Petróleo Brasileiro S.A. (NYSE: PBR), or Petrobras, could be the best oil and gas investment in the world. The reason it is not is because of its capital structure inverting common shareholders’ interests, compared to most giant oil companies that investors get involved in. After a huge recovery from its lows, Fitch Ratings has a big warning for investors.
24/7 Wall St. sees this as just one more effort aimed at crushing shareholders in order to be a state-dominated (or state-run) company. The potential consequences for the common stockholder — severe!
Fitch warns that the Brazilian government’s decision to assign the production of the excess volume of the transfer of right areas to Petrobras will further pressure the company’s cash flow generation ability. Further, Fitch warns that this move will weaken the company’s stand-alone credit quality.
Fitch went on to say that Brazil’s decision calls for a BRL2 billion ($909 million) bonus payment to the government during 2014 and the anticipation of BRL13 billion ($5.9 billion) of profits to the government between 2015 and 2018, significantly before any oil is produced from the assigned areas.
In short, at least from our view of what this will feel like from an investor point of view, it is almost the same as if Brazil is taxing Petrobras on profits that have not yet been made. Will they look for more taxes when the profits are actually made or per barrel concessions when the oil is drilled down the road?
Fitch went on to say:
These payments will put additional burden on Petrobras’ already negative free cash flow resulting from its aggressive capex program. These payments, coupled with the expected downstream losses for this year and moderate production growth during 2014, would negatively impact the company’s internal cash flow generation and increase reliance on borrowings. Considering Fitch’s price deck, Fitch expected that at the beginning of this year Petrobras’ borrowing needs would be around $15 billion, on average, over the medium term. These recent developments could increase the company’s needs for external funding beyond this estimate.