Brazil's Petrobras warns economy has changed forever as it books massive impairment

[RIO DE JANEIRO] Brazil's Petrobras took a 65.3 billion real (S$15.79 billion) impairment on its exploration and production assets on Thursday, warning investors that changes in consumer behaviour resulting from the coronavirus pandemic were likely permanent.

The impairment led Petroleo Brasileiro, as the firm is formally known, to book a first-quarter net loss of 48.5 billion reais. The company wrote off the entire value of its shallow-water assets, and said it did not expect to resume production at six high-cost production assets that are currently for sale.

Total impairments came to 57.6 billion reais for its deepwater assets, including the massive Marlim Sul oilfield, and 6.6 billion reais at its shallow-water fields. Other unspecified assets comprised the remaining 1.1 billion reais of writedowns.

The impairment served as a warning by the state-run oil giant that the oil market may never recover following the novel coronavirus pandemic, even as some major economies are already attempting to tiptoe back to normality following widespread lockdowns.

The company is now assuming long-term Brent prices of US$50 per barrel, versus a previous assumption of US$65, it said in its first-quarter results statement. The company projected that 2020 Brent prices would average US$25 a barrel before increasing US$5 every year until they reach US$50 in 2025.

"The company expects a lower level of demand in the long term, taking into account... structural change in the world economy, with permanent effects arising from this economic shock, including changes observed in consumer habits, which tend to be permanent," Petrobras said.

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Petrobras reported recurring earnings, before interest, taxes, depreciation and amortisation, adjusted for some one-off factors, of 36.9 billion reais.

That figure was significantly above the Refinitiv consensus estimate of 32.9 billion reais.

The company said its first-quarter results were not significantly affected by the economic fallout of the coronavirus pandemic, which would only be meaningfully felt in coming quarters.

It added that it benefitted from continued strong exports of crude and bunker fuel, a product used by ships.

In comments accompanying the results, Petrobras chief executive Roberto Castello Branco noted the company's debt increased "only US$2.1 billion" in the quarter, despite adverse market conditions.

He added that the company's ambitious divestment program was still intact, although it may suffer delays. Its sale of eight refineries, by far the largest ongoing divestment, is still going forward.

"In particular, we are confident that at least a significant part of the refinery sales shall have purchase-and-sale contracts concluded by the end of 2020," he said.

REUTERS