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Petrobras breathes easy

Brazilian company posts best financial results since bribery scandal

Petrobras has finally announced a positive annual result, five years after the Lava Jato corruption probe left the Brazilian state-controlled company with spiralling debts. The firm closed the year with a $25.8bn net profit, the highest figure in seven years, and a total of R$20.2bn ($5.27bn) in asset sales.

Improved crude and fuel prices largely contributed towards the strong year. Oil jumped 50pc year-on-year, in reals, and fuel 32pc yr-on-yr. Even a slight dip in production failed to impact the company's finances — production fell to 2.63mn bl/d oe from a record 2.65mn bl/d oe the year before.

Output is set to rise again this year and further boost the firm's bottom line. Four new production systems were installed in 2018 — P-74, the floating production, storage and offloading (FPSO) vessel Cidade de Campos, P-75 at Buzios and P-69 at Lula Extremo Sul — and this year Petrobras is pursuing another four in the pre-salt and deep-water regions. Gabriel Fonseca, lead equity analyst at Brazilian brokerage firm XPI, says "there is room for 10pc production growth in 2019".

P-67 was the first platform to be completed this year, at Lula Norte in the Santos Basin. The FPSO has capacity to process 150,000bl/d of oil and 6mn m3 of natural gas. The platform is located in the Lula field, which is Brazil's most productive at 900,000bl/d, and is expected to hit 1mn bl/d later in 2019.

A further two platforms with the same capacity have also already begun producing. P-76 at Buzios, the country's second most productive field, began production in February, followed by P-77, also at Buzios in the pre-salt Santos Basin. Petrobras plans to add another production system in 2020, followed by three in 2021 and another three in 2022.

The start-up of these facilities will enable Petrobras to increase production, but at a lower cost. According to UBS, in the first quarter of 2018, lifting costs fell by 7pc compared with the average cost the previous year. Currently, pre-salt production has a lifting cost of around $7/bl, including a production system leasing cost of $2/bl. In contrast, post-salt basins have an average cost of $10-11/bl. The breakeven cost of deep-water projects has also fallen to $29/bl.

There are some concerns, though, that Petrobras will struggle to maintain its production targets over the next few years. "Production shortfalls are a significant risk factor for Petrobras in 2019 and beyond. The 2023 production target, which equates to 6pc annualised growth rate from the 2018 baseline, is quite aggressive compared to the 3-4pc range that we anticipate," says Muhammed Ghulam, senior associate at Raymond James, a US investment bank.

Next steps

The next priority for the government is to resolve the Transfer of Rights dispute with Petrobras so Brazil can launch the surplus-volume auction later in the year. Vincente Neto, an analyst at Brazilian bank Bradesco expects that, after a protracted period of negotiations with the government, Petrobras will end the talks as net creditor: "We believe we might have a conclusion by the end of April. Our base case is the government having to reimburse Petrobras $8bn. The auction is already scheduled for 28 October."

Equally, Petrobras is focused on divestment and continuing to pay off its debt obligations. Last year the company managed to lower its debt-to-EBITDA ratio from 3.67 to 2.34. In an October report, UBS said the combined divestment programme could raise $20-35bn and decrease its debt-to-EBITDA ratio to a factor of 1.5.

"Petrobras is very well positioned," says Fonseca. "The Tag pipeline sale is very close to being announced, with the final bid on 2 April, and Braskem, the petrochemical company, very close. The government also wants to divest Petrobras' share of Brazil's refining capacity from 98pc to 50pc."

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