Petroleo Brasileiro S.A. or Petrobras PBR will likely disclose its 5-year spending budget next month, as per the Brazilian newspaper Estado de S Paulo. Most importantly, the company is expected to make more spending cuts.
Per the sources, Petrobras will allocate the revised budget mostly toward production activities in the deep water. The company will leave nothing for operations in onshore or shallow-water blocks. In addition to this, Petrobras is also anticipated to divest more properties than previously predicted.
Let’s find out why Petrobras may tighten its 5-year plan – for the period 2016 to 2020 − even after two budget cuts. Notably, Petrobras lowered its 2015 capital spending from $28 billion to $25 billion. For 2016, the company’s spending plan was cut from $27 billion to $19 billion − last year.
All these measures reflect the company’s efforts to come out of the bad phase it is going through due to the persistent weakness in oil prices and its involvement in a multibillion dollar corruption scandal last year. Following the scandal that led to a downgrade by rating agency Moody’s Investors Service, it has been hard for Petrobras – saddled with a huge debt load − to raise money both in the debt and the equity markets. Hence, rigorous asset selling emerged as an easy option to raise money and pay back debt. Spending cut is the other way out of the woods for Petrobras.
Headquartered in Rio de Janeiro, Petrobras is one of the largest integrated energy firms in Latin America. The company boasts healthy production growth and has announced several important discoveries of late. Additionally, loans from China should offer some relief considering Petrobras’ huge debt burden and the money-laundering scandal, which has tarnished its credit metrics.
However, much is yet to be achieved considering the firm’s scale of operations and investment base. Adding to the company’s problems is the currently weak commodity price environment.
As a result, Petrobras carries a Zacks Rank #3 (Hold), implying that the stock will perform in line with the broader U.S. equity market over the next one to three months.
Meanwhile, some better-ranked players in the energy sector are Canadian Natural Resources Limited CNQ, Murphy USA Inc. MUSA and Boardwalk Pipeline Partners, LP BWP. All these stocks sport a Zacks Rank #1 (Strong Buy).
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