Petroleo Brasileiro S.A. or Petrobras PBR shares gained 1.32% on the NYSE on Sep 20, after it announced a steep cut its capital spending budget for the period 2017–21. The company also announced its intention to accelerate disposal of assets over the same duration.
The company’s decision to reduce expenditure is part of its strategy to survive in an unfavorable business scenario. The Brazilian oil giant has already been grappling with issues like persistently weak oil prices and battered investor confidence as a result of multibillion dollar corruption scandal in 2015.
Details of the Five-Year Plan
The largest integrated energy firm in Brazil reduced its five-year capital budget for the 2017–21 period by nearly 25% or $24.3 billion to $74.1 billion. The company had projected capital budget of $98.4 billion at the beginning of this year. Notably, the previous estimation was also lower than $130.3 billion declared in 2015.
Investors should note that 82% of the integrated player’s newly revised budget – $60.8 billion – will be allocated toward exploration and production activities. For the refining, transportation and marketing operations, 16.7% of the total or $12.4 billion will be used. The remaining will be used for gas & power business and in other areas.
PETROBRAS-ADR C Price
The reduced capital investment will surely lower the future output. This is reflected in Petrobras’ production guidance for 2017 and 2021. In 2017, the company is expected to produce 2.07 million barrels per day (bpd) crude in Brazil, which is below the prior projection of 2.22 million bpd. For 2020, Petrobras estimates Brazilian oil output of 2.7 million bpd, same as the previous guidance. The company expects to produce 2.77 million bpd of crude in 2021.
For the 2015–16 period, Petrobras reaffirmed plans of asset sales worth as much as $15.1 billion. The company intends to raise an additional $19.5 billion through divestments and partnerships between 2017 and 2018. Petrobras also foresees sale of assets worth $40 billion over the next 10 years. Through these divestments, the company intends to reduce debt and exit from peripheral businesses such as biofuels, fertilizers and petrochemicals to focus on the most profitable deep water projects.
All these measures reflect the company’s efforts to recover from its current weakness. Following the scandal, it has been hard for Petrobras – which is presently the most indebted company in the world – to raise money, both in the debt and the equity markets. Hence, rigorous asset sales emerged as a viable option to raise money and repay debt. Spending cut is also a way out of the woods for Petrobras.
Zacks Rank and Stocks to Consider
Rio de Janeiro-based Petrobras carries a Zacks Rank #3 (Hold), implying that the stock will perform in line with the broader U.S. equity market over the next one to three months.
Some better-ranked players in the broader energy sector include Enbridge Inc. ENB, Murphy USA Inc. MUSA and China Petroleum & Chemical Corp. SNP. All these stocks sport a Zacks Rank #1 (Strong Buy). You can see the complete list of today’s Zacks #1 Rank stocks here.
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