How Petrobras emerged from crippling debt to record profits

This week, Brazil’s state-owned oil and gas company Petrobras recorded the highest quarterly profits in its history: BRL 18.8 billion—87 percent more than one year ago. The main driving factor of these numbers was the sale of a major pipeline network to a French-Canadian consortium for BRL 33 billion. But analysts were not only focused on the profits column in the company’s earnings reports—there was more to be excited about.

The company has continued to reduce its debt and increase its focus on deepwater oil and gas exploitation—which helps cut costs. Operational and maintenance costs in pre-salt fields (which account today for almost 60 percent of the company’s oil output), finished Q2 2019 at USD 6 per barrel, down 9 percent from one year ago. Morgan Stanley highlighted Petrobras’ strong free cash flow, which has been in the black for 17 straight quarters, at BRL 11.3 billion.

The government’s willingness to continue the divestment program kickstarted in 2016 also excites investors. The company’s current management, led by CEO Roberto Castello Branco, wants Petrobras to continue diminishing its presence in midstream activities, such as transportation segments, and downstream ones, such as oil refining and distribution. Per Morgan Stanley, the company’s EBITDA (earnings before interest taxes depreciation and amortization) was pushed down by non-essential activities. “We are confident in Petrobras’ growth trajectory in relation to its global peers,” said the bank. 

Just four years ago, Petrobras was the most-indebted oil company in the world, with liabilities of USD 127 billion as of September 2015, thanks to rampant corruption and (perhaps even more importantly) years of bad management. 

Its debts now stand at USD 76 billion, with an average maturity of 10.25 years and a stable average cost of 6 percent a year. We explain how Petrobras become so troubled—and how it has crawled back from catastrophe—even if a complete recovery may only...