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Analyst Note, Allen Good, 15. december 2014
Petrobras released unaudited third-quarter operational and financial information Friday. The release contained less detail than we were expecting, with no disclosure of earnings, only revenue figures and its balance sheet position. The latest delay was primarily the result of new developments (Securities and Exchange Commission investigation, class-action lawsuit) in the ongoing corruption scandal. Importantly, however, Petrobras did receive a waiver allowing for the delay of audited financial statements until Jan. 31, 2015, without risk of violating debt covenants or acceleration of debt by creditors. Our fair value estimate and moat rating are unchanged.
On a positive note, Petrobras says it's taking the necessary steps to preserve its cash balance (BRL 62.4 billion as of the third quarter) and generate positive free cash flow in 2015 at $70/barrel Brent and a real/dollar rate of 2.60, therefore eliminating the need for additional financing next year. These steps include discounting receivables, reducing capital spending, reviewing refined product price strategies, and reducing operating costs for operations not already in cost-reduction programs. As with all of Petrobras management's guidance, though, we have our doubts. We need more detail on the plans before assuming the firm can generate free cash flow, given our projection for almost a $15 billion funding gap in 2015 based on those conditions and previous guidance. That said, we applaud management for addressing its deteriorating financial position and investors' concerns, particularly regarding the risk of an equity issuance.
Filing audited statements in January remains critical to avoiding violating debt covenants and restoring some of the firm's credibility with the capital markets. The ability to deliver audited statements is likely to remain in doubt, however, until management actually does so. The amount of asset write-downs stemming from the corruption scandal will remain another unknown.
Bulls and Bears say
Bulls say
- Continued discoveries off the Brazilian coast after the initial presalt find in late 2007 are the first in what might ultimately be a tripling of Brazil's total reserves.
- Petrobras' extensive experience in deep-water offshore operations gives the firm the expertise and skills required to exploit the newly discovered resources.
- With nearly all of Brazil's refining capacity and investments to increase diesel production, Petrobras can capitalize on the growing domestic demand for refined products. Recent price revisions by the government should help stem losses.
Bears say
- Despite abundant resources, Petrobras has struggled to increase production. The firm lacks the resources and capabilities to effectively develop the new discoveries while maintaining performance in older fields.
- Petrobras is controlled by the government, which might mean that financial or strategic decisions benefit the country but harm shareholder returns, such as with the government's unwillingness to revise refined product prices.
- Investments in refineries will fail to deliver adequate returns on capital, given cost overruns and government-controlled prices.
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