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Petrobras cuts spending again as oil-price drop bites
[SAO PAULO] Petróleo Brasileiro SA, Brazil's state-controlled oil producer, on Tuesday slashed its investment budget for the third time in just over six months, to preserve cash to pay debt, the industry's largest.
With oil prices at about 12-year lows and the company's US$15.1 billion asset sale stalled, Petrobras cut its 2015-2019 capital spending budget by a quarter to US$98.4 billion from US$130 billion in June, according to a securities filing.
With planned 2016 investments of US$20 billion, versus US$27 billion proposed in June, Petrobras also trimmed its outlook for oil production in Brazil this year by nearly 2 perncent to 2.145 million barrels per day from 2.185 million bpd.
The production cut underscores the difficulties facing Chief Executive Officer Aldemir Bendine, as Brazil endures its worst recession in at least 25 years and its currency, the real, has gone into a tailspin. "Every day Petrobras is under more and more pressure," said Fabio Fuzette, who runs Sao Paulo investment fund Antares Capital. "If oil prices stay low, I'm not very hopeful. We will likely see more of the same shortly." Petrobras' preferred shares, the company's most-traded class of stock, fell 9.2 per cent in Sao Paulo to 5.53 reais, their lowest since Aug 26, 2003. The shares are down 9.1 per cent this month and 70 per cent in the last year. "Essentially the market is reacting to most news from Petrobras as bad news," said Luana Sigfried, an oil and gas analyst with Raymond James in Houston. "It's increasingly clear that the company is just trying to adjust to reality, and reality is that it's going to be a smaller and smaller company." Lower spending will free up cash to pay down the company's US$130 billion of debt, but it also threatens to crimp future output, which investors are counting on to satisfy longer-term obligations.
Such risks, including falling oil prices and a giant corruption scandal, led to Petrobras' loss of its coveted investment-grade rating last year.
The company's 5.75 per cent bond due in January 2020 fell 61 basis points to 78.25 per cent of face value to yield 12.6 percent.
In the Tuesday revision, Petrobras cut its outlook for the average benchmark Brent crude oil price in 2016 to US$45 a barrel from US$70 in June.
Brent crude oil fell 1.36 per cent on world markets on Tuesday to US$31.12 per barrel. Some analysts expect it to drop toward US$20 in coming months, slashing potential returns on Petrobras' technically complicated and remote offshore oilfields. If that happens, the company may need to cut spending further.
The situation has worsened because of a nearly one-third decline in the value of Brazil's real against the dollar last year. That means Petrobras needs more local currency to pay its debt, most of which is in dollars.
With Brazil's recession on track to be the longest since 1901 this year, demand for fuel and other Petrobras products in Brazil, the world's seventh-largest economy, is falling. Fuel sales fell for the first time in a decade, Sindicom, Brazil's fuel distributors' association, said on Tuesday.
The revision of the 2015-2019 plan is likely to be the last as the company is expected in February to release a new five-year plan running through 2020.
Under the revised plan, about US$80 billion, or 81 per cent of the planned capital spending for 2015 through 2019, is budgeted for exploration and production. About US$10.9 billion is earmarked for distribution and refining, with the rest being allocated to natural gas, power generation and other areas.