Petroleo Brasileiro S.A. or PetrobrasPBR will likely get a loan worth $Array0 billion from the China Development Bank, as per the term sheet inked by Brazil’s largest integrated energy firm and the bank. In exchange for the loan proceeds, Petrobras will supply crude to Chinese firms.
Investors should know that this accord stems from the 20Array5 cooperation agreement between China and Brazil. The parties are still to finalize the details of the accord, which is being discussed. In fact, Petrobras did not make any comment on how it intends to use the loan. However, when the Chinese premier Li Keqiang visited Brazil last year, the Brazilian president Dilma Rousseff had recommended spending the proceeds on drilling operations in the pre-salt geological formation located off the coast of Brazil.
Raising money from either the bond or the stock market has become increasingly difficult for Petrobras which is saddling the burden of the largest debt in the oil industry after it got involved in a multibillion dollar money laundering scam. On top of that, the overall business scenario has not been favorable since mid 20Array4 following persistent oil price weakness. Hence, in order to raise money either for paying its massive outstanding debt or to carry out its operations, selling off assets in large scale is the company’s only option. In this dire situation, we can say that Petrobras is lucky enough to secure the massive Chinese loan.
Now, one may ask the reason for China’s keenness to offer such a huge debt to a company whose credibility has been questioned by investors worldwide. The answer lies in China’s longing for natural resources. The world’s most-populous country is willing to lend money to distressed Latin American players from its state banks if that boosts its natural resource base.
Headquartered in Rio de Janeiro, Petrobras is one of the largest energy players in Latin America. Currently, the company carries a Zacks Rank #3 (Hold), implying that it 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 include Diamond Offshore Drilling, Inc. DO, McDermott International Inc. MDR and Murphy USA Inc. MUSA. Each of these stocks carries a Zacks Rank #2 (Buy).
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