Petrobras Forgoes Growth in 37% Spending Cut to Ease Debt

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Petrobras cut spending and output targets by at least a third as Brazil’s state-controlled oil company gives up its dream of being one of the world’s biggest producers.

Capital expenditures through 2019 will be $130 billion, while domestic oil production will average 2.8 million barrels a day in 2020, compared with a prior target of 4.2 million, the Rio de Janeiro-based company said in a statement Monday. The average spending estimate of three analysts surveyed by Bloomberg was $136 billion.

Petroleo Brasileiro SA, as it’s known formally, is focusing on exploration and production, scaling back investment in refineries that have become the subject of Brazil’s biggest corruption scandal at a time of slumping crude prices and development bottlenecks. Investors have been waiting for clarity on how the world’s most indebted oil company will fund giant offshore fields without having to return to equity markets to raise cash. In 2010, it held a $70 billion share sale, the world’s largest, and failed to deliver on promised growth.

“For the first time in many years we see a business plan that fits the company’s reality and international scenario,” Adriano Pires, the head of Rio-based infrastructure consulting firm CBIE, said by telephone. “It shows this management has a mandate.”

Production Targets

Shares of Brazil’s top oil producer dropped 3.5 percent to close at 12.75 reais in Sao Paulo on Monday, extending a drop in the past 12 months to 26 percent.

Petrobras is focused in cutting its debt burden, which reached uncomfortable levels after missing targets in recent years, Chief Executive Officer Aldemir Bendine said.

“It’s a challenge but it’s a realistic challenge,” he said in a press conference at company’s headquarters in Rio de Janeiro on Monday. “This plan is quite feasible.”

Petrobras, whose total debt stands at $125 billion, joins other oil companies in cutting spending after Brent prices dropped by more than half in the past year.

The plan is based on the company not losing money from selling imported fuel in Brazil, Petrobras said, after it lost about $40 billion between 2011 and 2014 because it subsidized gasoline prices.

‘New Reality’

The company expects Brent prices of $60 a barrel in 2015 and $70 a barrel from 2016 to 2019, it said in Monday’s filing.

“What we are doing is to adapt Petrobras to a new reality in the oil and gas market,” Bendine said. “A barrel at $60 to $70 is very good for the company, but it’s not $120.”

Petrobras is planning $42.6 billion in divestments and restructuring in 2017-2018 and boosted expected asset sales to $15.1 billion for this year and next. The company is also looking to trim its net debt to ebitda ratio, a measure of leverage, below 3 times by 2018 and 2.5 times by 2020, it said.

“Divestitures and a capital increase are the only remaining ways that Petrobras can resolve its existing financial leverage problems,” said Auro Rozenbaum, a Sao Paulo-based analyst from Bradesco BBI SA. “We continue to recommend that investors should consider avoiding the stock as we find it hard to see the company’s financial puzzle being resolved in the short term.”

(Updates with CEO comment in sixth paragraph.)
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