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Petrobras debt, operational metrics improve
March 23, 2017
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SAO PAULO: Petroleo Brasileiro (Petrobras) has cut debt by 20 per cent and had positive free cash flow for the seventh straight quarter during the fourth quarter, in a further sign of recovery at Brazil’s state-controlled oil company in spite of a quarterly profit miss.

Net income at Petrobras came in at 2.510 billion reais ($812 million) last quarter, reversing a loss of 16.458 billion reais in the July-to-September period. Drastic cost-cutting and higher well productivity helped offset weaker revenue trends, the main culprit behind the profit miss.

The average consensus estimates of analysts compiled by Thomson Reuters forecast a profit of 3.703 billion reais in the fourth quarter. Net debt fell a bigger-than-expected 20 per cent to 314.120 billion reais, helped by a stronger currency and sliding borrowing costs in Latin America’s largest economy.

The results underscore Chief Executive Officer Pedro Parente’s success in cleaning up a balance sheet with unrealistically priced investments and scaling back the largest debt burden among the world’s major oil companies.

Free cash flow, the money left for holders of bonds and shares after all operating and financial expenses are paid, reached 11.953 billion reais, down 27 per cent from the third quarter but in line with most estimates. Free cash flow generation is key for Petrobras’s goal to reduce debt.

“We had some good results in the quarter, but the job is far from done, the company’s debt is still too high,” Parente told reporters at an event to discuss results. “Happily, there are very encouraging operational numbers here.”

Chief Financial Officer Ivan Monteiro said at the event that both credit costs and access to financing have improved since Parente took the helm of Petrobras last May. Both elements are key to speed up a reduction in the company’s debt metrics in coming months, he added.

The cost of insuring against a Petrobras bond default for five years, a contract commonly known as credit default swap, has dropped about two-thirds in the past 11 months, to 334 basis points.

Management discussed results with investors during a conference on Wednesday.

CHALLENGES AHEAD

Parente, however, faces several market and operational challenges that include oil price decline, a corruption scandal highlighting governance flaws, and losses incurred over many years because of government-mandated fuel subsidies and money-losing investments.

This month’s ruling by state audit court TCU allowing Petrobras to resume asset sales should propel cash generation and translate into lower capital debt and fundraising needs, both executives said. Petrobras has a goal of about $19 billion in divestitures and new partnerships by December 2018.

Still, Petrobras will forgo dividend payouts and worker bonuses linked to profit related to last year, until the company’s debt and cash positions improve further, Parente said. The company lost a net 14.824 billion reais for the full year.

“We’d love to resume payouts as soon possible, though,” he said at the event.

A slump in global commodity prices led common American depositary receipts of Petrobras down 3.9 per cent to $8.81 on Tuesday in New York, extending their decline this year to 12.7 per cent.

Net revenue was largely flat from the third quarter, totaling 70.489 billion reais, below consensus estimates of 74.762 billion reais.

Even as Petrobras had to raise wages above inflation for a collective bargaining agreement, costs fell more than expected in the wake of smaller charges related to a worker retirement program and a 77 per cent decline in asset impairments.

Reuters

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