Will An IPO Enable Petrobras To Achieve Its Debt Targets?

Following the footsteps of its European counterpart BP Plc. (NYSE:BP), which recently spun-off its midstream operations by forming a master limited partnership (MLP), Petroleo Brasileiro Petrobras (NYSE:PBR) has filed the documents to launch an initial  public offering (IPO) of the common units of its fuel distribution unit, Petrobras Distribuidora S.A. (BR), after it is registered as a publicly-held company with the Brazilian Securities and Exchange Commission (CVM). The IPO, which is expected to be Brazil’s biggest IPO in this year, is aimed at raising around $2.3 billion, or $7.5 billion reais from the markets to pare down Petrobras’ heavy debt load and enhance its capital structure. Given that the company has the largest debt in the oil and gas industry, any step to reduce this debt load is likely to work in its favor and boost its valuation.

See Our Complete Analysis For Petrobras Here

Background

BR Distribuidora is a privately held subsidiary of Petrobras that operates over 8,000 gas stations, 91 fuel storage bases, 15 lubricant deposits, and 109 fuel stations in airports. Petrobras had been planning to come out with this IPO since 2015, but had to stall its plans due to the weak position of the privately held unit. However, in August of this year, Petrobras invested around $2 billion or $6.5 billion reais into its fuel distribution subsidiary to strengthen its balance sheet, and ensure an active investor participation in the IPO. The move helped to solve a long-standing dispute with state-controlled power utility, Centrais Elétricas Brasileiras SA, which was considered to be one of the biggest hurdle for the IPO.

Terms Of The IPO

Under the terms of the IPO, the Brazilian integrated energy company will offer a 25% stake in its distribution business to the public, which could go up to 33.75%, if the company sells all its additional and supplementary allotments. Based on the suggested price range of 15 reais to 19 reais per share, Petrobras would be able to raise as much as $2.3 billion, or 7.5 billion reais from the offering, which will be finalized on 13th December. If all goes as planned, the company will manage to attract a valuation of up to $6.8 billion, or $22 billion reais for its fuel distribution unit with the current offering.

Rationale Of The IPO

Petrobras has a highly levered balance sheet with long term debt of about $106 billion at the end of the third quarter of 2017. This has not only weighted heavily on its profitability in the current commodity slump in the form of high interest cost, but has also reduced its ability to raise further debt to meet its capital expenditure needs. Hence, the company has resorted to asset sales and partnerships to raise funds to not only meet its capital investment needs but also to de-lever its capital structure. Consequently, we believe that Petrobras’ main objective of launching an IPO for its fuel distribution unit is to raise funds to reduce its debt obligations.

That said, the IPO will pose as a litmus test for Petrobras, as the company has been probed for a number of corruption scandals in the past. The success of this IPO will prove the company’s mettle among investors, which is likely to enhance its value going forward. Although the amount that may be raised from this exercise will be relatively small in comparison with the company’s overall debt, it is expected to be a positive step towards reducing the mammoth debt burden on its books, and take it closer to its objective of reducing its leverage to less than 40% over the next two years, and to less than 35% by 2020. However, there is still a long way to go before Petrobras can boast of an optimal balance sheet and achieve its targeted Net Debt to EBITDA ratio of 2.5x by 2018.

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