Petrobras switches from asset seller to buyer as debt slumps

    • The new appetite for mergers and acquisitions does not mean the company will go on an issuance spree to finance acquisitions or boost investments, according to Petrobras' chief financial officer.
    • The new appetite for mergers and acquisitions does not mean the company will go on an issuance spree to finance acquisitions or boost investments, according to Petrobras' chief financial officer. PHOTO: REUTERS
    Published Wed, Jul 5, 2023 · 02:46 PM

    BUOYED by the response to its first bond issue in two years, Petroleo Brasileiro (Petrobras) is considering issuing more debt this year and is poised to buy assets after spending most of the past decade selling refineries and oil-exploration blocks.

    Strong cash generation combined with low production costs puts Brazil’s state-run oil giant in a comfortable position, chief financial officer Sergio Leite said in an interview, adding it is time for the company to “take a bigger step”. 

    “Petrobras had a divestment programme,” he said. “The company has now changed sides of the table.” 

    The new appetite for mergers and acquisitions does not mean the company will go on an issuance spree to finance acquisitions or boost investments, according to Leite. Follow-up bond issuances will serve to improve the company’s debt profile, he said.

    Petrobras’ gross debt dropped to the lowest level since 2010 in the first quarter to US$53.3 billion. That is close to the low end of a range between US$50 billion and US$65 billion set in its five-year strategic plan, which the new CFO said he sees as appropriate.

    “The idea is not to put Petrobras into debt,” he said to assuage concerns about margins and the speed of investment in energy transition projects. Investments or acquisitions should have their own financing structure, according to Leite, who mentioned partnerships and project finance as options.

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    Leite took over in March as part of the new executive board appointed by chief executive officer Jean Paul Prates, who vowed to halt “irrational” asset sales and said Petrobras should consider raising its stake in petrochemicals Braskem.

    “If we need to be aggressive we should owe a little more – US$55 billion would be fine,” said Leite, stressing the global turmoiled economic and geopolitical scenario requires prudence.

    While Petrobras’ debt ratios may bottom out, the company is still seeking to reduce its cost of capital, in part by cancelling its more expensive debt early, Leite said ahead of visiting foreign investors, including in London, this week. The company’s weighted cost of debt rose to 6.5 per cent at the end of the first quarter compared with 5.9 per cent in 2020, according to regulatory filings.

    Last week, the company sold its first dollar-denominated benchmark-size bond deal in two years, and demand suggested additional transactions could be viable, Leite said.

    “The time had come to put our feet in the water and see what the temperature was,” he said. “The acceptance was good, which leads us to continue looking at the debt markets. Petrobras is back to the game.”

    Petrobras’ debt arrangers collected as much as US$6.3 billion of potential orders out of 386 investors when a 10-year bond was preliminary discussed at a yield of about 7.25 per cent, according to the CFO. That allowed Petrobras to reduce the offered interest and place US$1.25 billion of notes due 2033 on Jun 26 at a yield of 6.625 per cent with over 327 investors.

    “Petrobras has solid financial metrics, and took advantage of a market liquidity window,” Moody’s senior analyst Carolina Chimenti said. “So far there’s been no drastic change in its financial strategy.” 

    While the yield on the company’s latest bond is above its weighted average rate, there are several US-dollar transactions that were first priced at more expensive terms, according to data compiled by Bloomberg. For instance, the company has over US$710 million of 7.375 per cent bonds due in 2027, which was first priced at par. The securities are quoted at about 104 cents on the dollar.

    “With this resource we’ll improve the profile, paying debts that have a higher rate” said Leite, without disclosing the specific securities that could be included in a transaction which may happen later this year. 

    The CFO expects investors to be more optimistic about Brazil in the short-term. Talks with bankers suggest the accounting scandal that toppled Brazilian retailer Americanas was restricted to the segment, Leite said. “They thought it would be a gunpowder fuse, but it was just a match.” BLOOMBERG

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