Petrobras Disappoints The Market With Weak 2Q’17 Results

by Trefis Team
Petroleo Brasileiro Petrobras
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Contrary to the market expectations, Petroleo Brasileiro Petrobras (NYSE:PBR), the Brazilian integrated energy company, posted a disappointing set of financial results for its June quarter of 2017 on 10th August 2017((Petrobras Announces June Quarter 2017 Results, 10th August 2017, The oil and gas company missed the consensus estimate for both revenue as well as earnings by a significant margin, leading to a 3% fall in its stock price post the announcement of the results. The lower revenue was largely driven by weaker-than-expected production volumes and softer downstream margins, while the earnings miss was primarily due to higher-than-expected finance expenses and taxes during the quarter. That said, the oil and gas giant has not changed its production and capital spending targets for the year, which could work negatively for the company, if the commodity prices do not rebound as anticipated by the company.

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Key Highlights of 2Q’17 Earnings Release

  • Petrobras’ domestic production grew around 2% on a year-on-year basis due to the ramp-up of its Lula, Sapinhoá, Parque das Baleias, and Marlim Sul fields and the start-up of production on its new systems – FPSOs Cid. de Caraguatatuba (Lapa), Cid. de Saquarema and P-66 (Lula). However, this growth was more than offset by the weaker production from the company’s international operations due to the sale of PESA and lower demand of Bolivian gas from Brazil. Although the decline in production was partially mitigated by higher commodity price realizations in the company’s domestic markets, the softness in international price realizations pulled down the company’s upstream revenue for the quarter.

  • The performance of Petrobras’ downstream operations also deteriorated notably during the June quarter, mostly due to lower sales volumes of diesel and gasoline and reduction in oil products sales volume in the domestic market. Further, the company saw a surge in its refining costs because of the decline in processed feedstock along with higher employee compensation costs. As a result, the integrated company’s net profit for the second quarter stood at $88 million, as opposed to $257 million earned in the same quarter of last year.
  • As mentioned earlier, unlike its peers, Petrobras has not pulled back its capital spending budget for the year, despite the ongoing volatility. The company plans to spend $17 billion in 2017, with more than 80% concentrated on exploration and production activities. While this investment will enable the company to achieve its production targets, it could weigh heavily on the company’s dwindling cash flows, if the commodity prices do not recover as expected.

  • On the financial side, the company has managed to bring down its long term debt from $118.4 billion at the end of 2016 to $113.8 billion at the end of the latest quarter, resulting in a net debt position of $89.2 billion. Going forward, the company aims to bring down its debt maturity in 2018 from $9.6 billion to around $8 billion by the end of this year. For this, Petrobras plans to secure long term credit lines with BNDES, a government-owned development bank, that will enable it to refinance some portion of its debt maturing in 2018 as well as fund some part of its capital expenditure.
  • That said, there is still a long way to go before Petrobras can boast of an optimal balance sheet. 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 recover gradually. In terms of the Net Debt to EBITDA ratio, the company expects to reduce this ratio to 2.5x by 2018, much lower compared to its earlier target of 3x in the same timeframe.

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