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Petrobras (PBR) Eyes $10B on Government Dispute Resolution

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Reportedly, Petrobras PBR is set to receive around $10 billion from the Brazilian government to settle the ‘transfer-of-rights’ dispute. The dispute basically relates to the oil-producing zone offshore Brazil (known as the ‘transfer-of-rights’ area) and dates back to 2010. Notably, in 2010, the government granted Petrobras the right to explore 5 billion barrels of oil and gas off the Brazilian coast, in return of additional shares in the company. The government’s move was seen as an effort to maintain control in the state-owned energy giant.

It was estimated thereafter that the ‘transfer-of-rights’ area held recoverable resources comprising around 15 billion barrels of oil and gas, which was in excess of what Petrobras was entitled to produce under the 2010 deal.

The cash-strapped Brazilian government is thus seeking auction rights for the extraction of the excess oil from the area. However, before auctioning, it is important for both the parties (Petrobras and the Brazilian government) to resolve their disputes over the area. Notably, in January, there were reports that the Brazilian government has agreed to pay $14 billion to the company to end the long-running dispute. However, the Brazilian Economy Ministry denied the reports. Nonetheless, Brazil’s mines and energy minister Bento Albuquerque acknowledged Petrobras as the creditor in the dispute and expected the conflict to get resolved within 100 days.

Per latest updates, both the parties are close to reaching a final agreement, wherein Petrobras is likely to receive a compensation of around $10 billion from the government. Further, the Brazilian oil giant is likely to receive payments from third-party bidders who are seeking to partner with it to develop deepwater oil projects. Hence, the companies bidding for the exploration of the area have to compensate Petrobras to the extent to which the latter has already invested in those blocs. Bloomberg projects Petrobras to receive an additional $9 billion from the companies, in addition to the payment it will be receiving from the government.

As it is, with Brazil boasting large oil and gas resources in its pre-salt zone area, the nation is gradually becoming a hotspot for the Big Oil companies. Petrobras is entering into various strategic partnerships with foreign oil giants to drive exploration momentum. In this regard, the company has inked deals with major players like TOTAL S.A. TOT, Royal Dutch Shell plc RDS.A and Equinor ASA EQNR. The settlement of this transfer-of-rights dispute will make the country an even more attractive destination for oil supermajors.

Apart from putting an end to the dispute, the payments of around $19 billion ($10 billion from the government and the rest from bidding companies) would help the company trim its debt levels to a considerable extent. Notably, while the company’s net debt of $100 billion peaked in 2015, concentrated efforts to lower leverage, and boost liquidity through operational efficiency and divestment of non-core assets have helped Petrobras to deleverage to a considerable extent. Its net debt declined to $69.4 billion in 2018, decreasing from $84.9 billion a year ago and $96.4 billion in 2016.

As we know, Branco, Petrobras’ CEO, aims to divest around $10 billion of assets by April 2019, signaling the divestment of TAG assets worth $8 billion, which had been stalled by the court earlier. Apart from this, Petrobras is also in talks with PetroReconcavo to jettison 34 oilfields in northeast Brazil. The Zacks Rank #2 (Buy) company is focused on vending its non-core assets to drive exploration momentum in core areas and strengthen its financials. You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.

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