Petróleo Brasileiro S.A. (ticker: PBR), or Petrobras, will release its official Q3’14 financial results in January 2015 without the external auditors report from PricewaterhouseCoopers (PwC). The decision, announced on December 29, 2014, adds that PBR is “committed to releasing its third quarter accounting statements reviewed by PwC as soon as possible.” The company typically releases its third quarter results in November, but had said via conference call on November 17 that financials would not be duly audited until 2015. Its current unaudited financials reflect one of the best quarters in the last several years, with operating cash flow at its highest level since Q3’09.
The partial release will keep PBR in compliance with obligations as it remains embroiled in a scandal involving several executives and even re-elected President Dilma Rousseff. Several measures are being taken to ensure PBR’s credibility, including implementing committees to handle the various legal implications at Brazil’s national oil company. In the past month, PBR has created:
- Special Committee. Duty: Reporting arm for independent investigation firms employed by PBR.
- Committees to Analyze the Application of Sanctions (CAASE). Duty: Analyze 23 partner companies and their involvement in various PBR operations, aimed to “protect the company and its partners from damages that are difficult to redress financially and from harm to its image,
- Legal representation of an American firm to address a class action complaint filed in New York (pending). The company said in a release it expects additional suits to be filed which may be consolidated with the current complaint.
Lava Jato Operation
The Lava Jato Operation, which is Portuguese for “Operation Car Wash,” came to a head on November 11, 2014. The Brazilian Public Prosecutor’s Office filed criminal charges citing active corruption, passive corruption, organized crime, money-laundering and falsification of documents. PBR employees were among those of the scores of people arrested, including the former director of downstream. Other companies involved in the arrests led to the formation of the CAASE group, which bars PBR from collaborating with any of the 23 suspected companies on future projects.
The corruption scandal only adds to the many troubles plaguing a company with access to massive offshore assets. In 2008, PBR’s market value was nearly $300 billion. Soaring debt and underwhelming profit, combined with the drop in commodities, leaves the company worth less than $50 billion today.
The handling of Petrobras was a hot topic in President Rousseff’s successful re-election campaign, and reports surfaced that her administration was receiving kickbacks from the company. Other accusations included offshore workers receiving $139 million in bribes for a drilling contract. A refinery in northeast Brazil, originally estimated at a development cost of $2.7 billion, is now expected to run $17 billion. The biggest blunder was a $1.18 billion price tag for a refinery in Pasadena, California, which was nearly 28 times the amount the original owner paid.
Since Rousseff was first elected in year-end 2010, PBR’s debt has nearly doubled to $135 billion. Its downstream segment alone lost $12.5 billion in 2013 and was on track to lose $10 billion in 2014 before the commodity turn. In a note on October 7, 2014, Raymond James reminded readers that PBR is also required by the government to sell fuel at a 10% to 15% discount to its citizens, further restricting its profits.
Petrobras Reaction
The embattled company held a conference call six days after the Lava Jato arrests, highlighting its unaudited results from Q3’14. Similar to today’s announcement, the company pledged to release audited results in a “timely” fashion, which would likely be no sooner than January 2015.
Management declined to comment on a dividend impact if profit and net income statements are affected in the audited results. The company said it is not in need of new capital for its current projects. “Fortunately, this year, we brought forward our funding,” said Almir Guilherme Barbassa, Chief Financial Officer. “Along the year, we kind of brought forward the funding that we would be doing next year so that the cash available in the company gives us enough space and momentum to do the work that we need to do now.”
Not all analysts are convinced, citing the high cost of offshore projects, where more than 90% of Petrobras’ operations take place.
PBR Operations
Petrobras says it is currently evaluating plans for 2015, and is “implementing a number of steps aimed at maintaining the cash level, in order to enable investments without the need for new financing.”
The oil price drop has left several nations dependent on hydrocarbon production in a very difficult spot. Venezuela and Algeria have both publicly called for production cuts in order to salvage their budgets. Brazil is no exception, and its real currency trades at a R$2.60 exchange rate for each US$1. Barbassa said, “As of next year, we’ll become a net oil exporter and it’s good for us to have a higher, more appreciated Brent and also a depreciated Brazilian real, so if you put it all together, we have a better outcome.”
PBR is adjusting its budget accordingly dependent on Brent prices of US$70.
José Miranda Formigli, Director of Exploration & Production, added: “The priority of the company is unchanged. Our priority is our output curve, and we will use all of the options available in terms of hiring good fleet services to ensure that we will work on the new wells, that we will ensure interconnection.”
The company has been setting production volume records throughout the year and set another mark on December 21, 2014. The record flow of 2,470 MBOPD had been boosted by nine new production units placed online since 2013 and enhancing production of the pre-salt layer in the Campos and Santos Basins. The pre-salt contributed 700 MBOPD, or about 28%, or the production record from 34 producing wells, which averages out to more than 20 MBOPD per well. The overall pre-salt volume is more than double the rate in 2013.
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