Brazil’s oil giant Petrobras just can’t generate the cash it needs to meet its aspiration to be a global energy player — or that of its controlling shareholder, the government, to be a cash cow. Worse-than-expected third quarter results reported on Oct. 25 underlined that, and came hard on a disappointing outcome to the long-awaited auction for exploration and development licenses for the country’s biggest-ever oil discovery, the Libra field. That will cause Petrobras to load up on even more debt, which has has more than tripled to 250.9 billion reais ($112.5 billion) in the 12 months ending Sept. 30.
The company’s latest stratagem to boost its cash generation and trim its debt is a new fuel-pricing plan announced Oct. 28. This will set automatic domestic fuel price rises or cuts in accordance with the movement of international prices, better aligning the two and thus reducing the cost of financing the gap.
Petrobras’ third quarter profit of $1.5 million was significantly lower than the $2.7 million earned in the same quarter a year-earlier and 45% lower than in the second quarter of this year. The depreciation of the Brazilian real against the dollar exacerbated the losses Petrobras takes from importing oil to supply the domestic market at government set subsidized prices — currently as much as 215,000 barrels per day of petrol and diesel. The fall in earnings has left the oil giant with little alternative other than to increase borrowing in order to finance its $237 billion five-year investment plan, considered the world’s largest corporate spending program.
Chief Executive Maria das Graças Silva Foster says, “we plan to reduce our debt levels over the coming months.” However, at the beginning of October Moody’s downgraded Petrobras’ debt on concern that the fuel subsidies and huge investment commitments would cause the company’s debt to grow until at least 2015. Getting some stability in to the company’s borrowing will be a first step. The new pricing policy will be presented to Petrobras’ board by November 22. It “will provide predictability and help us reduce our debt levels,” says Chief Financial Officer Almir Barbassa.
Petrobras’ debt problems don’t stop with the government imposing fuel subsidies as a way of tackling inflation, one of Brazil’s biggest problems. The auction of the rights to develop the giant Libra oil field, located off Rio de Janeiro’s coast, were sold to a consortium comprised of Petrobras (10%), France’s Total (20%), Anglo-Dutch Shell (20%) and China’s state-owned CNOOC and CNPC (10% each). However, under Brazil’s law, the National Council for Energy Policy decrees that Petrobras’ take an additional 30% stake directly. Thus Petrobras total participation in the consortium will be 40%. That also means footing 40% of the nearly $100 billion needed to develop the field, which in turn will mean loading up on more debt if the company can’t generate the cash from operations to meet the investment need.
Though the government has a controlling stake in Petrobras, some of its other investors told the Financial Times, that state intervention in the oil and gas industry had devalued the oil company by more than $200 billion. Generating more cash is not only important for itself to bring down its debt, but also for President Dilma Rousseff, who sees Petrobras’ financial well being as a way to cover for social spending promises ahead of next year’s elections. The success of one will play a big part in the future of the other.