How Will Petrobras’ Leverage Move In The Next Three Years?

Plummeting commodity prices have taken a toll on the profitability of the oil and gas companies worldwide. While the integrated oil and gas companies have managed to partially mitigate the negative impact of their weak upstream operations with their downstream operations, they have not remained immune from the commodity slump. For instance, the stock of Petroleo Brasileiro Petrobras (NYSE:PBR) has dropped from almost $20 per share in 2014 to under $3 per share in the first quarter of this year.

However, unlike other integrated companies, Petrobras has not raised additional debt to sustain its day-to-day operations and meet its capital spending needs. This is largely due to the fact that the company already has a huge amount of debt on its books and may not be in a position to issue additional debt at attractive rates. Nonetheless, the Brazilian energy company has reduced its long term obligations in the last few quarters as opposed to its counterparts, who have increased their leverage in the same duration.

That said, due to the diminishing profitability and cash flows, Petrobras has seen a sharp decline in its shareholders’ equity. This has led to a sudden rise in the company’s debt-to-total capital ratio, which is used as a measure to determine the leverage of a company. Petrobras’ leverage has increased from around 40% in 2013 to more than 60% in 2015.

In addition to this, the company’s Net Debt to EBITDA ratio, which shows the number of years that it requires to repay its long term debt (excluding cash and cash equivalents) at the current rate of profits, has also gone up significantly. This is largely due to Petrobras’ deteriorating profits and declining cash flows. The company’s Net Debt to EBITDA ratio has increased from 3x in 2013 to 3.8x in 2015. Further, based on our forecasts for 2016, this ratio is likely to reach an all time high of 5.6x.

The company’s management is aware of the rising concern of investors regarding its increased exposure to debt. Consequently, the company aims to bring down its leverage to less than 40% over the next two years, and to less than 35% by 2020, assuming that the commodity prices will recover gradually. Similarly for the Net Debt to EBITDA ratio, Petrobras plans to reduce this ratio to 2013 levels of 3x by 2018 and further to less than 2.5x by the end of this decade. Based on our estimates, we figure that Petrobras will be able to improve its leverage over the next three years, given that the commodity markets recover steadily during this period.

Have more questions about Petrobras (NYSE:PBR)? See the links below:

• How Will Petrobras’ Oil & Gas Production Move In The Next Five Years?
• How Important Is The Upstream Business For Petrobras?
• How Will Petrobras’ Revenue Move If Crude Oil Prices Rebound Over The Next Two Years?
• How Will Petrobras’ Revenue Move If Crude Oil Prices Continue To Remain Depressed Over The Next Two Years?
• Is It Time For Crude Oil Prices To Recover?
• Petrobras’ 2Q’16 Earnings Plunge On The Back Of Lower Commodity Prices
• Here’s Why We Revised Petrobras’ Price Estimate To $11 Per Share
• Petrobras Q1 Earnings: Revenues And Earnings Suffer Due To Low Oil Price Environment, Company Cuts Capex
• How Are Petrobras’ Revenue & EBITDA Composition Expected To Change By 2020?
• What’s Petrobras’ Revenue & Earnings Breakdown In Terms of Different Products?
• What’s Petrobras’ Fundamental Value Based On Expected 2016 Results?
• How Is Petrobras’ Revenue & EBITDA Composition Expected To Change in 2016?
• By What Percentage Can Petrobras’ Revenues Grow Over the Next Five Years?

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