According to a recent Bloomberg article, Petrobras’ record spending and deteriorating production are fueling concern that debt is nearing unsustainable levels at the state-run oil company, already the world’s most indebted major producer.

A 2.8 ratio of debt to earnings before items in the fourth quarter exceeded an internally set limit because of all-time high capital expenditures, according to data compiled by Bloomberg. Announcing a 16 percent capex increase this year, the company’s CEO reminded investors yesterday of the company’s role in driving the economy and creating jobs.

The company is struggling with the dual priorities of extracting crude from miles below the Atlantic seabed and keeping debt low enough to maintain its investment-grade rating.

“They spend big amounts to bring production up, but at some point you will have to see that reflected in the numbers. It’s testing everyone’s patience,” said one asset manager.

Voting shares slumped to the lowest since 2005 yesterday after the company announced different dividend payments for preferred and ordinary shares for the first time in more than a decade.


Petrobras increased total debt 26 percent last year, while posting the first annual output decline since 2004. For every $100 of revenue in the fourth quarter, Petrobras had a gross profit of $23, down from $26 a year earlier and $38 in the same period of 2009.

Debt could reach a level that forces the company to trim investments.

“How are they going to deal with these levels of investments with the drop in profitability?” Bradesco SA analyst Auro Rozenbaum said by phone from Sao Paulo. “With these gaps in fuel prices, there’s a concern with the debt level.”

Petrobras’ leverage has increased because the company is going through a “difficult period” where production isn’t growing, Petrobras’ CFO told analysts. “We are investing steadily to deliver on our projects and believe we will reverse this situation in time,” he said.

The biggest concern for the market right now is that production isn’t rising and there aren’t any more gasoline adjustments. Overall, there is an enormous reluctance to buy Petrobras’ shares.

Here’s the “good” news: not much will change in 2013

Petrobras went through three “intense” debates with the government before the last three fuel price increases, and still sells fuel below international prices, Foster said. Still, the company doesn’t have any plans to reduce investments this year, she said.

“We have a fundamental role in creating and maintaining jobs in Brazil,” Foster said. “Brazil needs us to grow. We have an important participation in economic growth.”

Source: Bloomberg

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