RIO DE JANEIRO (Jan 27): Petrobras is set to release its long-delayed earnings report this week and investors want to know one thing: How much has Brazil’s biggest-ever corruption scandal cost so far?
Petrobras, the state-run oil producer embroiled in an alleged kickback scheme involving US$23 billion of contracts, plans to post unaudited third-quarter results following a board meeting today.
The company, which has posted negative free cash flow in every quarter since 2010, has twice delayed the release as it tries to calculate how big of a writedown it needs to account for losses from corruption.
It’s the first step to regaining credibility lost while allegations of mismanagement and inflated contracts wiped out US$68 billion in market value since Sept 1.
Petrobras has until Jan 31 to report the earnings to avoid violating terms of some of its debt. Further delays could prompt creditors holding some of the US$54 billion of outstanding bonds -- the most of any corporate issuer worldwide -- to demand their money back.
'Clear idea'
“The market no longer has a clear idea of Petrobras’ financial situation because of the lack of balance releases,” said Edmar Almeida, an energy specialist at the Federal University of Rio de Janeiro.
“We don’t even know the 2014 investment numbers -- if Petrobras spent a little or a lot.”
That’s caused Petrobras’ outlook to suffer.
Analysts haven’t been so negative on the stock since it first started trading in the US in 2000.
Moody’s Investors Service in late December said it may cut Petrobras’ Baa2 credit rating, the second-lowest investment grade, because of concern about the company’s ability to raise cash amid the delayed earnings.
Petrobras had until Dec 29 to report earnings to avoid violating terms of some bonds, according to hedge fund Aurelius Capital Management, which last month asked bondholders to submit a notice of default to the company.
Doing so -- which would require the participation of holders of 25 percent of an outstanding bond series -- would give the company 60 days to resolve the dispute before investors could demand their money back.
Executives arrested
The list of troubles at Petrobras has swelled since police arrested its former head of refining, Paulo Roberto Costa, in March, revealing a multibillion-dollar money laundering and corruption scandal that has been dubbed the Car Wash.
Petrobras has been taking measures to strengthen its corporate governance systems and internal controls including the establishment of a new compliance, governance and risk directory, the company said in an e-mailed reply to questions.
The company, which up to last year financed a chunk of its investments with benchmark international bond sales, is all but shut out of international debt markets now.
The company may need to turn to Brazil's national development bank, known as BNDES, to fund all or part of a $20 billion gap in its finances this year, said Daniel Kastholm, Fitch managing director of Latin America corporate finance, in an interview at Bloomberg’s office in Sao Paulo on Jan 20.
BNDES declined to comment in an e-mailed statement.
The oil company, which confirmed in a Jan 23 regulatory filing that it may write down the value of some assets, is also reviewing its US$220.6 billion investment plan for the 2014-2018 period, as difficulty raising cash coincides with plunging oil prices.
Petrobras declined to say how much the impairments would be after O Globo newspaper reported the writedowns may cost about 10 billion reais (US$3.87 billion), citing an unidentified government official.
Cash alternatives
Alternatives to raise money such as selling lower-returning assets also won’t be easy after oil prices fell by half in four months, said Chris Kettenmann, chief energy strategist at Macro Risk Advisors, a New York-based broker dealer.
“Funding a capital budget that drives meaningful growth is a challenge for the company,” Kettenmann said in a telephone interview. “It’ll be tough in the near-term for investors to get excited about the story.”
The state-run producer is delaying projects including a multibillion-dollar refinery and halting payments on existing contracts that are behind schedule, a person with direct knowledge of the decision told Bloomberg News last month.
Oil price plunge
The company said on Dec 12 that it’s working with a US$70 price estimate for this year. That’s 41 percent above the US$49.69 averaged by the Brent crude barrel in 2015 and US$3.12 higher than the median analyst estimate in a Bloomberg survey.
While Petrobras shares are cheap and the company is enjoying better margins on gasoline sales in Brazil because of government-set prices, new management is needed to restore credibility before investors will be willing to buy again, said Rafael Giovani, a director at brokerage firm UM Investimentos.
Chief Executive Officer Maria das Gracas Foster “needs to be replaced for the company to be credible again,” Giovani said in an interview from Rio. “That’s what’s needed for the shares to go back to the 15-real level.”