Petrobras finally released its audited 4Q and full
year 2014 financial statements yesterday.
Today, it held its conference call with analysts. In more ways than one, the company is out of
the ICU, but a long way from regaining its form of the mid 2000s.
Solving these problems will call on the obvious
financial skills of management, but also on the cooperation of Petrobras’
controlling shareholder, especially if it is mostly passive. There is clear progress on those fronts:
New CEO Aldemir Bendine and his team can take credit
for avoiding the brick wall. Like
Freddie Mercury of his favorite rock band Queen, he surely pleads, with his
controlling shareholder, the Brazilian State: “Don’t stop me now!” Would President Dilma Rousseff be more
receptive if he wore white denim jeans, a wife-beater and Addidas track
shoes? We’ll never know.
Tonight
im gonna have myself a real good time
I
feel alive and the world it’s turning inside out Yeah!
I’m
floating around in ecstasy
So
don’t stop me now don’t stop me now
‘Cause
I’m having a good time having a good time
As I expected in my two previous posts[1],
the company booked a small “corruption” charge based on the 3% bribes skimmed
off a variety of contracts and a large impairment charge. I thought that the former would be north of
R$4 billion and the latter a maximum of R$61 billion. The final, audited numbers, were R$6.2
billion and R$44.6b billion respectively.
The direct and indirect cost of corruption was probably
higher than the R$6.2 billion number because 70% of the impairment was due to
massive cost overruns at the Comperj and Abreu e Lima refineries, and it is
hard to explain that away by blaming sheer incompetence alone. But the official version looks better and doesn’t
change the company fundamentals[2].
Another decision of the incoming management which I
expected was cutting dividends for the time being.
I’m
a shooting star leaping through the skies
Like
a tiger defying the laws of gravity
I’m
a racing car passing by like Lady Godiva
I’m
gonna go go go
There’s
no stopping me
I also feel comforted in my belief that the choice
of a financially savvy top management, rather than a technical one, was the
correct choice. For now and the next few
years, the key challenges are financial.
This is clear when one considers the following:
-In 2014 the company generated gross cash flows from
operations of US$27 billion yet spent US$35 billion in capex, paid US$6 billion
in interest, US$4 billion in dividends, US$10 billion in debt maturities and
raised US$31 billion in new financing;
-Last year its gross debts rose to US$132 billion as
a result of net new borrowings and the weakening of the real (80% of the debts
are denominated in foreign currencies).
Given that the real has devalued another 12% since year-end, the
financial pressure has risen even further;
-The company has debt maturities ranging between US$16
billion and US$27 billion in each of the next four years.
I’m
burning through the sky yeah!
Two
hundred degrees
That’s
why they call me Mister Fahrenheit
I’m
trav’ling at the speed of light
I
wanna make a supersonic man out of you
-The company was facing a financing gap of US$13
billion this year[3],
which has already been filled with a combination of Brazilian and Chinese bank
loans;
-2015 capex have been cut from US$35 billion in 2014
to US$29 billion (for now);
-A preliminary divestiture program of around US$14
billion over the 2015-2016 is being implemented;
-Mr. Bendine has stated that he has the approval of
his government to sell liquids domestically at price parity with international markets;
-New board members from the private sector are
expected to join at the end of this month, among them Mr. Murilo Ferreira the
CEO of Vale SA who will become chairman of the board;
-Finally there are talks in Congress in Brasilia to
bring more flexibility to the minimum content rules and to drop the requirement
that Petrobras take a 30% stake in all new pre-salt projects and operate them.
Don’t
stop me now
I’m
having such a good time
I’m
having a ball
Don’t
stop me now
If
you wanna have a good time
Just
give me a call
But shareholders shouldn’t uncork the champagne and
sing “We are the champions” just yet (or
perhaps ever).
Right now, Brazil is still reeling from the
magnitude of the petrolão scandal,
and the combination of popular anger, judicial activism and political rivalries
will ensure that corruption will be held in check and government meddling will
be scrutinized by the press. Then what?
A recent opinion poll showed that, while angry with
the corruption at Petrobras, a majority of Brazilians is against its
privatization; if this sentiment can’t be changed, sooner or later the same
lethal combination of corruption and incompetence will return.
Finally, one shouldn’t forget that the oil and gas
industry is going through a period of low prices which may last longer than expected
and cause operational and financial damage.
Depending on what management is willing and allowed to do, it may find
itself in a tight corner again.
Don’t
stop me
Don’t
stop me
Don’t
stop me
Hey
hey hey!
Don’t
stop me
Don’t
stop me
Ooh
ooh ooh (I like it)
Have
a good time, good time
Don’t
stop me
Don’t
stop me
Ooh
ooh alright
In my post of 1/29/15, I disclosed that I had bought
some shares (PBR). The price was then
US$6.40 and I thought that it had the potential to at least double. Since then, I bought some more and haven’t changed
my views. Its closing price today is
US$9.40.
In my post of 2/6/15 I suggested that Petrobras wouldn’t
be privatized[4],
losing the opportunity to emulate Total of France but also avoiding the ghastly
fate of PDVSA. If I am right, Petrobras
is a two to three year trade. If I am wrong and it is privatized ...
Don’t
stop me now (‘cause I’m having a good time)
Don’t
stop me now (‘cause I’m having a good time)
I
don’t wanna stop at all
[1] Of 1/29/15 and 2/6/15.
[2] Besides, digging deep into the cost overruns
would have taken much longer, delaying the publication of the audited
financials for no greater benefit to the company.
[3]
Based on the following reasonable assumptions: US$60/bbl, 2.8mm boe/d production and
R$3.10/US$.
[4] As Vale was for example, where a majority of
voting shares is in the hands of private investors.
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