What: Shares of Petrobras (NYSE:PBR) have declined 10% as of 3:00 p.m. today after announcing the company plans to cut its long-term capital budget plans and is looking to sell assets.
So what: Considering how low oil prices are today, it's not too shocking to hear that Petrobras has decided to scale back its capital spending plans for the next five years. A large portion of the company's future production is slated to come from the pre-salt fields in ultra-deep waters off the Brazilian coast. These are expensive sources of oil on a per-barrel basis, and with oil prices where they are today and no clear indication that prices will climb back to their pre-decline levels, it's hard to justify spending on these kinds of projects.
Then, there is the other issue that Petrobras needs to deal with: its staggering debt load. With more than $130 billion in debt already and the possibility that it will need to raise even more to meet its funding needs, management is now saying that it will look to sell assets to help fill some of the spending gaps. In a recent client note, management is moving ahead with the sale of about $15 billion in assets, and expects that number to climb. As much as it may sound painful to sell that many assets, it's much better than trying to take on a lot more debt at this point in time.
Now what: Petrobras' woes continue to pile on. If the political kickback scandal wasn't enough to question its management practices, cheap oil prices have made so many of the company's potential reserves completely uneconomical. What it announced today are things that you would want to see, but chances are, this is just the beginning of very hard decisions that will be taken in the coming months.
It will take a monumental effort on the part of management to right the ship here, and it's getting to the point where the Brazilian government is considering a bailout. For individual investors that may look at Petrobras' dirt-cheap stock price and consider it a value play, it's likely best to stay away for now. The issues surrounding the company make its stock almost radioactive, and any money thrown at it is pure speculation right now.
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