Petrobras’ 2Q’16 Earnings Plunge On The Back Of Lower Commodity Prices

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Petroleo Brasileiro

Petroleo Brasileiro Petrobras (NYSE:PBR), the Brazil-based integrated energy company, reported a weak set of June quarter results, largely because of depressed commodity prices and asset impairments. [1] While the sharp recovery in crude oil prices over the second quarter resulted in better price realizations on a sequential basis, the company missed the consensus estimate for both revenue and earnings by a huge margin. The oil and gas major posted a 7% growth in its total production during the quarter, which led to a 13% improvement in its revenue sequentially.

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Despite the initial signs of recovery in commodity prices, the global upstream capital expenditure in the industry is likely to remain low in 2016. In line with the industry trend, Petrobras also reduced its capital spending for 2Q’16 to $3.8 billion, almost 36% lower compared to the previous year. Further, the E&P company has reduced its capital spending budget for 2015-2019 from $130.3 billion to $98.4 billion, in its latest investor presentation. [2] While a further reduction of roughly 25% in the capex budget seems to be a positive for the company, the absolute amount of capital spending is still relatively large compared to its competitors.

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Apart from this, the Brazilian oil and gas company plans to divest $15.1 billion of its assets in the 2015-2016 time frame. Of this, only $1.9 billion worth of divestitures have been closed year-to-date. This implies that the company has been unable to find suitable buyers for its assets despite the low valuation of its assets. Hence, we expect that Petrobras will not be able to deliver on its divestiture plans and is likely to miss its target for this year.

Further, Petrobras has successfully issued bonds of $6.75 billion in the international market in order to extent the maturity period of its long term debt. However, the company’s debt stood at $124 billion at the end of the June quarter, as opposed to $44.5 billion of debt held by its rival, Exxon Mobil (NYSE:XOM). The enormous debt on the company’s books is likely to weigh heavily on its operations, as its cash flows continue to remain low. Thus, we figure that Petrobras is expected to see a further deterioration in its earnings as well as its market value over the next few quarters.
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Source: Petrobras’ Meeting With Investors, 11th July 2016

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Notes:

1) The purpose of these analyses is to help readers focus on a few important things. We hope such lean communication sparks thinking, and encourages readers to comment and ask questions on the comment section, or email content@trefis.com

2) Figures mentioned are approximate values to help our readers remember the key concepts more intuitively. For precise figures, please refer to our complete analysis for Petrobras

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Notes:
  1. Petrobras Announces Second Quarter 2016 Results, 11th August 2016, www.petrobras.com []
  2. Petrobras’ Meeting With Investors, 11th July 2016, www.petrobras.com []