Brazil's incoming president Michel Temer has already pleased investors by naming former central banker Henrique Meirelles as finance minister. While the world's focus was on the new cabinet, the state-owned oil giant Petroleo Brasileiro reported a third consecutive quarterly loss of 1.25 billion reais ($359 million).
That announcement generated fewer headlines, but it underlined what may become one of Temer's biggest challenges: appointing new leadership at Petrobras and dealing with the company's financial situation.
Although collapsing oil prices are at the center of Petrobras's travails, the company's debt will cause more headaches. Petrobras is by far the biggest Brazilian borrower in overseas markets, with almost $52 billion of foreign-currency bonds outstanding. According to its latest quarterly report, current debt, or money that falls due within the coming 12 months, totals $17.5 billion, the largest ever short-term liability Petrobras has faced.
Petrobras still generates a lot of cash -- $4.4 billion from operating activities alone in the first quarter -- so it's a long way from default. But it's also burning money developing and exploring expensive wells under the sea.
The majority of expenditures relate to the company's sub-salt reserves, which are harder and more expensive to develop. Petrobras is prepared to foot that bill in part because it's sticking to a long-term forecast for Brent crude of $72 a barrel.
That call, however, is becoming harder to justify, meaning Petrobras should be doing some serious soul searching. To be sure, it has started shedding non-core assets and cutting jobs, but there need to be more sweeping changes than that.
That Petrobras has been slow to recognize this new world order of low oil prices has prompted debate in Brazil over whether it will require a government bailout. Last month, Gustavo Franco, a former central banker and founder of asset manager Rio Bravo Investimentos, joined the chorus, concluding that an equity injection will be hard to avoid. In January, Citigroup analysts put the cost of a potential rescue at as much as $21 billion.
For Temer to spend that kind of money so early in his tenure would be unpopular, to say the least. The problem is that if Petrobras's finances deteriorate and it does end up in a debt restructuring -- admittedly a scenario that's still unlikely -- it would boost the cost of credit for the country as a whole. The international bondholders holding that $52 billion hardly differentiate between Petrobras and the sovereign.
One thing is certain. Whoever becomes Petrobras's next chief executive will have their work cut out. Less clear is whether investors will applaud as loudly as they did for Meirelles. This could shape up to be Temer's greatest test.
This column does not necessarily reflect the opinion of Bloomberg LP and its owners.
Sub-salt reserves refer to prospects that exist below salt layers. Until recently, many firms didn't bother with them because of poor seismic data or because it was believed reservoir-quality rock didn't exist below salt layers.
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