|Petrobras Has Another Problem To Deal With: Oil|
Forbes, October, 26, 2015
Petrobras hasn't traded with oil prices for years, primarily because of the Brazilian government. In better times, it was because the government wasn't allowing the oil giant to raise gasoline prices. In the worst of times, as in today, it is because of the bribery scandal known as "Car Wash".
Politics aside, Petrobras has another problem: oil prices.
The price of oil is approaching levels where deep water drilling off the Brazilian Atlantic Coast is no longer financially viable. The bulk of Petrobras' oil wealth lies deep beneath the ocean bedrock, called the pre-salt level. It's naturally a costly endeavor to pull that crude out of the ground.
Seeing how Brazil is a relatively inexpensive labor market, it actually needs oil to be at around $45 a barrel for pre-salt to make sense. Today, oil futures are hovering around $48 a barrel. Petrobras' prize possession is close to becoming a money losing operation. So, should oil fall below $45 for an extended period of time, the stock will take an additional hit. Indeed, this company is like one big Jenga game and no one wants to pull out the next block. Whether it is a law suit or a new discovery from the Car Wash investigation, Petrobras is like a house of cards. Some guys even think that in a nightmare scenario, the government could even delist the thing from the stock exchange.
For now, Petrobras is renegotiating rental agreements on drilling platforms to lower overhead. If successful, then the company can lower the $45 per barrel that it has targeted as the break even price in its budget for the next five years.
The decline in oil has led to declines in cash flow, too. Its most prolific oil field, the Lula field, is returning 26.5% less on a cash basis than it did a year ago.
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