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Petrobras defers production boom

Brazilian heavyweight revises down its output projections as it focuses on the long-term

Brazil’s state-run oil and gas firm Petrobras has amended and released its latest five-year strategy plan, first publicised last December, projecting weaker than anticipated oil output numbers across the near-term.

The Brazilian firm is now projecting oil production of just 2.2mn bl/d for 2020, an increase of 2pc over the 2019 average, and actually lower, by 4pc, than its third-quarter performance—despite the expected start-up of a floating production storage and offloading (FPSO) vessel at the Atapu field in the Santos basin. Swiss investment bank Credit Suisse, for one, had projected production of 2.4mn bl/d for 2020.

Petrobras fingers planned maintenance work and production decline from mature assets in the Campos Basin as major drags on near-term output growth, but that the accelerated start-up of the 13 new production systems should begin to considerably ramp-up production from 2021. The Brazilian firm promises 5pc annual average growth over the five years. 

“Looking ahead to 2024, the oil production target is 2.9mn bl/d, equating to annualised growth of 7pc from the 2020 base,” says Pavel Molchanov, director and equity research analyst at US bank Raymond James. “This represents just the latest instance of Petrobras setting the bar low for the near-term and pushing growth out into later years.”

Petrobras has failed to achieve production growth of 7pc in any year over the past decade

To help reach its target, the Brazilian company revised up its projected capex spend for the next five years. In the December version, Petrobras originally proposed $68.8bn, with 86pc allotted to exploration and production (E&P). The firm will now invest $75.7bn, although with a very slightly lower 85pc share earmarked for E&P. While the revised plan represents a $5bn increase in E&P spend, it is still almost $4.5bn less than in its previous five-year plan.

In every year between 2013 and 2018, Petrobras’ actual capex finished lower than originally announced in the company’s strategy plan. Petrobras has also failed to achieve production growth of 7pc in any year over the past decade, despite previous pledges to commit more capex to E&P than it is promising in its new plan. Despite this past performance, the company is now backing its ability to maintain 7pc pa production growth over 2021-24.

And the stakes for delivering are high. “Petrobras's greater-than-expected production ramp-up to 2024 and its long-term production are a lot more important for value than next year's production,” says Regis Cardoso, lead Latin American oil and gas analyst at Credit Suisse. “That is particularly true given that capex remains in line with our estimates. We previously thought c.$15bn average capex pa would be sufficient to maintain production at 2.4mn bl/d, but Petrobras’ new business plan is clearly suggesting it could instead continue growing all the way to 2.9mn bl/d. That is much better capex efficiency than we thought.” Leasing, rather than owning, FPSOs may be one way in which Petrobras can achieve that efficiency, in Cardoso’s view.

Paying down debt

With Petrobras burdened with over $100bn in gross debt in the aftermath of Lava Jato corruption scandal, underscored by chronic top-level mismanagement, reducing that debt and returning its finances to greater health remain key Petrobras priorities. In the first three quarters of 2019 it succeeded in reducing its debt pile by around $21bn. Petrobras is now targeting a goal of $60bn in gross debt by 2021.

At the end of September, the company’s gross debt reached $90bn, against $101bn after the second quarter. If Petrobras can achieve its plan to lower the debt to $60bn then the firm has pledged to pay out 60pc of its operational cash flow, excluding capex, in dividends to investors.  

Divestment remains a key pillar of the company’s debt reduction strategy. Around $20-30bn is planned in asset sales between 2020-24, with Petrobras planning to offload 50pc of its refining assets and sell several major natural gas pipelines including TAG, NTS and TBG. Brazilian financial services firm XP Investimentos estimates the planned divestments will generate between $19.8bn and $23.3bn for the firm.

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