Petrobras debt, operational metrics improve despite profit miss

By Guillermo Parra-Bernal and Marta Nogueira

SAO PAULO/RIO DE JANEIRO (Reuters) – Petróleo Brasileiro SA cut debt by 20 percent and had positive free cash flow for the seventh straight quarter during the fourth quarter, in a further sign of recovery at Brazil’s state-controlled oil company in spite of a quarterly profit miss.

Net income at Petrobras <PETR4.SA> came in at 2.510 billion reais (677 million pounds) last quarter, reversing a loss of 16.458 billion reais in the July-to-September period. Drastic cost-cutting and higher well productivity helped offset weaker revenue trends, the main culprit behind the profit miss.

The average consensus estimates of analysts compiled by Thomson Reuters forecast a profit of 3.703 billion reais in the fourth quarter. Net debt fell a bigger-than-expected 20 percent to 314.120 billion reais, helped by a stronger currency and sliding borrowing costs in Latin America’s largest economy.

The results underscore Chief Executive Officer Pedro Parente’s success in cleaning up a balance sheet with unrealistically priced investments and scaling back the largest debt burden among the world’s major oil companies.

Free cash flow, the money left for holders of bonds and shares after all operating and financial expenses are paid, reached 11.953 billion reais, down 27 percent from the third quarter but in line with most estimates. Free cash flow generation is key for Petrobras’s goal to reduce debt.

“We had some good results in the quarter, but the job is far from done, the company’s debt is still too high,” Parente told reporters at an event to discuss results. “Happily, there are very encouraging operational numbers here.”

Chief Financial Officer Ivan Monteiro said at the event that both credit costs and access to financing have improved since Parente took the helm of Petrobras last May. Both elements are key to speed up a reduction in the company’s debt metrics in coming months, he added.

The cost of insuring against a Petrobras bond default for five years <PETR5YUSAC=R>, a contract commonly known as credit default swap, has dropped about two-thirds in the past 11 months, to 334 basis points.

Management will further discuss results on Wednesday in a conference call with investors.


Parente, however, faces several market and operational challenges that include oil price nearing their lowest in a decade, a corruption scandal highlighting governance flaws, and losses incurred over many years because of government-mandated fuel subsidies and money-losing investments.

This month’s ruling by state audit court TCU allowing Petrobras to resume asset sales should propel cash generation and translate into lower capital debt and fundraising needs, both executives said. Petrobras has a goal of about $19 billion in divestitures and new partnerships by December 2018.

Still, Petrobras will forgo dividend payouts and worker bonuses linked to profit related to last year, until the company’s debt and cash positions improve further, Parente said. The company lost a net 14.824 billion reais for the full year.

“We’d love to resume payouts as soon possible, though,” he said at the event.

A slump in global commodity prices led common American depositary receipts of Petrobras <PBR.N> down 3.9 percent to $8.81 on Tuesday in New York, extending their decline this year to 12.7 percent.


Net revenue was largely flat from the third quarter, totalling 70.489 billion reais, below consensus estimates of 74.762 billion reais.

Even as Petrobras had to raise wages above inflation for a collective bargaining agreement, costs fell more than expected in the wake of smaller charges related to a worker retirement programme and a 77 percent decline in asset impairments.

Capital spending surprisingly rose 15 percent last quarter, bucking the 9 percent decline forecast by analysts. Petrobras revised total capital spending planned for the 2017-2021 period to $74.5 billion from $74.1 billion previously.

Steps to grow output in some offshore fields, sell non-essential assets and keep expenses in check helped drive operational earnings higher, executives said at the event.

Adjusted earnings before interest, taxes, depreciation and amortisation, a gauge of operational profit known as adjusted EBITDA, reached 24.788 billion reais, beating an estimate of 19.707 billion reais.

(Additional reporting by Gustavo Bonato in São Paulo; Editing by James Dalgleish, Bernard Orr)