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Debt-laden Brazilian state-run Petrobras is in exclusive talks with Argentinian Pampa Energia to sell its 67.2 percent stake in its Argentina business to the local company in its latest move to stay afloat.
According to filings both companies made to their respective regulators, the talks will continue for a maximum of two months. A Reuters report citing an anonymous source close to the matter suggested that the deal is all but agreed, and only the formalities remain to be cleared.
Petrobras Argentina is among the top four E&P companies in the country, and also has downstream operations and is active in the utility sector as well. This makes it a good fit for Pampa, a top utility that’s also active in E&P via its Petrolera Pampa unit.
The price tag of the deal is said to be between $1.2 billion and $1.5 billion, depending on the source. Whichever it turns out to be, Petrobras could certainly use some cash right now. The Brazilian giant is the most leveraged energy company in the world with its debt standing at 4.8 times its EBITDA and exceeding $100 billion.
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Against this background, the expected price of the Argentina divestment looks quite modest, but it will allow Petrobras a breath of fresh air, albeit a short one. Petrobras has more than one problem, and not a lot of ways to deal with them.
The company borrowed heavily in the past, when oil prices were in the three-figure realm, to explore Brazil’s offshore deposits. Exploration and production in the pre-salt is very investment-intensive due to the substantial depths at which drilling takes place. Then prices fell, and the debt remained.
Another thing that fell was the veil covering a corruption scandal involving Petrobras, local construction companies and Brazilian politicians. The unwinding of the scandal and the continuing investigation has put the company in the spotlight—and not in a good way, as it was revealed that the machinations of some of its now former managers have cost it billions of dollars.
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Then there is the issue of the pre-salt development. A new bill, passed by the Brazilian Senate in late February, aims to remove a stipulation made in earlier legislation that requires Petrobras to hold 30 percent in any pre-salt project development. The bill has yet to go through the lower house of parliament and President Dilma Rousseff. If it does get approval, it will make the exploration process easier, as Petrobras does not have the financial capacity to take a 30 percent stake in any major development.
To date, the situation with the state-owned energy giant is all but catastrophic: no cash, huge debt, reputation in the dirt, and perhaps worst of all, no great chance of succeeding with its divestment program aiming to offload assets worth $15 billion by the end of this year. There are few buyers in the energy industry, and those that are there are unwilling to pay a lot in the current price environment.
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The company “needs to be capitalized at some moment,” Maua Capital chief executive Luiz Fernando Figueiredo told Bloomberg. It needs at least $25 billion to stay afloat, the former central banker estimates.
The $1.2-$1.5 billion that the Argentina sale could generate is a very small portion of this and what’s more, it will strip Petrobras of otherwise lucrative operations. Beggars, however, can’t be choosers, and Petrobras is so deep in the doldrums that any cash coming its way should be welcome. In fact, it should definitely be happy when the sale is over—this is its third attempt to unload its Argentinian business.
By Irina Slav for Oilprice.com
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Irina is a writer for the U.S.-based Divergente LLC consulting firm with over a decade of experience writing on the oil and gas industry.