Buoyed by the response to its first bond issue in two years, Petroleo Brasileiro SA is considering issuing more debt this year and is poised to buy assets after spending most of the past decade selling refineries and exploration blocks oil
Strong cash generation combined with low production costs puts Brazil’s state oil giant in a comfortable position, Chief Financial Officer Sergio Caetano Leite said in an interview, adding that it’s time for the company to “step up big”.
“Petrobras had a divestment program,” he said. “The company has now changed sides of the table.”
According to Leite, the new appetite for mergers and acquisitions does not mean that the company is going to make issues to finance acquisitions or boost investments. Follow-on bond issues will serve to improve the company’s debt profile, he said.
Petrobras’ gross debt fell to its lowest level since 2010 in the first quarter to $53.3 billion. That’s near the low end of a range of $50 billion to $65 billion set out in its five-year strategic plan, which the new CFO said he considers appropriate.
“The idea is not to put Petrobras into debt,” he said to calm concerns about margins and the speed of investment in energy transition projects. Investments or mergers and acquisitions should have their own financing structure, according to Leite.
Leite took over in March as part of the new executive board appointed by CEO Jean Paul Prates, who vowed to halt “irrational” asset sales and said Petrobras should consider increasing its stake in petrochemicals Braskem .
“If we have to be aggressive, we should borrow a little more — $55 billion would be nice,” Leite said, stressing that the turbulent global economic and geopolitical scenario calls for prudence.
While Petrobras’ debt ratios may come down a bit, the company is still looking to reduce its cost of capital, in part by paying off its most expensive debt early, Leite said before visiting foreign investors, including London , this week. The company’s weighted cost of debt rose to 6.5% at the end of the first quarter from 5.9% in 2020, according to regulatory filings.
Last week, the company sold its first dollar-denominated benchmark bond deal in two years, and demand suggested additional deals could be viable, Leite said.
Petrobras debt arrangers raised up to $6.3 billion in potential orders from 386 investors when a 10-year bond with a yield of about 7.25% was preliminarily discussed, according to the CFO. This allowed Petrobras to reduce the interest offered and place $1.25 billion in notes due 2033 on June 26 at a yield of 6.625% with more than 327 investors.
“It’s time to put your feet in the water and see what the temperature was,” he said. “The acceptance was good, which leads us to keep looking at the debt markets. Petrobras is back in the game.”
While the company’s latest bond yield is above its weighted average rate, there are several US dollar deals that were priced more expensively, according to data compiled by Bloomberg. For example, the company has more than $710 million of 7.375% notes due 2027, which was first pegged at par. The securities are trading at about 104 cents on the dollar.
“With this resource we will improve the profile, paying debts that have a higher rate”, said Leite, without revealing the specific values that could be included in a transaction that could occur at the end of the year.
The CFO expects investors to be more optimistic about Brazil in the short term. Talks with bankers suggest the accounting scandal that brought down Brazilian retailer Americanas SA was limited to the segment, Leite said. “They thought it was going to be a powder fuse, but it was just a match.”
