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Tsvetana Paraskova

Tsvetana Paraskova

Tsvetana is a writer for the U.S.-based Divergente LLC consulting firm with over a decade of experience writing for news outlets such as iNVEZZ and…

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World’s Most Indebted Oil Company Makes Major Hedge

In February and March, Brazil’s state-controlled oil firm Petrobras hedged 128 million barrels of its expected 2018 production —equal to around 15 percent of total production—at an average price of $65 per barrel, to protect part of its operating cash flow generation this year.

The hedge puts a floor under around 350,000 bpd of Petrobras’s oil production this year, or just above 15 percent of its oil production of around 2.2 million bpd that the company has reported for the past two years.

Petrobras has purchased put options referenced to the average Brent price in February and March through the end of 2018, at an average cost of $3.48 per barrel and average exercise price of around $65/barrel, the Brazilian company said in a statement. The options mature at the end of this year.

The cost of the hedge, 128 million barrels at $3.48 per barrel, is around US$445 million.

“The transaction aims to shield part of the operating cash generation projected by the company for 2018, ensuring a minimum price level for the production volume under the transaction without, however, locking the price, should the average price of Brent in the year exceed the reference value,” Petrobras noted.

The company keeps its preference for exposure to the oil price cycle, but an occasional hedging strategy via derivatives may be applicable, depending on the business environment and Petrobras’ business plan goals. As such, the hedge is aimed at reducing the possible negative impact on cash generation in “the most adverse price scenarios”, helping the firm to proceed with its debt reduction. Related: The Struggle Continues For Bankrupt Shale Drillers

Petrobras—largely viewed as the world’s most indebted oil company—reduced its net debt by 12 percent on the year to US$84.9 billion, and boosted free cash flow by 12 percent to US$13.85 billion last year, the company said earlier this month when it reported another annual net loss—albeit much smaller—due to a class action settlement in the United States.

By Tsvetana Paraskova for Oilprice.com

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