VistaBrazil - March 2015

Petrobras struggles to raise cash as shares downgraded to junk

Two weeks after Aldemir Bendine took over as chief executive officer of Petrobras, the company was downgraded to Ba2 by Moody's Investors Service on 24 February. That puts its rating at two notches below investment grade, the second downgrade in less than a month. Brazil itself is rated three steps higher, at Baa2.

The company is exploring financing options in response. It needs to sell at least US$20 billion in assets and reduce capital expenditures to approximately US$25 billion for 2015, according to a recent Bank of America report. The BofA report pointed to the potential for Petrobras to raise significant sums from its exploration and production assets if oil prices rebound.

According to Reuters, Petrobras hired financial services company JPMorgan to help sell US$3 billion in assets this year, including exploration licenses for pre-salt oil reserves, but the company denied the report.

In any event, on 2 March, Petrobras announced a more aggressive divestment program, putting the value of planned asset sales in Brazil and abroad at US$13.7 billion over 2015-16. The company expects 30 percent of the funds to come from the sale of exploration and production projects and 30 percent from the supply area, covering refineries, pipelines, terminals, and elements of the gas distribution network. Although it has not defined precisely what will be up for sale, the company did indicate that most of the assets will be related to natural gas.

The board of Petrobras has authorized the company to raise up to US$19.1 billion in fresh capital in 2015.

The company also announced plans to cut up to US$10.7 billion from its planned investment budget for 2015 in order to preserve cash and improve its status in the marketplace. With investments of US$27.5 billion originally planned for deep-sea exploration and development, the cut is a deep one.

By the end of 2014, Petrobras had debts of US$114 billion, almost five times its capacity to generate funds.

Estado do São Paulo newspaper on 26 February cited an unidentified Petrobras executive, who said that the Brazilian government has offered the company up to US$2.1 billion in loans from state banks to shore up its cash position. In light of reduced government spending, that possibility remains speculative. The Brazilian government has withdrawn its backing from a proposed local Petrobras bond, according to Bloomberg on 12 March.

The Moody's ratings cut will not only lower the company's intrinsic value but also increase its cost of capital significantly. Yield spreads on Petrobras international bonds widened in response to the cut, although they tightened again somewhat on the news of the company's two-year divestment program.

It may be a drop in the bucket, but one bright spot in the company's financial picture should be noted. On 12 March, some US$58 million of Petrobras money was repatriated by federal prosecutors from Swiss...