A Look At Petrobras’ Cost Reduction Strategy
The commodity downturn that began more than two years ago has uprooted the dynamics of the oil and gas industry, leading to a steep decline in the profitability of the large oil and gas players. One of the victims of the devastation caused by the ongoing down cycle is Petroleo Brasileiro Petrobras (NYSE:PBR), which has witnessed a huge plunge in its operating income over the last few quarters. The integrated energy company’s operating income dropped from around $4.5 billion in the first quarter of 2015 to an operating loss of $3.4 billion in the most recent quarter. We had analyzed Petrobras’ production growth expectations in our last article – A Look At Petrobras’ Production Strategy. In this note, we will discuss the Brazilian company’s cost reduction efforts to sustain its operating margins in the ongoing oil glut.
Cost Reduction Measures
As mentioned earlier, Petrobras’ profitability has been deteriorating over the last two years due to the turmoil in the commodity markets. Consequently, to weather the negative impact of plummeting commodity prices, the oil and gas giant aims to control its operating costs over the next few years. As per the company’s Business and Management Plan (BMP) for 2017-2021, it targets to bring down its manageable operating costs for the period to $126 billion, almost 18% lower than its previous expectations. Manageable operating costs include lifting, refining, logistics and distribution, overhead, and other expenses that the company has to undertake to carry out its operations.
Petrobras’ Manageable Costs ($ Bil)
Since 53% of the manageable costs are attributable to Petrobras’ exploration and production operations, lifting expenses form a critically large portion of the company’s overall cost. Thus, in order to control the lifting costs, the oil and gas producer has been focusing on exploring and developing its pre-salt reserves. In this quest, the company has increased its daily oil output from these regions to 1 million barrels per day (Mbpd), a 24-fold increase since the beginning of this decade.
Petrobras’ presence in the pre-salt provinces has given it a competitive edge over its competitors, since these reserves are believed to have large accumulations of extremely high quality, and commercial value light oil. For this reason, the output from these regions generates a much higher EBITDA per barrel compared to the oil produced from onshore as well as offshore (deep and ultradeep waters) plays, making it the company’s most profitable play. Furthermore, Petrobras’ experience in the pre-salt domain has enabled it to gather and build breakthrough technologies to bring about cost efficiencies for the company. Consequently, the company expects to reduce its lifting costs from $14.60 per barrel in 2014 to $9.60 per barrel over the next few years.
Petrobras’ Lifting Costs ($/barrel) – Pre-Salt
Apart from streamlining its upstream costs, Petrobras also has plans to reduce its refining costs, which form a significant part of the company’s overall operating costs. The energy company aims to integrate the common and interdependent activities among its refineries, and optimize the consumption of power, catalyzers, and chemicals to bring down its refining costs from roughly $500 per unit of equivalent distillation capacity (UEDC) in 2014 to under $300 per UEDC over the remaining years of this decade.
Our Take
Based on Petrobras’ quarterly performance, we believe that the company has been unsuccessful in controlling its operating costs as planned. In the third quarter, the oil and gas major’s operating costs (excluding asset impairment) were 32% higher in contrast to the previous quarter, and roughly 18% greater than the same quarter of last year. Thus, we believe that the company has a long and tough road ahead in terms of reducing its operating costs. However, with consistent efforts and efficient use of its advanced technology, the company could emerge as a dark horse for investors.
Stay tuned for our next analysis where we will discuss Petrobras’ capital allocation plans and how the company plans to finance its capital spending needs.
Have more questions about Petrobras (NYSE:PBR)? See the links below:
- A Look At Petrobras’ Production Strategy
- Petrobras’ Stock Plunges Due To Disappointing 3Q’16 Earnings; Company Sets An Optimistic Production Plan For Next 4 Years
- Petrobras To Post A Strong Quarter Backed By Higher Realizations And Cost Savings
- How Will Petrobras’ Leverage Move In The Next Three Years?
- 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
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