Petrobras On Track To Achieve Its Targeted Debt Levels? – Part 1

Petroleo Brasileiro Petrobras (NYSE:PBR), the Brazilian-based integrated energy company, is one of the most levered oil and gas companies in the world. The company’s total debt, net of cash, stood at almost $90 billion at the end of the third quarter of 2017. This massive debt has not only weighed heavily on the company’s profitability in the form of high interest cost, but has also reduced its ability to raise further debt to meet its capital expenditure needs in the current low price environment. Also, the company’s deteriorating cash flow position has made it difficult for it to meet its annual debt repayment obligations, further hampering its credibility in the markets. However, Petrobras is aware of the rising investor concern over the huge debt on its books and has been trying to bring down its leverage through various initiatives. Below are some of the latest steps undertaken by the company to pare down its debt and achieve its targeted debt position over the next few years.

See Our Complete Analysis For Petrobras Here

Successful IPO of Fuel Distribution Unit

Last month, Petrobras had initiated the process to launch an initial  public offering (IPO) of the common units of its fuel distribution unit, Petrobras Distribuidora S.A. (BR). As a next step, the company raised around $1.5 billion from the market in exchange of roughly 30% of its distribution subsidiary in the IPO last week. However, the money raised in the issue was lower than the company’s expectations, as the investors remained conservative due to concerns over the country’s presidential elections due next year and the delay in approval of crucial macroeconomic reforms. The investors priced the subsidiary’s shares at 15 Reais, the lower end of the pre-determined range of the IPO, which forced the company to increase the size of the issue to 335 million shares to accommodate the “greenshoe” option opted by the investors in case of an over-allotment of shares.

Although the IPO did not perform as per the company’s expectations, we figure that it was a success since Petrobras managed to raise $1.5 billion, which is a decent sum in the prevailing weak price environment. In fact, the issue turned out to be Brazil’s biggest stock issue of the year. The success of the issue signifies that investors acknowledge the company’s efforts to reduce its heavy debt load and are supporting the company despite corruption charges against it in the recent past. We believe that the IPO will not only enable Petrobras’ fuel subsidiary to operate more efficiently and independently from the parent company, but will also provide the requisite cash, albeit small, to the parent company to pare down some of the excessive debt on its books.

Strategic Partnership With Statoil

Over the last couple of years, Petrobras has been cementing new strategic partnerships and join ventures with peers and contemporaries in order to raise funds to reduce its debt burden as well as finance its capital spending needs. In this quest, the company signed a partnership with Statoil, the Norwegian company, earlier this week, aimed at aligning the strategic interests of the two companies using the knowledge and expertise that they have in their respective markets. The deal includes the sale of 25% of Petrobras’ interest in the Roncador field to Statoil for a sum of $2.9 billion, of which $2.35 billion will be an upfront payment, while the remaining will be contingent to investments in projects to increase the recovery factor of the field. The agreement also entails maximizing the value of the Roncador asset by increasing the recoverable oil volume and extending the useful life of the field.

This implies that apart from enhancing the value of Petrobras’ existing assets, this strategic partnership will improve the company’s cash position in the form of the proceeds from the asset sale. As mentioned earlier, at the moment, the company is focused on bringing down its debt obligations to improve its credit rating in the global markets. Thus, an upfront cash payment of $2.35 billion will be instrumental in enabling the company to achieve its desired debt levels.

In our Part 2 of this analysis, we will talk about the other measures that Petrobras has undertaken of late in order to reduce its debt burden and the cumulative impact of these transactions on its capital structure.

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