Petrobras lost $2.1 billion to graft

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A bird flies past an oil drilling platform in Guanabara Bay near Niteroi, Brazil, on Monday, April 20, 2015. A bird flies past an oil drilling platform in Guanabara Bay near Niteroi, Brazil, on Monday, April 20, 2015.
Brazil’s national oil company said a graft scandal cost it 6.2 billion reais ($2.1 billion) following a five-month debate that cost the chief executive her job, destabilized politics and shut off its access to bond markets.
Reporting the corruption-related charge in its first audited financial results since August, Rio de Janeiro-based Petrobras posted a net loss of 21.6 billion reais for 2014, dragged down by an impairment of 44.6 billion reais. Total debt rose to 351 billion reais at the end of last year, it said.
Ensnared by the ever-widening graft investigation dubbed Carwash, Petrobras has been all but shut out of bond markets and had its credit rating cut to junk by Moody’s Investors Service on Feb. 24. The scandal -- a decade of alleged kickbacks, bribes and inflated construction contracts -- is playing out as crude trades near six-year lows. President Dilma Rousseff, whose popularity is at an all-time low, is struggling to contain the damage at the driller she oversaw and championed.
“Petrobras surpassed an important obstacle, following a collective effort that shows our capacity to overcome challenges in an adverse environment,” Chief Executive Officer Aldemir Bendine said in a letter to investors.
Impairments include about 31 billion reais for delays and overruns at the Abreu e Lima and Comperj processing plants and 10 billion reais to reflect lower prices. The company opted not to pay dividends to preserve cash, reduced its 2016 investment budget by 37 percent to $25 billion and will present a revised business plan in about 30 days, Bendine said.
‘Credible numbers’
While the reported losses are in line with expectations, suggesting a neutral reaction from markets, the release means the new management passed a test, Adriano Pires, head of Rio-based consultancy CBIE, said.
“Finally the balance is out, and with credible numbers,” he said by telephone. “The market will be satisfied.”
A combination of missed production targets, mounting debt and gasoline subsidies eroded confidence in the biggest producer in deep waters with the market value tumbling by about $250 billion since peaking at $310 billion in 2008.
The list of troubles at Petrobras, known formally as Petroleo Brasileiro SA, swelled since last year when police arrested its former head of refining, Paulo Roberto Costa, revealing a money-laundering and corruption scandal.
Taking measures
Petrobras has been taking measures to strengthen its corporate governance and internal controls including the establishment of a new compliance, governance and risk directory, and is seeking reimbursement for damages.
The world’s most indebted oil company is slashing investments and selling $13.7 billion of assets to protect its cash position.
While Petrobras isn’t interested in selling production assets in its so-called pre-salt fields, the company doesn’t rule out selling high-risk exploration partnerships there, Bendine said. He said Royal Dutch Shell Plc, which agreed to buy BG Group Plc, may seek more pre-salt partnerships.
The stock has climbed 11 percent since April 13, when the company said it would present the delayed results to the board. This month, Petrobras obtained more than $9 billion from bank loans, credit lines and a platform sale and leaseback accord to cover funding needs for 2015, it said April 17.
Releasing earnings, that were delayed as the company grappled with a way to book graft costs, averts a potential acceleration of debt payments and may unlock Brazil’s corporate bond market. No Brazilian companies have sold debt overseas since Nov. 14, data compiled by Bloomberg show.
Hard read
The company’s American depositary receipts climbed 2.1 percent in after-market trading Wednesday, reversing earlier losses.
“It’s still hard for investors to decide what to do with the stock,” Celson Placido, strategist and partner at brokerage firm XP Investimentos, said by telephone interview from Sao Paulo. “Recognizing only 6 billion reais of losses related to corruption means the rest of the losses are due to incompetence. That requires a huge change in management.”
Full-year sales rose 11 percent in 2014 to 337.26 billion reais, the company said in Wednesday’s statement. The refining unit posted the largest operating loss in the year of 57.4 billion reais. Investments fell 17 percent in 2014 to 87 billion reais.
A lack of consensus over the size of the writedowns prompted CEO Maria das Gracas Foster to resign. She was replaced Feb. 6 by state banker Bendine.
Moody’s lowered Petrobras two levels to Ba2 in February, citing delays in delivering audited financial statements and difficulties to reduce its “very high” debt.
Missed targets
“If the company is able to conclusively address its near-term liquidity risks, its ratings could be upgraded, although likely not to investment grade,” Moody’s said Feb. 24.
Petrobras has missed annual production goals each year in the past decade. While output from its pre-salt discoveries has risen to more than 700,000 barrels a day, the decline in older reservoirs together with operational delays have largely eroded the gains.
Investors should be cautious about Petrobras’s growth prospects because locally built production vessels face delays and higher-than-expected maintenance stoppages at offshore fields, Credit Suisse analysts including Thomas Adoff and Andre Sobreira said in an April 20 research report.
Fuel losses
Since 2011, the government has forced the company to sell gasoline and diesel at below-market prices, an inflation-fighting measure that generated tens of billions of dollars in operating losses at its refining division. Petrobras took on an additional $35 billion in debt over the period as a result of the policy, according to Credit Suisse.
Petrobras is selling imported gasoline and diesel at a small premium following the drop in global crude prices, and is unlikely to increase them anytime soon, according to Credit Suisse.
“The publication of results is just the kickoff for resuming other discussions in the company,” Karina Freitas, an analyst at brokerage Concordia, said by telephone from Sao Paulo before the release. “Once there’s a clear signal on leverage levels, the next step would be the operational side: production levels, fuel price policies, investments.”

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