As expected, Petroleo Brasileiro Petrobras ( PBR ), the Brazilian integrated energy company, posted a strong improvement in its March quarter earnings(( Petrobras Announces March Quarter 2017 Results , 11th May 2017, www.petrobras.com)), backed by the surge in commodity prices over the last few months, higher production, and lower operating costs. Further, the country’s government allowed the company to sell fuel at a profit in the domestic market, which enabled the company to generate profits in the current quarter as opposed to heavy losses reported in the same quarter of last year. Consequently, the oil and gas giant witnessed a 5.6% jump in its stock on 12th May 2017, post its earnings call for the quarter.
Going forward, Petrobras’ production targets remain intact for 2017 and the remaining years of this decade. Also, the company will further cut down its operating costs in order to improve its declining margins, and divest its non-core assets to enhance its highly levered balance sheet.
Data Source: Google Finance; US Energy Information Administration ( EIA )
Key Highlights of 1Q’17 Results
Similar to its American counterparts, Petrobras also experienced a sharp rise in its price realization in the first three months of the year, given the improvement in the global commodity prices. Further, the company grew its total hydrocarbon production by over 7% during the quarter, which provided a boost to its top line. The company’s 1Q’17 revenue stood at $21.7 billion, significantly higher on a year-on-year as well as quarter-on-quarter basis.
On the cost side, Petrobras booked lower import costs during the quarter as it utilized a higher share of national oil in its processed feedstock and leveraged the natural gas it produced domestically. Further, the company reduced its sales, general and administrative (SGA) expenses by roughly 9% and recorded lower asset write-offs and impairments in the March quarter. As a result, the integrated energy company posted net profit of $1.4 billion in the first quarter, as against a net loss $318 million suffered in the year ago quarter.
Not only did Petrobras show a recovery in its operational performance, but the company also made a strong headway in improving its capital structure. The company, known to be the world’s most indebted oil company, pared down its long term debt to $115 billion, almost $3 billion lower compared to the previous quarter. While there is still a long way to go before the company can boast of an optimal balance sheet, it is surely making progress towards achieving its goal of reducing its leverage and Net Debt to EBITDA ratio.
To this effect, Petrobras plans to raise about $21 billion through asset divestment and partnerships in 2017-2018, up from its previous target of $19.5 billion. In fact, the company revised its divestment portfolio recently, and included its Pasadena Refinery in Texas, and its 50% stake in an African oil exploration venture into the list of assets that have been set aside for sale. However, the company has been unable to secure any new deals in this quarter due to the geo-political conditions in the country. Also, the company has denied the news of any talks with Exxon Mobil ( XOM ) for a strategic alliance.
Despite the ongoing volatility in the commodity markets, Petrobras expects to expand its total (Brazil and international) oil and gas output from 2.62 million barrels of oil equivalent per day (MBOED) in 2017 to 3.41 MBOED by 2021, growing its production at a compound annual growth rate of around 7% over the remaining years of this decade. Accordingly, the company has increased its capital spending budget to $74.5 billion for the next 3-4 years, with continued focus on exploration and production activities.
Moreover, the oil and gas company will continue to manage its lifting and refining costs in order to enhance its profitability in the coming quarters. As per the Strategic Plan 2017-20121, Petrobras aims to bring down its lifting costs from around $11 per boe in 2016 to $9.60 per boe in a few years by increasing its participation in pre-salt plays and managing its drilling rig idleness. Besides, it targets to bring down its overall manageable operating costs to $126 billion, almost 18% lower than its previous expectations. In terms of its downstream operations, the company aims to integrate the common and interdependent activities among its refineries, and optimize the consumption of power, catalyzers, and chemicals to bring down its refining costs from roughly $500 per unit of equivalent distillation capacity (UEDC) in 2014 to under $300 per UEDC over the remaining years of this decade.
Thus, in a nutshell, we believe that while Petrobras has benefited from the recent recovery in commodity prices, its highly skewed balance sheet, coupled with its dented reputation and poor execution abilities, could prove to be a major roadblock in its ability to revert back to its historical value. However, if the company delivers successfully on its expansion and divestment plans, it could see a new high, assuming that the commodity markets rebound as expected.
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