Albert Tobin, Senior Portfolio Manager at Hennessy and Associates, believes that “Brazil’s low-cost oil will help Petroleo Brasileiro compete in a tough market as it seeks to turn around its business. The cheaper offshore oil puts Brazil on the ‘winner’s side’ of a very tough market, and many oil majors have been buying up blocks in Brazil’s offshore reserves.”
After years of poor management within the company, a deep slump in global oil prices and a massive corruption scandal at Petrobra, the company is now finally on course to turn around its business. Many of the world’s big oil majors, like Exxon Mobil, BP, Royal Dutch Shell, and Total, have recently snapped up blocks in the Atlantic Ocean off the coast of Brazil that hold crude under thousands of feet of salt.
Since a boom in U.S. shale output is unsettling the oil market, it is crucial to be a low-cost producer and Pedro Parente, CEO of Petrobas, said, ”For this, we count on the pre-salt production because the level of productivity of the fields is very high, so the cost to extract oil from the pre-salt is very low. So, we are talking about extraction costs below $7 per barrel.”
The company recently published its quarterly results which show that it is slowly turning around its balance sheet despite many recent headwinds, and Petrobras recently unveiled a plan to review fuel prices more frequently, and gain back market share by keeping wholesale prices to retailers above global benchmarks.
How would Petrobras deal with a period of rising interest rates which would make it more expensive to borrow and refinance existing debt?
Albert Tobin, Senior Portfolio Manager at Hennessy and Associates, believes that the company has to follow a strategic plan, “Reducing costs, have more effectiveness, more efficiency in capital expenditure numbers and fulfilling their divestment program.”
Petrobras intends to drive down its net debt and, if it can accomplish that feat, then the company will be better prepared for a higher rate period.