Detail of the facade of the Petrobras headquarters in Rio de Janeiro. Photo: EBC / reproduction

Pedro Parente, president of Petrobras, in an interview with Mail Brazilienseon 04.12.2016, he stated that: “corruption destroyed Petrobras. I've been with the company for six months. The bandwagon is over.” Taking advantage of the population's perplexity about corruption in the company, its current president built and reinforced this narrative, creating the following myth: corruption would have generated a structural financial crisis that could only be resolved with the sale of assets (reduction in the size of from the company).

This myth was used to legitimize the management strategy of the current presidency (expressed in the Business and Management Plan – PNG – 2017-2021) which has as its axes: 1) focus its activities on Exploration & Production of oil and gas, reducing its participation in other areas making the company “lean” (with a reduction in the number of employees and investments); and 2) to rapidly reduce its level of indebtedness/financial leverage. This is anchored in the divestment strategy (sale of assets, mainly to foreign capital, and reduction of investments).

The main goals established in the PNG (2017-2021) were: to reduce the net debt/LTM adjusted EBITDA ratio from 5,3 in 2015 to 2,5 in 2018; cut 25% of investments; sell assets worth US$21 billion in 2017 and 2018; and reduce operating expenses by 18%.

Is Petrobras really facing or has it faced a structural financial crisis? What does it mean to set a target of 2,5 net debt/LTM EBITDA for 2018?

Therefore, it is intended here to answer these questions, seeking to present the evolution of the indebtedness of the
Petrobras showing that the company does face a short-term financial challenge that requires specific strategies (reducing leverage and lengthening its debts) without this necessarily implying the sale of assets that reduces future cash generation, wasting productive potential.

Petrobras Debt Management: short-term financial challenges
There is no doubt that Petrobras has been facing, in recent years, short-term financial challenges with accelerated leverage (net debt/LTM EBITDA ratio – which grew from 2,5 in the 2nd quarter of 2012 to 5,3 in the 4th quarter of 2015 ) due to the growth in net debt and the relative stability of adjusted LTM EBITDA (operating cash flow).

Federal deputies of the Parliamentary Commission of Inquiry (CPI) that investigates irregularities at Petrobras make a technical visit to the company's headquarters in Rio (Tânia Rêgo/Agência Brasil)
Net Debt Ratio: EBITDA – 2nd quarter: 2012 - 1st quarter: 2017
Net Debt/EBITDA Ratio – 2nd Q/2012 – 1st Q/2017

This increase in Petrobras' debt is in no way linked to the issue of Petrobras' corruption. Part of the increase in indebtedness was strongly influenced by the exchange rate devaluation (from 1,56 US$/R$ in the 1st quarter of 2011 to 3,97 US$/R$ in the 3rd quarter of 2015), since around 80% of its debt is denominated in foreign currencies, mainly in dollars. It is no wonder that from the 3rd quarter of 2015 onwards (when the exchange rate starts to appreciate - around 40% compared to the 2017 quarter) the net debt began to fall rapidly.

It should be noted that the other part of the debt occurred with the increase in investments after the discovery of the pre-salt layer and to expand the refining sector. At that time, Petrobras' cash generation was not enough to meet the growth in the necessary investments that made the pre-salt viable and responsible for 50% of current production.

On the LTM EBITDA side, there was a drop until the 3rd quarter of 2014 and its recovery can be explained by three factors. The first was the significant reduction in the price of oil, which reached US$113,46 in 2011, while the price of a barrel of Brent dropped to US$33,8 in the 1st quarter of 2016 and started to recover more recently (US$ 53,78 in the 1st quarter of 2017). The second was the fuel price repression policy between 2011 and 2015, which had a negative impact on cash generation. The third resulted from the increased demand for oil products in Brazil between 2010 and 2014, forcing Petrobras to import oil products to meet the domestic market, creating the need for investments in new refineries. These two elements (imports and new refineries) caused a reduction in the company's cash position.

Despite these short-term financial challenges (which are already being reversed as a result of recent changes in the price of oil and the exchange rate), Petrobras has a positive situation, in terms of the medium and long term, in relation to the large oil companies in the world, as it has new competitive producing areas that can generate future cash flows. This situation arises from the fact that the Pre-Salt (i) has a falling extraction cost (which reached the value of 8,0 US$/boe) and (ii) it becomes one of the main frontiers of oil exploration in the world ( around 100 billion barrels of recoverable oil in unproved reserves), increasing oil reserves in Brazil putting it on the side of Venezuela and Saudi Arabia.

Therefore, Petrobras, despite having a short-term financial challenge – without a deep financial crisis due to its medium and long-term cash generation potential – proposes a draconian reduction (in terms of temporality) of the net debt ratio /EBITDA to 2,5 in 2018 which necessarily forces the sale of operating assets.

It should be noted that this goal was chosen in a discretionary manner by the current president of Petrobras, who stated in an interview with the magazine Value Executives(May 2017): “anticipating the deleveraging target […] by 2,5 times from 2020 to 2018 was my thing [decision]”. In other words, the strategy of selling assets was imposed by the personal decision of the current president of Petrobras.

In the current scenario (drop in oil prices, situation of the world oil and gas market, etc.), selling assets now implies a significant loss of value of these assets at a time of discrepancy between sellers and buyers in the oil market.

In addition to this possible financial loss on the sale of assets, a recent study shows that if the net debt/EBITDA ratio target was changed to 3,1 in 2018, a reasonable indicator, it would not be necessary to sell profitable assets to make cash in the short term; and that the company would reach the established leverage target of 2,5 in 2021 with Petrobras' current public parameters (fundamentals).

The argument of the current Petrobras board is that the magic leverage number of 2,5 in 2018 would allow, through the sale of assets, lower capitation costs (lower interest rates) of new financing. This can happen, meaning a gain in terms of interest payments, however, the company is not taking into account the effects of medium and long-term cash losses from the sale of profitable operating assets and its reduction in exploration share. of the Pre-Salt, the new frontier of world exploration.

In general terms, the current financial target of 2,5 leverage in 2018 of the PNG (2017-2011) hides a deliberate strategy of selling assets, regardless of its medium-term effects for the firm and for Brazil. Selling assets has become a matter of faith!

There are indeed alternatives for managing Petrobras' debt without having to sell assets and reduce its stake in the pre-salt layer. First, the financial target of 2,5 leverage could be set for 2021. In addition, there are other financing options with and without federal government support. Among them, we can highlight: i) the use of part of the foreign exchange reserves to restructure Petrobras' debt; ii) loan from the Treasury to Petrobras through BNDES, whose guarantee would be the issue of debentures by the Brazilian state-owned company; iii) creation of a hybrid instrument of capital and debt, in which the federal government would raise funds; and iv) capitalization in the international market through the issuance of debt securities (among other financial instruments). Recently, Petrobras raised around US$ 4 billion in the international market.

Eduardo Costa Pinto is a professor at the Institute of Economics at UFRJ and a member of the Strategic Studies and Proposals Group of the Unique Federation of Oil Workers GEEP-FUP

1 comment

  1. Congratulations to PáginaB for this extremely enlightening article. Petrobras is the patrimony of the entire Brazilian people and has spent many years researching, investing and discovering great wealth. Its assets, together with and mainly the pre-salt layer, are what could be called the most strategic element for the development of Brazil in the medium and long term. We cannot hand all this over to the interests of the large international groups in the oil and derivatives sector. Our future as a Nation depends a lot on Petrobras. Let's fight for all who call themselves Brazilians, for our sovereignty and right to the development of our nation. So, who knows, our children and grandchildren will have a better country.

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