Energy Business

Is It Possible That a $9.7 Billion Loss at Petrobras Is Actually OK?

Petróleo Brasileiro S.A. (NYSE: PBR), or Petrobras, released its audited financial results for the fourth quarter of 2014. That should read “finally released” in the reporting. The state-run Brazilian oil giant has been hamstrung by its operating and corporate governance structure for years now, and the results are of course a large loss.

The one observation that 24/7 Wall St. would make on the morning after is that Petrobras is lucky that its shares are not indicated much lower than the 4% or so they were in the early bird hours. As a reminder, Petrobras shares, even at $8.93 as of Wednesday’s close, were up 80% from the bottom under $5 seen earlier this year.

24/7 Wall St. has used the U.S. dollars version of the release to keep this on par for U.S. investors. Petrobras said:

The $7.367 billion loss in 2014 resulted from impairment charges in the amount of $16.823 billion. Write-offs of overpayments incorrectly capitalized in the amount of $2.527 billion were recognized in the third quarter of 2014 related to the payment scheme uncovered by the investigations of the “Lava Jato (Car Wash) Operation.”

Petrobras has a consolidated net loss of $9.722 billion in the fourth quarter, versus positive numbers of $2.76 billion in the fourth quarter of 2013. The company’s total domestic and international crude oil and natural gas production (Mbbl/d) was 2,799 in the fourth quarter, versus 2,534 in the fourth quarter of 2013.

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Petrobras headlines from outside news agencies should sum up this report’s caution better than anything else:

  • Petrobras says $2.5bn of corruption losses are ‘recoverable’ (Financial Times)
  • Petrobras’ Problems Go Deeper Than Corruption (Bloomberg)
  • Petrobras posts $2.1B charge linked to scandal (CNBC)
  • Brazil’s Petrobras Reports Nearly $17 Billion in Asset and Corruption Charges (WSJ)
  • Petrobras puts corruption loss at $2bn (Financial Times)
  • Brazil’s Petrobras: Graft scheme cost $2.1B in losses (AP)
  • Petrobras Lost $2.1 Billion to Graft (Bloomberg)
  • The Top Three Stocks to Watch in Asia Today (Bloomberg)
  • Petrobras Releases Audited Results With $2.1 Billion Graft Cost (Bloomberg)
  • Petrobras Reports $14.7 Billion Write-Off, Stock Retraces Gains (Barron’s)

Selected comments from CEO Aldemir Bendine were as follows:

Petrobras has overcome an important obstacle by publishing its 2014 audited financial statements, following a collective effort that highlights our ability to meet challenges under adverse circumstances. This experience has given me even more confidence to address the strategic issues that we face in pursuing the Company’s business plan in an efficient manner that creates value for the Company.

In addition, changes in Petrobras’ business context, including the decline in oil prices, the appreciation of the U.S. Dollar and the need to reduce our level of indebtedness, have prompted a review of the Company´s future prospects and ultimately led to the reduction in the pace of the Company’s capital expenditures.

As a result, the Company has decided to postpone the completion of some of the assets and projects in its 2014-2018 Business and Management Plan. The postponement of those projects had an impact on our impairment tests, and we recognized impairment charges in the fourth quarter of 2014.

Now that we have published our financial statements, we will turn our focus to our medium and long-term challenges. We are developing a new business plan, in which we will include financial assumptions that reflect current oil industry conditions.

We are revising our capital expenditure plans to prioritize oil and gas exploration and production activities, which is our most profitable business segment. We are focusing on building a sustainable business plan from a cash flow perspective, considering potential effects on our supply chain and, consequently, on our production curve.

I would like to conclude this message by emphasizing my strong belief that Petrobras is and will remain a profitable and efficient Company, which has made substantial improvements in its corporate governance and increased its dedication to generating returns for its shareholders and investors.

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Petrobras American depositary shares (ADSs) were down 3.8% at $8.59 in early bird trading Thursday morning. They have a 52-week range of $4.90 to $20.94. Frankly, Petrobras investors are lucky here that things were not worse — even with all of those charges.

As a reminder, Petrobras has one massive short interest. This was listed as 128 million shares on last look.