Petróleo Brasileiro Petrobras SA (ADR) (NYSE:PBR) has said that it will slash its five year investment plan, which is yet the clearest indication that the damage from the corruption scandal and rising debt has force it to cut down its spending program even further to improve investor confidence.
In its long delayed document, the Brazilian oil giant now expects its capital spending to be more than $130 billion, way below less than $207 billion for the projects that are underway.
Finance Minister, Joaquim Levy, says the move is not unusual, since most oil companies around the world are doing it, and Petrobras is not different. The cutbacks are likely to have huge implications on the Brazilian economy, which is forecasted to contract by 1% this year, since the company is the single biggest source of investment, and that in turn, helps the construction sector and its suppliers indirectly.
The cutback will also serve as a setback against Brazil’s goal to become the top five oil-producing nations by the end of this decade, despite of the more than four million barrels of oil per day, that has been reduced to less than 3 million barrels of oil per day.
Petrobras’ fortune has had a radical change for the worse for the past several years. Ever since the announcement of pre-salt oil reserves, Brazil jumped into high euphoria and enthusiasm that it could be ‘the next big thing’. The left-leaning governments of Brazil had attempted to use the Brazilian oil giant as a vehicle for a broader economic development.
The result of this excitement was a massive spending spree through debt that is flying over the company’s head for a long time now. Capital expenditures were clocked in at 13% growth. Several huge refineries were built, most of them shooting past the budget.
Now, the company has seen its hands tied to the mountain of debt. Making matters worse was that the government adopted strict mandates for oil company to hold a minimum 30% stake for a newly developed pre salt oilfields, on top of high local rules and hefty dividend payments to investors, along with the forceful subsidization of fuel prices to ordinary Brazilians further adding to the woes.
The road to recovery will not be without roadblocks, and Chief Executive Aldemir Bendine has to focus on this for the most part, since he took the helm earlier this year. He also pledges to improve corporate governance, debt reduction, selloff assets, aside from the oil field, and most importantly, start cleaning up the mess from within.
Petrobras’ stock price ended the day at $9.02, a massive decline of more than 4%, based on the reflection of the budget cutback announcement.
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