By: Mark Melin

Petrobras (PBR): cutting capital spending by more than one third as oil production expected to lag

The Brazilian state-run oil concern released its budget today and it paints a picture of an organization in distress taking emergency action to stem red ink and shore up its balance sheet. As a fraud investigation into the company has raged, the company had been bleeding cash due to mismanagement. In this environment and limited options available, Petrobras cut its investments by 37 percent over the next five years, reducing capital spending to $130.3 billion from its previous five year plan, which had pegged spending at $206.8 billion.

With lowered spending also comes lowered production estimates. Petrobras slashed its domestic production target to 2.8 million barrels a day from the previous business plan, which had estimated the company would produce 4.2 million barrels per day. As a point of comparison, Canada produced nearly 3.8 billion barrels of oil per day in 2014 and the world’s largest oil producer, Russia, produces over $10 billion barrels per day.

Reduction in spending and production ends the Petrobras plan to become a world leader in oil production

The business plan places gravity on plans to place Petrobras among the world’s elite oil producers, a dream brought to life by the discovery of significant oil reserves off Brazil’s coast. The Wall Street Journal, citing unnamed expert sources, said the original business plan went too far.

Petrobras, in a hurried bid to raise cash, plans to sell off $15.1 billion in assets in 2015-16, up from a target of 13.7 billion. Another $42.6 billion in savings would be achieved in 2017-2018 in non specific “foresees business restructuring efforts, de-mobiization of assets and additional divestments.”

Bridgewater Associates noted dire concerns regarding Petrobras, saying they had to raise cash and make tough decisions quickly

Earlier in 2015, a Bridgewater Associates strategy document noted that Petrobras is likely to be caught in the middle of this debt storm without a strong shelter, as debt payments were forcing the company to sell assets. Bridgewater termed Petrobras as systemically significant in that its failure could tank the entire Brazilian economy.

The firm is the most significant source of capital expenditures in Brazil, with the problem being that erosion in its balance sheet “has massively boosted its need for foreign borrowing as it has become a major debtor,” in both the local markets as well as among foreign investors.

Petrobras generally used as a tool of political patronage, as a corruption investigation and prosecution continues

Petrobras was used as a political patronage tool that supported various administrations and was also called upon to supply the nation with subsidized fuel, allowing Brazilian residents to purchase gasoline at lower than market choices. It went on a spending spree that, Brazilian prosecutors claim, led to a bribery scandal that directed major contracts to favored organizations. Nearly 30 arrests of Petrobras officials have taken place over the past year. One former Petrobras executive who cooperated with investigators has returned a nearly $97 million fortune he built, storing the money in Swiss bank accounts, the report noted.

“So, a weak government faces a terrible choice between trying to save a company that is under investigation for corruption with those very same officials” who are involved in a corruption investigation, the Bridgewater document said at the time.