March 18, 2020 |
Brazilian oil company may have to execute a u-turn, oil and gas specialists say
Brazilian state-run oil company Petrobras appears to be sticking to its rapid divestment plan despite plummeting oil prices and a global economy poised for a severe slowdown, according to a string of recent announcements that point to more asset sales.
Since President Jair Bolsonaro took office in January 2019, the Brazilian state-owned company, Petrobras, has been executing an aggressive divestment plan. However, under current conditions, analysts are questioning the logic of moving the plan full steam ahead.
Petrobras raised $16 billion from asset sales in 2019. In December the company laid out its plans how further asset sales, plus a 10% reduction in costs, 15% cut in corporate expenses in 2020 and lowering the gross debt to $60 billion from just under $90 billion late last year, while keeping a minimum cash balance of $6.6 billion, would create a potential upside for the share price of around 45%.
But the outbreak of the novel coronavirus, COVID-19, which is paralyzing the global economy, on top of the failure of Russia and OPEC to agree on a new deal to cut supplies has led to oversupply and a more than 50% drop in the price of crude oil, creating financial havoc for governments with state-owned oil companies.
“This is not a good time to continue,” said one veteran oil and gas banker in New York, referring to the context of crashing oil prices. “They’d be selling at the lowest point of the cycle if they continue.” The banker requested anonymity because of a lack of clearance to speak on the record.
Petrobras' stock trading in Brazil has slumped more than 57% in price in just 17 trading days, according to data provider Refinitiv. The stock is trading near a better than 2-1/2 year low.
But Petrobras is pushing forward, seemingly undisturbed. On Monday, the company announced the binding phase of the sale of part of its interest in exploratory blocks located in the Pelotas Basin deep waters in state of Rio Grande do Sul.
Also, on March 13, it announced the binding phase for TAG, its national gas transportation segment; on March 9, it signed an agreement to sell 100% of its stakes in four onshore fields; and on March 6, it started the binding phase of E&P assets and released a teaser for a sale of assets in Colombia, the company said in a series of statements.
“Petrobras is in a good position to withstand the fall in oil prices,” the oil and gas banker said.
The company has cleaned its balance sheet, holds a good cash position, has a high operating margin, and has highly efficient offshore production, the banker explained.
“But buyers of assets in the oil and gas sector are currently in absolute shock,” said Francisco Monaldi, fellow in Latin American energy policy of Rice University’s Baker Institute for Public Policy. “They did not expect a fall in prices of this size at this speed. Now they have instructions to decrease costs in a radical manner, so they are unlikely to have any resources to invest.”
To be sure, a source with direct knowledge told Reuters on Tuesday that the company was evaluating a short-term adjustment to its five-year business plan.