Petrobras Tries American-Shale Boys' Tack to Survive Oil Crisis

  • Oil producer may borrow as much as $20 bln from banks, market
  • Investments fall to half of boom year levels, CEO says

The head of Brazil’s troubled oil giant is carving a path through the worst oil rout in a generation that would look familiar to producers throughout the U.S. shale patch: focus on the core.

Petroleo Brasileiro SA is preparing to deepen spending cuts and concentrate on its best fields to confront the collapse of crude prices, Chief Executive Officer Aldemir Bendine said Thursday. The state-controlled producer is preparing to increase borrowing to as much as $20 billion next year, he said in an interview from one of the company’s office towers in downtown Rio de Janeiro, where it’s based.

Aldemir Bendine

Photographer: Paulo Fridman/Bloomberg

Petrobras is working to release its next five-year investment plan as early as January, prioritizing the most prolific so-called pre-salt projects in deep Atlantic waters while looking for partners to ease spending at more marginal ones, Bendine said. Earlier this year, it said it was cutting a five-year plan of about $130 billion to about $119 billion. The next one probably will be lower still, he said. That compares with a $237 billion plan in 2013.

“We need to adjust the plan to the new reality in the oil industry,” said Bendine.

Producers across the globe are pulling back to cope with a glut that led oil prices to plunge by two-thirds over the past 18 months. The Permian Basin in West Texas is the only one of the regions that ignited the U.S. shale boom where output is increasing, after drillers pulled back elsewhere.

Petrobras, battered by a corruption probe and a market rout that have led the oil industry’s most ambitious investment plan to unravel, had its debt rating lowered to junk this year and has seen its market value shrink to about a 10th of its peak seven years ago. To pay off a debt-fueled expansion into some of the deepest and most complex projects in the industry, the company will primarily turn to foreign and domestic banks and sell assets, but only if the price it right, he said.

“We’re aware of the size of the challenge,” Bendine said. “Reducing the size of the debt will come with divestitures; there’s no other way.”

Petrobras will start 2016 with at least $20 billion in cash, enough to meet debt service costs for the year, and plans to borrow another $20 billion from banks, development agencies, and capital markets in an effort to stretch out its $128 billion of debt, Bendine said. This year the company borrowed $13 billion.

“We’ll start the year with an announcement of new lines of credit,” he said.

The company has had success selling its massive floating production vessels, which often cost more than $1 billion to build, and then leasing them back from the new owners. Demand for these deals is strong after completing two operations this year, he said.

Downsizing Operations

The company “will work with a smaller group of assets, but more efficient ones,” Bendine said. He’s counting on asset sales to reduce the industry’s largest debt load.

Petrobras announced a $15.1 billion divestment plan earlier this year, and originally planned to raise $3 billion in 2015. The company then reduced the target to $700 million, leaving $14.4 billion for 2016. Still, Bendine said the target will “easily” be met despite plummeting oil prices and political turmoil in Brazil that make it harder to find buyers.

“People say all majors are selling assets, but are they also interesting?" he said. "I’m positive that we have a group of assets much more interesting than the international market.”

One business that is attracting potential investors is BR Distribuidora, a fuel distribution unit with more than 7,000 filling stations, Bendine said. Petrobras has about 12 interested parties and plans to sell as much as 35 percent of the business to form a joint venture. At a later date Petrobras could list the company to raise more cash, he said.

Offshore Fields

Petrobras is looking for investors in some of its smaller offshore fields, including Golfinho and Bauna, and was even in talks earlier this year with its partners at Libra, considered Brazil’s biggest discovery, to sell a 10 percent stake, he said. Still, the company is in no rush to unload its offshore deposits with oil trading at around $40 dollars.

An effort to impeach President Dilma Rousseff further complicates the hunt for buyers, he said. A swift resolution to the political deadlock in Congress, where Rousseff is struggling to maintain support from the ruling coalition amid the longest economic downturn since the Great Depression, would be the best outcome for Petrobras and the economy, he said.

Fuel imports have dropped to a minimum amid weakening demand in Brazil, and the company sees no need to increase refinery prices in the short term as they are now at a “good premium” compared with international rates, he said.

Under previous management, Petrobras lost tens of billions of dollars during the oil boom because it sold imports at a loss as part of a wider government strategy to contain inflation.

The company now has full independence to set prices according to market dynamics, Bendine said.

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