniker of ‘most indebted publicly traded oil and gas corporation in the world’—will continue to improve upon its underlying fundamentals.

Petrobras’ strict focus on capital discipline and portfolio rationalization has resulted in a remarkedly dramatic financial rebound for the company, particularly when you consider the company faced major hurdles in 2015, including the impacts of the precipitous fall of oil prices in late 2014, the massive debt the company had amassed, and the major corruption scandal that engulfed the company, hampering the company’s finances and investor trust.

This more prudent capital and portfolio approach taken since 2015 has been a byproduct of several factors. First and foremost, was the precipitous fall in oil prices that started in the second half of 2014, which limited capital availability and stifled investments across the industry. Second was the massive debt that Petrobras had amassed after years of overspending cashflows because of ambitious corporate investment objectives in both Brazil as well as globally. Third was the major corruption scandal that erupted in tandem with these other two events, which ensnared not just Brazil in general, but Petrobras in particular, significantly impeding the company’s finances and investor trust.

The company’s keen focus on asset divestments in recent years has significantly streamlined the company’s upstream portfolio, allowing it to focus on key growth projects in the pre-salt, such as the Búzios field. Using the IHS Markit Vantage database, we have identified other assets that could be good candidates for potential divestment that could build upon cost-savings and cash inflows.

Petrobras’s continued path of high-grading its upstream portfolio, which includes at least partially redirecting investments away from low-return, late-life assets and into higher-return pre-salt fields, will likely have a material impact on both volume gains and value growth going forward. We believe that Petrobras’ strategic shift these last few years offers the greatest potential yet for longer-term value creation for shareholders, including the Brazilian government, which owns a majority controlling stake (common shares outstanding.).

A Strategy of Capital Discipline, Portfolio Rationalization, Restrained Spending—and Yes, Debt Reduction.

Petrobras announced its latest strategic plans in December 2018, which covers the 2019 to 2023 period. The company’s main efforts will be focused on portfolio rationalization, pre-salt volume growth and debt reduction. Keeping in line with these objectives, the company expects to continue its ambitious future asset divestment plans, which, in the upstream, will consist of mostly producing shallow-water and onshore assets, according to Petrobras’ announced assets that are currently for sale.

In addition, the company will continue to temper its capital investments, which are expected to total more than $84 billion during the 2019 to 2023 period (82 percent of that will be dedicated to exploration and production (E&P). This latest plan signals continued capital restraint, which marks an important sign of the company’s commitment to improving its financial health. This latest capital investment plan (total of more than $84 billion, with an annual average of $17 billion) is roughly 13 percent higher than the 2018 to 2022 business plan CAPEX of $74.5 billion (average of $15 billion per year during the period) and is an indication of the company’s comfort level in boosting spending to increase production.

It is notable that the projected $84 billion capital spending budget is an extraordinary 65 percent decline from Petrobras’ peak capital spending of nearly $238 billion in the 2013 to 2017 plan, which averaged to $47 billion in spending per year! At the peak, Petrobras was averaging CAPEX of more than $40 billion per year, and, after including dividends, was outspending cash flows by nearly two times.

While a large chunk of the spending targeted exploration and development of the pre-salt, one of the largest and most promising resource discoveries of this century, upward of half of capital investments were piled into the company’s non-upstream segments, most notably the downstream, which, at the time, was suffering considerable losses because of regulated retail product prices in Brazil. However, by the start of 2015, when both the commodity price crash and the Lava Jato scandal descended upon Brazil in full force, Petrobras, which was already saddled with more than $130 billion in total debt (roughly $100 billion in net debt), found itself even further restricted from capital markets, prompting it to make significant strides to quickly improve its balance sheets.

Since 2015, Petrobras has slashed capital budget investments by a compound annual rate of 5 percent per year, with 2019 CAPEX projected to be 61 percent lower than in 2013, and 14 percent lower than in 2015. After outspending cashflows for years by extremely wide margins, Petrobras has now underspent cash flows consistently since 2015, and we project it continue doing so through at least 2020, under various oil price scenarios.

As a result of this capital restraint and newly available free cash flow, Petrobras’s net debt went from a peak of $106 billion in 2014 to $69 billion at year-end 2018. Additionally, we are forecasting net debt to continue to decline at a significant rate, with 2020 levels anticipated to be as low (relatively speaking) as $55 billion—a level Petrobras’ balance sheet has not seen since 2011. (Note that this forecast excludes the impact of estimated future asset sales, implying that Petrobras can continue along this positive financial trajectory absent any additional divestments; additional asset sales will further enhance its financial position.).

Asset sales have played a major role in Petrobras’s turnaround in the last several years. In fact, since 2015, Petrobras has announced asset deals worth more than $17 billion in proceeds, much of which has gone to reduce debt. In addition to closed/announced deals, since 2017, the company has announced plans to divest a significant number of assets, several of which are producing upstream oil and gas assets.

Although Petrobras has made great strides toward improving its financial health, we expect it to continue to evaluate its asset portfolio and look for opportunities to streamline its portfolio and continue to reduce debt, with future investments prioritizing deep water assets.

Claudia Pessagnois associate director of energy research and analysis at IHS Markit.

Siddhartha Sen, technical research director at IHS Markit, and Divya Ramaswamy, technical research principal, IHS Markit, also contributed to this article.

 

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