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A new dawn for Petrobras?

The government-controlled oil giant is trying to change strategy - and market perceptions

When Pedro Parente took over as the head of Brazil's scandal-hit oil company Petrobras, he promised a badly needed course correction. Gone, Parente says, are the government shackles that many blame for dragging the company down. The country's new president Michel Temer had given him the freedom to take the company its own way. "We don't have to ask anything of anyone. We can take actions that address the interests of the company," Parente exclaimed at his first press conference in June.

Amid a shattering and ongoing corruption probe, Parente was tasked by Temer to turn around the world's most indebted oil company-one of the toughest tasks in the industry. He plans to do so by re-doubling the company's focus on high-return deep-water production and reining in its spiraling debt.

The recently approved 2017-21 business plan envisions spending $60.6bn-more than 80% of the total budget-on exploration and production, with an emphasis on bringing existing discoveries on stream. Petrobras's latest oil-production target is 2.77m barrels a day from around 2.07m b/d today, an ambitious jump but more modest than previous plans.

To come up with the capital needed to hit this goal without taking on more debt, Parente is slashing capital spending and selling assets. He hopes to raise $15bn by the end of 2016 and almost $20bn through 2018, a critical source of cash flow that the business plan hinges on.

Parente intends to trim net leverage by roughly 50% to 2.5 times earnings by 2018, equivalent to about $50bn in debt reduction over the next two years. If successful, it would likely be enough to win back the company's investment-grade credit rating.

But just how feasible are Petrobras's ambitions?

Fitch, for one, sounds doubtful, saying Petrobras's projected asset sales "are uncertain and difficult to predict", thus hindering its reliability to raise cash.

Nevertheless, recent aggressive asset sales show signs of hope. Statoil bought a 66% operating stake at the Carcará pre-salt field for $2.5bn, freeing up another $8bn of committed investment Petrobras can reallocate elsewhere. Brookfield Infrastructure Partners, a Canadian energy-infrastructure asset manager, bought Petrobras's Nova Transportadora do Sudeste business, which supplies natural gas to Brazil's most industrialised, populated states. Those deals accounted for about 35% of the 2016 divestment target. Another $1.38bn came after selling Petrobras Chile and a majority stake in Argentina, bringing the total from those three deals alone to $9.08bn.

The highest bidder

Petrobras is also planning to sell a controlling stake in BR Distribuidora, Brazil's largest network of petrol stations, which could bring in at least $6bn, while still allowing the company to collect profits by holding on to a minority stake. The company plans to hold an auction on this stake by the end of this year.

Some argue that raising fuel prices could be another near-term solution. Domestic fuel sales account for about one-third of the company's annual revenue and Parente has said the new Petrobras can change prices at the pump without the government's authorisation-a profit-driven shift from previous administrations' policies. This wouldn't be popular-government-set prices are already higher than international ones.

The company also plans to shrug off biofuels, significant petrochemical ventures and national LPG distributor Liquigás. Similarly, Petrobras workers' voluntary-termination programme may help it save up to $10.2bn by 2020.

All this shedding from its midstream and downstream businesses ought to mean Petrobras ends up with more focus on its attractive upstream portfolio. Total pre-salt production has nearly doubled to 1.06m b/d over the past two years, with more than two-thirds coming from the state-controlled firm. Vast untapped reserves and relatively attractive economics, even at $50 oil, mean much more is possible.

Highly skilled but drowning in debt, Petrobras's main other task will be to lure capital while exploiting its proven deep-water prowess. Recent legislative changes should help. It took more than a year of fierce debate, but Brazil's congress finally nixed an oil law that required Petrobras to hold at least an operating 30% participation in every pre-salt project. The government has yet to flesh out the details on taxes as well as local-content rules, which by industry standards are still considered high. Existing and new field boundaries will need to be clearly outlined to foster competition and attract big fish.

Success or not will be plain by mid-2017, when Petrobras will auction off four new pre-salt areas contiguous to the Tartaruga Verde and Sapinhoá fields, Gato do Mato prospect, and Carcará field.

Beside the auctions, more Petrobras fields could hit the market once it concludes a complex round of negotiations with the government over the price it paid in 2010 for the right to develop around 5bn barrels in reserves at six areas in the pre-salt Santos basin.

Parente has brought a pragmatic, business approach to running the company, which has been appreciated by investors. After the dark years of the lingering Lava Jato scandal, Petrobras's shares are at least rising again. But turning the company around may prove harder done than said.

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