Petrobras Q3 Preview: Company Plagued By Internal And Macroeconomic Problems, Will Remain So In Near Term

Petroleo Brasileiro Petrobras (NYSE:PBR) will release its third quarter earnings report on November 12. ^[1] The company has had a rough ride in the last few months, facing roadblocks in the form of various internal and macroeconomic headwinds. Petrobras is currently experiencing the crippling effects of one of the worst worker strikes in the last 20 years, while a falling domestic currency, an ongoing corruption scandal, and the recent S&P downgrade are also adding to the company’s woes. Additionally, Petrobras’ average realizations for both upstream and downstream segments are down drastically in 2015 due to the extended period of low crude oil prices. We believe that these problems will persist in the near term and Petrobras will resultantly continue to operate in a challenging environment for the next few months.

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Petrobras Hit Hard By Internal And Macroeconomic Turmoil

The last few months have been full of turbulence for Petrobras. The company is currently experiencing the crippling effects of one of the worst worker strikes in the last 20 years. ^[2] While the workers have claimed that the strike has affected production by around 500,000 bbl/day, Petrobras maintains that the loss of output was around 300,000 bbl/day initially, and the company has been able to reduce that to around 115,000 bbl/day by Monday. ^{[3] [4]} Even though the strike will not affect Petrobras’ third quarter results, the disruption is turning into a big headache for the company. The workers are striking against the planned budget cuts and asset sales, which puts Petrobras in a catch-22 situation. Even though the reduction in spending will affect the workers drastically, the company needs to implement its revised plans in order to survive the current oil price environment and the persistent economic downturn in Brazil. The Brazilian Real (BRL) has depreciated close to 30% compared to the US dollar since the start of the year and is expected to drop further in the future. Additionally, S&P downgraded Petrobras to junk status last month after doing the same to Brazil’s sovereign debt. ^[5] We believe that the fall in the Real and the downgrade will have a negative effect on Petrobras as the cost of servicing the company’s $134 billion debt will go higher.

Realizing that it will need to divert funds in order to cover its rising interest payments, Petrobras is striving hard to reduce its spending. In a revision to its Business and Management Plan 2015-2019, the company aims to shave off a total of $11 billion from its capital spending plans for this year and the next. ^[6] The company also plans to spend $7 billion less in total costs and expenses excluding raw material purchases for 2015 and 2016. The new investment plan assumes that the Real would average 3.28 to the dollar in 2015 and 3.80 in 2016. ^[7] However, the real is currently touching 3.75 to the dollar, which will surely throw off 2015 calculations. Additionally, Petrobras is sticking to its earlier divestment target of $15.1 billion for 2015-2016 but a senior company source has claimed to Reuters that the company seems unlikely to meet this divestment goal by the end of 2016. ^[8] There is also the matter of an ongoing corruption scandal that allegedly has ties to the upper echelons of the Brazilian government. All this leads us to believe that Petrobras will continue to operate in a challenging environment for the next few months.

Depressed Oil Price Environment Hurting Both Upstream & Downstream Price Realizations

The extended period of low crude oil prices has hurt Petrobras’ operations in 2015. Even though the company has increased daily crude oil and NGL production by 8% in 1H-2015, compared to 1H-2014, its Average Price Realized per BOE for upstream operations has dropped below $50 as compared to $80 in the previous year period. ^[9] A similar story has played out in Petrobras’ downstream operations as well, and the company’s Average Price Realized per Barrel of Refined Product has come down from $128 in 1H-2014 to below $95 in 1H-2015. ^[9] The average crude oil price has hovered around $55 for the year to date and we believe that prices will not experience any significant recovery for the rest of the year due to the ongoing stand-off between OPEC and Non-OPEC producers. Consequently, we believe that Petrobras’ average realizations will remain depressed for the year 2015 and will only witness a gradual recovery when crude prices start climbing in the later part of our forecast period. As a result of this rapid decline in realizations in both upstream and downstream sectors, we believe that Petrobras’ total revenue for the year 2015 will decline 28% and amount to $181 billion. Please note that the calculated revenue figure has not been subjected to any intersegment elimination.

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1. 3Q15 Webcast Invitation, November 9, 2015, Petrobras Press Release [↩]
2. Worst Petrobras strike in 20 years endangers debt plan, November 4, 2015, Reuters [↩]
3. Petrobras Turns Into Worst-Performing Oil Stock Amid Strike, November 3, 2015, Bloomberg [↩]
4. Update on Oil Workers’ Strike – 11/09, November 9, 2015, Petrobras Press Release [↩]
5. S&P Downgrades Brazil’s Petrobras to Junk Status, September 10, 2015, Wall Street Journal [↩]
6. RPT-UPDATE 2-Brazil’s Petrobras cuts spending plan for 2nd time in 3 months, October 6, 2015, Reuters [↩]
7. Adjustments in the Business and Management Plan 2015-2019: Additional information, October 8, 2015, Petrobras Press Release [↩]
8. Petrobras to slow asset sales, focus on cost cutting -source, September 14, 2015, Reuters [↩]
9. Petrobras SEC Filings [↩] [↩]