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Petrobras lowers capex budget

Brazilian company re-evaluates spending strategy while focusing on divestment

Petrobras, the Brazilian state-owned oil company, has revised down its capital expenditure budget for the year. The firm will now allocate only $10-11bn in capex across 2019, downgrading from $16bn. Petrobras invested $4.9bn over the first two quarters of the year, with 83pc assigned to its exploration and production business.

The firm's CFO Andrea Almeida said several factors had a role in the reduction. The joint development of reservoirs across licence or contract areas—field unitisation—has led to savings of around $1bn. Postponements of investments, including drilling completion, interconnections of gas lines and scheduled stops in refineries and platforms, further reduced outlay by $1.7bn. The company says optimisations across the business have already achieved $200mn in savings and would trigger a further capex reduction of around $1.3bn before the conclusion of the year.

The revision will affect the company's five-year plan, released last year. The firm is in the process of amending the $84bn capex plan, although it advises to expect few big changes.

2.7mn bl oe/d — downgrading production target

When questioned by analysts if the "relatively low capex" was sustainable, Petrobras CEO Roberto Castello Branco pointed out that spending on items such as acquiring blocks in licensing round auctions would be "on top of capex", and that the firm is "always interested" in participating. But he emphasised the company's commitment to increasing value.

"Our main concern is not with the size of the capex, how many billions of dollars we are going to spend," says Castello Branco. "It is much more on the effectiveness of our investment expenditures. We would like each dollar invested to extract the maximum return possible. This is consistent and key to our strategy."

Pavel Molchanov, senior vice president and equity research analyst at US bank Raymond James, is unconvinced by the company's restraint. "Even before the latest budget cut, Petrobras has taken a very conservative approach vis-à-vis its capital program—I would argue, overly cautious," he says.

"Spending in 2019 is tracking to be down by a stunning 75pc from peak 2013 levels. While this is clearly positive for free cashflow generation, there is also an undeniable headwind for production. Despite all the pre-salt FPSO startups in recent years, production is barely up from the levels of a decade ago."

Pre-salt focus

Petrobras revised down its production projections for the year, from 2.8mn bl/d oe to 2.7mn bl/d, despite achieving record daily and monthly highs in July. Petrobras stressed problems with gas destabilisation at the pre-salt Buzios field as one of the key reasons for the revision.

The pre-salt is continuing to grow in importance for the company, despite the production downgrade. Total production grew 3.8pc from Q1 to Q2, driven largely by a 13pc increase from the pre-salt across the second quarter, and the completion of seven new platforms in the pre-salt across 2018-19. Lifting costs in the area also fell to $6/bl oe, the lowest ever recorded.

Portfolio management is central to Petrobras' value maximisation strategy. This year production has been split roughly 55pc pre-salt, 33pc deepwater, 9pc onshore and 3pc shallow water. Next year, , Petrobras intends to shift this balance to 88pc deep and ultradeep, 10pc onshore and 2pc shallow, as the company pursues oil in the pre-salt at ever deeper depths.

Petrobras will continue to priorite key assets in deepwater basins such as the Campos, where it has 70 planned projects and is investing $21bn over the next three years. The company also plans to foster more strategic partnerships in the pre-salt.

Funds from Petrobras' divestment strategy, such as pipelines and refineries, which have raised $9bn, would be redirected back into the more profitable, productive pre-salt, says Castello Branco. "TAG is a gas pipeline with an expected rate of return on capital employed of 6pc to 7pc," he says. "These funds will be reallocated to finance investments in the pre-salt where we expect returns in excess of 10pc. So, it will contribute to a higher return on capital employed."

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