Brazil’s state-run oil company Petrobras (NYSE: PBR) is looking to sell assets and redirect funds towards a capital spending plan of five years. The five-year expenditure plan could amount to $236.7 billion, Reuters reports.
Oil exploration and productivity are expected to finance the overall spending plan. For now, the company has a plan of raising $9.9 billion in asset sales for 2013, and it is starting with short sells of Nigerian oil field interests.
CEO of Petrobras Maria das Gracas hopes to reach the 9.9 billion mark to “free up cash, avert the sale of new shares, reduce debt and protect the company’s investment-grade rating,” according to Reuters. Petrobras has an eight percent stake in the Agbami blocks, which is being run by Chevron (NYSE: CVX), and another 20 percent in the offshore Akpo project, under French oil company Total (NYSE: TOT). Altogether, the sale of these Nigerian oil interests may go for $5 billion.
The company hired international bank Standard Chartered to run the auction process, and various state oil companies from Asia seem interested in purchasing what Petrobras has to offer. If everything goes according to plan, the short sells will propel Brazil into the next decade in exploring oil and gas reserves. The company is expected to produce 5.2 million bpd in fuel resources if it raises the necessary funds.
This is all in effort to make Brazil a contending oil producer and get the economy back on a path to sustainability. According to The New York Times, Brazil has been unable to keep up with increased international energy demand.
The Brazilian ethanol industry did not meet expectations, and Brazil has not made substantial oil discoveries since 2007. Petrobras also faced a mandate from the government to buy oil platforms, ships, and other forms of machinery from companies that showed little signs of growth.
President Dilma Rousseff made it a priority to revitalize Brazil’s ship industry, but this came at high cost, with little return in investment.
Petrobras faces high debt, which had lead to project delays, and the company is stuck with old fields that yield little oil. Brazil was once a fast-growing economy, with an economic expansion of 7.5 percent in 2010, and Petrobras was once one of the most sought-after companies on the public trading sphere – only second to ExxonMobil (NYSE: XOM). But economic growth slowed to less than one percent last year, as reported by The New York Times.
Things went south when President Rousseff decided to use Petrobras as a front in protecting the Brazilian economy. Petrobras has provided many jobs to Brazilians, with unemployment numbers around a mere 5.4 percent. But while the company was used to help the working population, oil production and industry fell behind.
Brazil has narrowly focused on deep-sea exploration, while ignoring shale regions. A surplus in car manufacturing has also caused rising demand for gasoline, but Brazil lacks the necessary refineries to refine the crude. As a result, Brazil has to import a vast amount of gasoline from abroad.
And Petrobras continues to undergo losses from gas imports, as the government continues to keep domestic fuel low in order to keep inflation at bay in a struggling economy.
This is what happens when a state-run oil company is caught between opposing sides. As a company, Petrobras is obligated to churn profit and satisfy investors, but state interests and political will can place tremendous stress on productivity.
Petrobras is still a viable company, unlike Venezuela’s state-run oil company PDVSA, which was used as a cash vehicle to fund the late Hugo Chavez’ social programs. While Petrobras has yet to go in that direction, the current administration in Brazil is using Petrobras as a tool to boost the economy.
Governments should let their state-run companies be companies instead of political tools. The head of state-run companies have to answer to political leaders, who will use whatever means they can to get reelected or to boost a sluggish economy, at the expensive of the company itself. This causes investors to lose interest because management decisions are being made not on a business level but on a political one.
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Brazil’s struggling economy and lagging state-run company has many investors like Jim Chanos saying, “thanks, but no thanks.” While speaking at the Ira Sohn Value Investing Conference in London, hedge fund manager Jim Chanos mentioned Petrobras as one of “two favorite shorts,” according to Business Insider. Chanos maintains that state control of Petrobras is stifling the company’s progress.
From Business Insider:
“People who invested 10,000 reais (US $ 4,968.7) 12 months ago in the most traded stock (preferred shares, without voting rights) from the state-owned company, by March 19 of this year have 7,912.18 reais (US $ 3,931.2), considering already earnings (dividends, interest on company capital and income).
People who invested the same amount in common share (less traded, with voting rights) had more losses: the balance decreased to 7,021.70 reais US $ 3,448.5). Shares fell during this period pressured by investors distrust in government interference in the company, which prevented, for example, the adjustment of gasoline prices due to inflation.”
If Petrobras is to gain more investment, there must be some degree of separation between state and business interests. Chanos is merely echoing what many investors are feeling. Many investors do not have a problem with Petrobras as a state-controlled company, as long as the company is making sound management decisions that will boost profit.
Brazil is not heading toward instability on the same level as Venezuela, but the economy could continue to decline if government policy does not change.
This would explain the company’s pursuit in raising capital and focusing on exploration projects. Further drilling for crude and gas will be a great help in providing revenue to the company and the Brazilian economy. Brazilian leaders need to refocus priorities if they wish to join the rest of the world in on-shore exploration.
Perhaps the divestment decision will allow Petrobras to get out of debt while helping the Brazilian economy. The issue of whether state-run companies should exist is another issue; what matters is that companies under state control should focus on business rather than political diversions.
Petrobras has a long road ahead to recovery, but the selling of various assets could be a step in the right direction.
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