Energy

Liam Denning is a Bloomberg Gadfly columnist covering energy, mining and commodities. He previously was the editor of the Wall Street Journal's "Heard on the Street" column. Before that, he wrote for the Financial Times' Lex column. He has also worked as an investment banker and consultant.

The NYSE ticker for Petrobras, "PBR", makes sense, alphabetically speaking. Can it be entirely a coincidence, though, that one look at the Brazilian oil major's balance sheet makes you want to down a case of the stuff?

Drink?
Petrobras' net debt at the end of the first quarter was bigger than Exxon's, Chevron's and BP's combined
Source: Bloomberg

Petrobras, which on Friday reported its first-quarter numbers, admits it has a problem, with its chief financial officer saying:

Petrobras is a company with very high cholesterol levels, which is leverage.

This sickness has no doubt been exacerbated by the corruption scandal that has left Petrobras in the cross-hairs of the Department of Justice and taken down members of Brazilian president Dilma Rouseff's inner circle (she now faces an impeachment trial on separate allegations).

But Petrobras' plight is merely an extreme form of what has happened to the entire oil industry.

Larded
Net debt at the end of the first quarter
Source: Bloomberg

Petrobras' issue, other than corruption, is the billions plowed into developing Brazil's so-called pre-salt oil riches off the coast. Capital expenditure began to ramp up in 2008 and peaked in 2013, by which time Petrobras had invested almost $260 billion -- just in time for a once-in-a-generation oil crash. Government mandates requiring Petrobras to use a lot of local equipment and services in the projects added to the pressure. The relatively high cost of these barrels -- with a breakeven oil price for new projects of between $70 and $80 a barrel, according to Evercore ISI -- means it will be a long, long time before they yield a decent return on investment, if ever.

Petrobras isn't alone, though. Chevron's balance sheet has taken a hammering from its Australian liquefied natural gas projects, also timed to start up just as global gas prices have tumbled. Shell, meanwhile, has almost tripled its net debt since the end of 2014 due to the acquisition of BG Group -- which, again, isn't the best advertisement for oil majors' sense of timing. And all of the traditional majors are struggling to generate positive free cash flow; certainly, they aren't making enough to cover their sacrosanct dividends.

Free At Last?
Free cash flow after capital expenditure, trailing 4 quarters
Soyrce: Bloomberg

Here, at least, Petrobras can be happy to be leading the pack. And it stopped paying cash dividends a while back. Still, when your net debt is almost 20 times that free cash flow number, probably best not to pop the champagne corks just yet.

This column does not necessarily reflect the opinion of Bloomberg LP and its owners.

To contact the author of this story:
Liam Denning in San Francisco at ldenning1@bloomberg.net

To contact the editor responsible for this story:
Mark Gongloff at mgongloff1@bloomberg.net