Petrobras Reduces Output Estimates on Deeper Spending Cuts

  • Petrobras slashes 2015-2019 spending again to $98.4 billion
  • 2020 output target cut 3.6% to 2.7 million barrels a day

Petrobras further cut spending and reduced estimates for its production growth amid the worst oil market in a generation and a massive corruption scandal. The stock tumbled.

Petroleo Brasileiro SA, as Brazil’s state-controlled oil producer is formally known, slashed its business plan for the five years through 2019 to $98.4 billion, the latest adjustment to the original $130 billion announced last year, it said Tuesday in a filing. The Rio de Janeiro-based company reduced its 2020 target for Brazilian oil production by 3.6 percent to 2.7 million barrels a day.

Petrobras has been beset with the collapse in oil prices as it navigates Brazil’s biggest corruption scandal, which blocked some of its suppliers from future contracts and sent a group of former executives to jail for allegedly taking bribes. Petrobras has contributed to Brazil’s worst two-year recession in more than a century with annual investments slumping to about half of what it spent during the commodities boom.

Petrobras’ shares fell as much as 8.7 percent to 5.56 reais in Sao Paulo, a 12-year low and the biggest drop on the benchmark Ibovespa stock index. Credit Suisse initiated coverage of the company with an underperform recommendation and assigned its U.S.-traded shares a $2 target price, compared with $3.41 at 12:13 p.m. in New York.

“All valuation methods point to a downside,” Credit Suisse analysts Andre Natal and Regis Cardoso said in a research report dated Jan. 11. “Current management seems strongly committed to deleveraging the company, but we think it won’t be easy under current market conditions.”

Asset Sales

Petrobras will have to sell $43 billion in assets in the coming years and oil prices need to recover to $80 a barrel by 2020 to justify current equity prices, the analysts said. The exchange rate also needs to remain stable and domestic fuel prices need to rise, they said.

The world’s most-indebted oil company said it plans to invest $20 billion in 2016, up slightly from its most recent estimate of $19 billion. Petrobras still plans to divest $14.4 billion this year to help fund its spending plan. The company expects Brent crude prices to average $45 a barrel this year, down from its previous estimate of $55 a barrel.

“Petrobras plans to spend the same amount it should generate in cash this year, leaving no margin to reduce its massive debt,” Flavio Conde, an oil analyst at WhatsCall consultancy firm, said from Sao Paulo. “The company is now 100 percent dependent on asset sales to reduce leverage, and you can’t control sales results."