Is Petroleo Brasileiro SA Petrobras Brazil’s Biggest Problem?
By Muhammad Ali Khawar on Jan 23, 2016 at 8:33 am EST
Is Petroleo Brasileiro SA Petrobras Brazil’s Biggest Problem? Is Petroleo Brasileiro SA Petrobras Brazil’s Biggest Problem?
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Bidness Etc takes a look at how Petrobras’ multi-billion dollar corruption scandal and debt burden continues to affect the Brazilian economy
Petroleo Brasileiro SA Petrobras’ (NYSE:PBR) bailout can cost around $20 billion to the Brazilian government if crude oil prices fall to $20 per barrel. The amount would be required to improve the capital structure and liquidity position of the federally-operated oil and gas corporation, Bloomberg reported citing Citigroup’s research.
Petrobras: High Debt Burden
Low crude oil prices and a multi-billion dollar corruption scandal have adversely affected Petrobras’ balance sheet position. The company had more than $130 billion in liabilities for the three-month period, ended September 30, 2015. Its debt to earnings ratio has increased to 6.5 times, which according to Citigroup is an "unsustainable level.”
Petrobras’ total debt to total equity ratio jumped from around 115% in 2014 to 174% at the end of September 2015 — making it the most indebted company in the oil and gas industry.
In 2015, Standard & Poor's (S&P) Ratings Services downgraded Petrobras' credit rating to Junk. Fitch Ratings Inc. and Moody's Investors Service have also lowered the company's credit rating to the lowest investment grade.
Brazilian Economy: Already in Trouble
The deteriorating condition of one of the country's prime industries continues to adversely affect the economy. The Latin-American economy was expected to post 1.2% gross domestic product (GDP) growth last year. However, due to worsening socio-economic conditions, the economy posted a decline in GDP for two consecutive quarters. After dropping more than 2% in the second quarter of fiscal '15 (2QFY15), Brazil’s GDP plunged 1.7% in 3Q. The drop exceeded the 1.2% consensus estimate.
In 2015, the Brazilian Central Bank conducted a survey with 100 economists as participants, who forecasted a 3.2% and 2.04% decline in the economy’s GDP in 2015 and 2016, respectively. Brazilian government, itself, expects a more than 0.9% budget deficit.
If crude prices continue to drop, it is highly likely that Petrobras’ financial condition would only worsen. Earlier this month, the oil major reduced its 2016 production target, and 2015-2019 capital investment plans. It now plans to invest around $98.4 billion, down 24% from a previous $130.3 billion projection. This year’s production is estimated to be around 2.14 million barrels per day (bpd).
The energy company has also announced to speed up its asset divestiture plan. According to Reuters, Petrobras is considering to sell its $892 million worth of stake in the petrochemical company, Braskem SA. The state-run company has hired Banco Bradesco SA as its financial advisor to help evaluate different options.
Though Petrobras continues to make efforts to reduce its high debt burden, if crude oil prices drop any further, the Brazilian government would have to intervene to bail out the company.
