{"id":72000,"date":"2015-05-05T07:04:22","date_gmt":"2015-05-05T11:04:22","guid":{"rendered":"http:\/\/countingpips.com\/?p=72000"},"modified":"2015-05-05T07:54:45","modified_gmt":"2015-05-05T11:54:45","slug":"petrobras-brews-corruption-and-huge-debts","status":"publish","type":"post","link":"https:\/\/www.investmacro.com\/forex\/2015\/05\/petrobras-brews-corruption-and-huge-debts\/","title":{"rendered":"Petrobras Brews Corruption and Huge Debts"},"content":{"rendered":"
May 5, 2015<\/div>
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By WallStreetDaily.com<\/u><\/a> \"Petrobras<\/p>\n

By Tim Maverick<\/a>, Commodities Correspondent<\/em><\/p>\n

Brazil\u2019s state oil company Petr\u00f3leo<\/strong> Brasileiro<\/strong> SA <\/strong>(PBR<\/a>), commonly referred to as Petrobras, was once the darling of emerging market investors<\/a>. But, no more.<\/p>\n

For the past year, the company has been embroiled by the biggest political bribery scandal in Brazil\u2019s history.<\/p>\n

Dubbed the \u201ccar wash\u201d by the police, Brazilian prosecutors allege that politicians colluded with former company officials and contractors to extract billions of dollars in bribes. More than 750 individual projects are under investigation.<\/p>\n

The scandal caused Petrobras to write off about $2 billion in its latest (and much-delayed) financial results.<\/p>

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If that isn\u2019t bad enough, the tumble in oil prices and project delays have started to hit home.<\/p>\n

The company wrote off an additional $15 billion as an impairment charge due to the value of its oil assets tumbling.<\/p>\n

That brings the total write-offs to nearly $17 billion!<\/p>\n

\"The<\/p>\n

Unfortunately for the company and its investors, the scandal is only the tip of the iceberg for Petrobras.<\/p>\n

World\u2019s Most-Indebted Major Oil Company<\/h2>\n

Petrobras\u2019 real problem is too much debt.<\/p>\n

In fact, it\u2019s the world\u2019s most-indebted major oil company. Petrobras carries a net debt load of $106.2 billion as of the end of 2014.<\/p>\n

According to The Wall Street Journal<\/em>, that\u2019s nearly 4.8 times the company\u2019s earnings before interest, taxes, depreciation, and amortization. The Wall Street Journal <\/em>went so far as to call the company \u201can oil major with the leverage of a Texas wildcatter.\u201d<\/p>\n

Now, Petrobras faces the very stiff task of somehow servicing this debt at a time when oil prices are down about 50% from the levels they were a year ago.<\/p>\n

In an effort to carry its debt burden, Petrobras has tried to eliminate the dividend. It will also slash its capital expenditures next year to $25 billion, down 37% from its original forecast of $39.5 billion.<\/p>\n

Additionally, it says it will sell an estimated $13.7-billion worth of assets to help with its debt.<\/p>\n

Some of the assets to be sold may even include part of its crown jewel \u2013 the pre-salt oil fields that lie in deepwater offshore. Some are already in production, but Petrobras says it will take on partners for the fields not yet developed.<\/p>\n

The problem is, Petrobras probably won\u2019t get a good price, despite the quality of the assets. Buyers will no doubt low-ball Petrobras, knowing the company is in dire straits. These fields\u2019 breakeven point is somewhere in the $50- to $55-per-barrel range, which will also hold down the price.<\/p>\n

And Petrobras has other worries too besides its debt problem\u2026<\/p>\n

You see, the company buys some oil at prevailing market prices. But, because of government intervention, it must sell refined products at a fixed price that often leads to losses.<\/p>\n

Another headache is a weakening Brazilian real. Not only does the currency\u2019s value cause the company\u2019s refining margin to take a hit, but it increases its debt burden. Plus, two-thirds of the company\u2019s debt is denominated in U.S. dollars.<\/p>\n

But Petrobras\u2019 woes don\u2019t stop at the company\u2019s doors.<\/p>\n

A Major Headache for Brazil<\/h2>\n

Petrobras\u2019 problems are being felt by the Brazilian economy \u2013 the world\u2019s seventh-largest \u2013 as a whole.<\/p>\n

The company\u2019s budget slashing will likely deepen the country\u2019s expected recession. In fact, it could account for shaving off 1.5% of the gross domestic product!<\/p>\n

Some economists predict that Brazil will experience its worst recession in 25 years. There\u2019s also a fear that the corruption scandal will spread to other state companies, such as Brazil\u2019s electricity provider, Eletrobras <\/strong>(EBR<\/a>).<\/p>\n

Even if the scandal doesn\u2019t spread, Brazil will still be hit by the turmoil at Petrobras.<\/p>\n

A key reason for that is Petrobras invested double the government\u2019s entire discretionary infrastructure budget each year. It had accounted for 10% of Brazil\u2019s total annual investments. And, at its peak, its revenue equaled 8% of the gross domestic product.<\/p>\n

Already, two refinery projects worth $30 billion have been canceled. A $1.3-billion fertilizer plant and dozens of drilling and production vessels (worth hundreds of millions each) are all in limbo.<\/p>\n

Add to that, 23 of the company\u2019s major suppliers \u2013 including some of Brazil\u2019s largest construction firms \u2013 are on a payment blacklist, meaning the government will no longer do business with them. This \u201cblacklist\u201d has already pushed five companies into bankruptcy since November.<\/p>\n

None of this bodes well for Brazil or holders of a broad-based Brazil exchange-traded fund, such as the iShares MSCI Brazil Capped <\/strong>ETF<\/strong> (EWZ<\/a>).<\/p>\n

Until the scandal starts to die down, any investment in Brazil \u2013 especially Petrobras \u2013 should be put on the back burner.<\/p>\n

And the chase continues,<\/p>\n

Tim Maverick<\/p>\n

The post Petrobras Brews Corruption and Huge Debts<\/a> appeared first on Wall Street Daily<\/a>.<\/p>\n

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 <\/p>\n","protected":false},"excerpt":{"rendered":"

By WallStreetDaily.com By Tim Maverick, Commodities Correspondent Brazil\u2019s state oil company Petr\u00f3leo Brasileiro SA (PBR), commonly referred to as Petrobras, was once the darling of emerging market investors. But, no more. For the past year, the company has been embroiled by the biggest political bribery scandal in Brazil\u2019s history. Dubbed the \u201ccar wash\u201d by the […]<\/p>\n","protected":false},"author":3,"featured_media":0,"comment_status":"open","ping_status":"open","sticky":false,"template":"","format":"standard","meta":{"footnotes":""},"categories":[],"tags":[],"class_list":["post-72000","post","type-post","status-publish","format-standard","hentry","no-post-thumbnail"],"_links":{"self":[{"href":"https:\/\/www.investmacro.com\/forex\/wp-json\/wp\/v2\/posts\/72000","targetHints":{"allow":["GET"]}}],"collection":[{"href":"https:\/\/www.investmacro.com\/forex\/wp-json\/wp\/v2\/posts"}],"about":[{"href":"https:\/\/www.investmacro.com\/forex\/wp-json\/wp\/v2\/types\/post"}],"author":[{"embeddable":true,"href":"https:\/\/www.investmacro.com\/forex\/wp-json\/wp\/v2\/users\/3"}],"replies":[{"embeddable":true,"href":"https:\/\/www.investmacro.com\/forex\/wp-json\/wp\/v2\/comments?post=72000"}],"version-history":[{"count":2,"href":"https:\/\/www.investmacro.com\/forex\/wp-json\/wp\/v2\/posts\/72000\/revisions"}],"predecessor-version":[{"id":72012,"href":"https:\/\/www.investmacro.com\/forex\/wp-json\/wp\/v2\/posts\/72000\/revisions\/72012"}],"wp:attachment":[{"href":"https:\/\/www.investmacro.com\/forex\/wp-json\/wp\/v2\/media?parent=72000"}],"wp:term":[{"taxonomy":"category","embeddable":true,"href":"https:\/\/www.investmacro.com\/forex\/wp-json\/wp\/v2\/categories?post=72000"},{"taxonomy":"post_tag","embeddable":true,"href":"https:\/\/www.investmacro.com\/forex\/wp-json\/wp\/v2\/tags?post=72000"}],"curies":[{"name":"wp","href":"https:\/\/api.w.org\/{rel}","templated":true}]}}