Petrobras – light at the end of the tunnel

Pedro Franklin, Director of Comerc Gás, analyzes the company' business plan

Pedro Franklin, Director of Comerc Gás, analyzes the company’ business plan


Given the uncertainties of the world economy and the extraordinary drop in crude oil prices due to over-supply, Petrobras recently announced its 2017 – 2021 business and management plan. Even in an adverse scenario, with the European and Japanese economies close to a stand-still, a slow-down in China, the situation in the Middle East and the US elections, Petrobras sees light at the end of the tunnel.

To get an idea of the size of the challenge of finding a way out of the current situation, Petrobras has the highest debt of any oil company in the world, with a gross debt of US$ 132 Bn in 2016. That same year Petrobras dropped back to speculative grade, and the cost of funding jumped from 4.0% a year to 8.6% a year, and has been at that level since 2011. Meanwhile, legal claims filed by US shareholders are concerning.

 Source: Petrobras
Source: Petrobras

The good news is that the dark part of the tunnel may be behind it. The vision Petrobras displayed in its business plan is that of an integrated, results oriented, energy company with a focus on oil & gas. The plan they propose is ambitious. Petrobras plans to bring down its leverage (net debt/EBITDA) to 2.5 by 2018, after reaching a high of 5.3 in 2015. Meanwhile it expects divestments totaling US$ 19.5 Bn in 2017-2018. As a result, the company will exit biofuel manufacture and LPG distribution, and will sell its stake in petrochemicals and fertilizers.

 Source: Petrobras
Source: Petrobras

As of 2017, investments will concentrate in E&P (82%), refining and natural gas (17%), with an overall reduction of 25% compared to the previous plan. This decision marks a search for efficiency, as even with a major reduction in investments the company expects to keep output at the same level. Between 2010 and 2016, well productivity increased 30%, and the time to dig a well and set up a rig went from 310 days to 89 days.  With the expected sale of company assets and increased operating revenue, the company expects it will not have to seek funding for the period between 2017 and 2021. Operating costs are also falling. Extraction costs should drop from US$ 14.6/boe (barrel of oil equivalent) in 2015 to US$ 9.6/boe in 2017. The cost to operate refineries should also drop substantially, from US$ 490.00/UEDC to US$ 290.00/UEDC  (Utilized Equivalent Distillation Capacity).

Source: Petrobras
Source: Petrobras

Petrobras has announced it will be a major player in natural gas and believes it to be a transition fuel to renewable energy. It is de-verticalizing its operations adding that there are regulatory, tax and fiscal challenges to be overcome in this process.

The risks involved in the plan are many, such as insufficient funds and unpredictable changes in market conditions, but according to the proposal presented, they will all be mitigated by a number of initiatives. Although challenging, the proposals seems to be completely feasible, especially if the company maintains its current position of results-oriented company. The outlook is optimistic. All that is left for us is to monitor the implementation of the measures announced with great expectation.


*Pedro Franklin is the Director of Comerc Gás, part of Comerc Energia



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