Could This Be A Turning Point For Petrobras?

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By Haley Zaremba

Brazil’s state-run oil company Petróleo Brasileiro SA, known as Petrobras, is in the midst of a sweeping effort to decrease its significant debt and raise profits by selling off some of its more nonstrategic assets. While previously Petrobras’ divestment had been focused on refineries, in a statement released on Monday, Petrobras announced that is has now begun the process of selling exploration and production assets in the southeastern state of Espirito Santo. The assets currently for sale are in the  Peroa and Cangoa areas, in addition to the BM-ES-21 concession.

This is certainly not the first sale that Petrobras is making as a part of the company’s efforts to raise the bottom line and “increase cash flow, reduce its net debt ratio and free up funds for investments in more strategic areas,” as explained by Latin American business news outlet BNamericas. The company started selling off nonstrategic assets at the beginning of this year, bringing nearly $13 billion in to Petrobras this year. Of Petrobras’ 13 refineries, it is selling off eight, an extremely significant portion of the country’s total refining capacity. ”The eight refineries being put up for sale and their associated logistics assets represent 50 percent of the country’s refining capacity, with 1.1 million bpd of Brazil’s 2.2 million bpd processed oil capacity.” Also according to BNamericas, this is just the beginning for Petrobras’ asset sales. “The current plan sets a goal of US$26.9bn worth of sales by 2023.”

According to reporting from the Wall Street Journal, “during the second quarter, the company sold its 90% stake in gas pipeline operator Transportadora Associada de Gas SA for 33.5 billion reais, and also sold a refinery in Texas while continuing the process of unloading other assets. Petrobras said it used part of the proceeds from those sales to cut its debt, which was 80% dollar-denominated as of June 30. Net debt fell to $83.67 billion at the end of the second quarter, from $95.53 billion at the end of the first quarter, Petrobras said.”

So far, the divestment effort seems to be working quite well for Petrobras’ profit margin and is even bolstering Petrobras’ production levels, as the company has sold off many older wells to focus more on the nation’s higher-yielding pre-salt wells. Petrobras has reported that output from their pre-salt fields increased nearly 13 percent from the first quarter. While this is a significant increase, production in post-salt offshore fields, where production has been halted on some platforms, fell by 4.1 percent and shallow water and onshore wells saw their output fall by 10 percent. Although these numbers were not as high as investors hoped, and Petrobras posted a disappointing second quarter in terms of production, last week Petrobras announced that the third quarter has seen huge improvements. “In a presentation to discuss record quarterly profits, Petrobras said it produced 2.76 million barrels of oil equivalent per day (boepd) in July, up from 2.633 million in the second quarter. On July 28, it said, production hit a record of 3 million boepd,” said Reuters in a report titled “Brazil’s Petrobras reports long-awaited production boost.”

While the influx of cash from asset sales and marked increase of production in the last quarter are certainly good news for investors, Petrobras is not totally out of the doghouse yet. According to the Wall Street Journal’s interviews with analysts such as XP Investimentos’ Gabriel Francisco and Raymond James’ Pavel Molchanov, investors are still paying close attention to Petrobras’ operations and will remain attentive as the year progresses to see how healthy the company’s business really is. It remains to be seen whether Petrobras’ big divestment plan will be converted into a sustainable profit margin or if the spike in Petrobras’ cash flow is purely temporary.

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