Woodlands GEMBA
December 12, 2015
Dragon Slayers:
Angie Thompson
Ryan Cantor
Abigail Beaty
Table of Contents
Overview ............................................................................................................................. 2
Historic Governance............................................................................................................ 7
Current Leadership ............................................................................................................. 9
Car Wash Scandal.............................................................................................................. 10
Petrobras Reserves Analysis ............................................................................................. 14
Financials........................................................................................................................... 15
Bibliography ...................................................................................................................... 19
Woodlands GEMBA Team Dragon Slayers
Petrobras 1
Overview
Petrobras is driven by the challenge of supplying the energy that can propel
development and ensure the future of the society with competency, ethics, cordiality,
and respect for diversity. Petrobras is a publicly traded corporation founded in October
1953 and the majority stockholder is the Federal Government, which is represented by
the National Treasury. Petrobra performs as an integrated energy company within the
following sectors of Exploration and Production, Refining, Marketing, Transportation,
Petrochemicals, Oil product distribution, Natural gas, Electricity, Chemical gas, and
Biofuels. Petrobras is considered the leader in the Brazilian oil industry, and has a
presence in eighteen countries.
In 1961 Petrobras had an important step in refining when REDUC - the Duque de Caxias
Refinery - was founded in Rio de Janeiro and in 1963 Cenpes, a research and
development center was created in Rio de Janeiro. In 1968 the first platform, the P-I
was built as a mobile drilling rig and was able to operate in water of up to 30 meters
deep. It was the one that discovered the first oil field in the Brazilian continental shelf,
offshore Sergipe, in 1969, giving rise to the Guaricema field. In 1974 there was the
discovery in the Campos Basin and years later in 1986, oil in the Amazon was found in
the Urucu Field, located in the Solimões River Basin. In 2002, Podium Gasoline was
launched at the service stations in Brazil. One of the most significant findings for
Petrobras was in 2007 with the discovery of the pre-salt cluster off the Brazilian coast
bringing a new horizon for the oil industry worldwide. In 2012, production was
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Petrobras 2
underway at the FPSO Cidade de Anchieta vessel platform, in the Baleia Azul field and in
2013 the pre-salt output reached 300,000 barrels of oil per day.
If you ask Petrobras, they focus on sustainable development and they pursue business
looking at a long-term perspective. They contribute to economic and social
development and to a healthy environment in the communities where they have
operations. Petrobras also attempts to maximize collaboration and to seize synergies
among teams, areas and units, ensuring an integrated vision of the company in their
actions and decisions. They continuously seek to generate value for all stakeholders,
reference Figure 1, focusing on capital discipline and on cost management. They very
much value and acknowledge, in a differentiated manner, high-performance people and
teams. Petrobras cultivates overcoming challenges and seek, relentlessly, to generate
and implement innovative technological and business solutions that help their company
attain its strategic objectives.
Petrobras has five subsidiaries including Distribuidora, Biocombustível, Transpetro,
Gaspetro and Liquigás. Petrobras Distribuidora operates in the distribution, trade and
manufacturing of oil products and byproducts, in addition to in imports and exports. On
the Brazilian streets and roads, the company has upwards of 7,000 service stations, the
biggest service station network in Brazil. This subsidiary has more than 10,000 major
customers, among industries including but not limited to, thermoelectric plants, aviation
companies and light and heavy-duty vehicle fleets. It has been signing-on partnerships
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Petrobras 3
to deploy natural gas-fired thermoelectric power units and programs to optimize
product use in respect for the environment. Petrobras Biocombustível was created in
2008, and its mission is to produce biofuels with environmental and social responsibility.
This contributes to the diversification of the Brazilian energy matrix and to reduce
greenhouse gas emissions, promoting the development of the regions where it
operates. This subsidiary is present in all Brazilian regions; it produces biodiesel and
ethanol. Petrobras Transpetro undertakes oil and oil products, ethanol, biofuels, and
natural gas transportation and storage activities. It is in charge of more than 14,000
kilometers of pipelines; among oil pipelines and gas pipelines which interconnect all
Brazilian regions and supply the country's most remote points. In addition to the
pipeline network, there are also terminals and a fleet of oil tankers, joining forces with
Petrobras' production, refining, and distribution areas. Petrobras Gaspetro is directly
related to the enhancement of the natural gas supply nationwide. From Corumbá near
the Bolivia-Brazil border to the city of Uruguaiana, in Rio Grande do Sul, the company
counts on a gas pipeline network, belonging to Petrobras, that ranges for more than
7,000 kilometers. This network runs under the Brazilian soil, crossing through states and
taking natural gas, via state distributing companies, to homes, industries, plants, and
automotive vehicles. It also allows the company to operate in another important
segment: telecommunications, a service that uses cutting-edge technology and is
required by major companies all over the world. The last subsidiary, Liquigás
Distribuidora operates in the bottling, distribution, and sale of liquefied petroleum gas
(LPG). It is the leader of the Brazilian market of gas bottles of up to 13 kg - commonly
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Petrobras 4
used in homes for cooking food, our subsidiary supplies about 8.5 million homes and
more than 35,000 customers in the bulk segment monthly. One of the largest LPG
distributors in Brazil, it also provides products and services tailored to various sectors,
such as industry, trade, agriculture and livestock. Present in 23 Brazilian states, Liquigás
has a network of approximately 4,800 authorized resellers.
Figure 1:
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Petrobras 5
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Petrobras 6
Historic Governance
Unlike other NOCs, Petrobras did not begin due to rich oil reserves. As the internal
exploration and infrastructure were established beginning in 1954, “frugality and
ingenuity” were prized descriptors of the new company’s leadership in the early days.
For this reason, Petrobras top managers were selected from the military, whose
disciplined culture was soon exemplified by the company. Modeling themselves after
efficient IOCs, “Petrobras top managers organized the company to operate as an
integrated oil company, with multiple divisions and a central executive board.” (Victor,
Hults and Thurber)
There was much political strife regarding both how Petrobras was managed and how
revenues were derived. Following a military coup in 1964, Petrobras “stopped revealing
much about its international operations or affairs to the public.” In 1968, under the
leadership of General Ernesto Geisel, Petrobras expanded with the creation of four new
subsidiaries that would enable the verticalization of the company, as well as spread the
influence of the company into the most important sectors of the Brazilian economy.
(Victor, Hults and Thurber)
Although Petrobras nearly went bankrupt during the 1973 oil crisis, the discovery of the
Bacia de Campos oil field in 1975 saved it’s finances and helped it restructure
nationwide. Petrobras began signing contracts with private oil companies to explore
more oil fields throughout Brazil.
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As the country moved towards democracy in the late 1980s, the idea of privatization of
Petrobras was a political hot topic, with promises of privatization and market
liberalization by incoming Presidents. The total privatization of Petrobras proved
impossible, but the liberalization of the oil market moved forward in 1995 as “the
government ended the Petrobras monopoly over hydrocarbon resources and retained,
for itself, the right of these resources.” (Victor, Hults and Thurber)
The establishment of the National Petroleum Agency (ANP) created a level field for
payment to the government following the discovery of new fields, with the aim of
exposing Petrobras to new competition. Share of Petrobras were sold to private
investors, but to satisfy nationalists, the government retained the majority stock.
“Petrobras accepted these new policies because they removed the government’s
control over pricing of oil products.” In spite of the changes, Petrobras continued to
maintain its monopoly in the domestic market. (Victor, Hults and Thurber)
In 2010, following the major discovery of strategic reserves, including pre-salt, the
Brazilian government created Pré-Sal Petróleo S.A. (PPSA) or “Petrossal”, a subsidiary of
Petrobras. It’s important to note that Petrossal is a government-appointed
administration, not an oil company. The goal of Petrossal was to oversee productionsharing contracts for the country's “strategic areas” or pre-salt blocks. Under Brazil's oil
and gas regulatory framework, Petrobras must hold a 30% operating stake in all pre-salt
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blocks. In addition, a minimum 42% of oil produced must be ceded to the federal
government, which in turn has pledged to inject the revenue into education and health.
(BN Americas)
With substantial and potentially lucrative discoveries of the early 2000s, this creates a
big departure from the previous relationship between Petrobras and the Brazilian
government. In the past, “Petrobras thrived because it successfully sought autonomy
and because it faced a scarcity of capital and other resources…Today, the perception of
oil scarcity has disappeared and the governments’ appetite for oil revenues has
increased spectacularly, moving the set of preferences of the government far away from
where it was at the time of Petrobras’ founding.” (Victor, Hults and Thurber)
Current Leadership
Petrobras is currently lead by CEO Aldemir Bendine. Bendine was formerly the head of
state-owned bank Banco do Brasil. Mr. Bendine took the helm after Maria das Graças
Silva Foster resigned along with five other senior executives in the midst of the pricefixing and skimming scandal that’s been plaguing the company since Feb 2014.
The CEO role at Petrobras is largely a political post. Brazil’s President, Dilma Rouseff,
appoints most of the board members, who then approve the CEO. Feelings on Bendine’s
appointment are mixed, with independent board members complaining that the new
CEO represents little more than a political appointment.
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While views on Bendine’s performance at Banco do Brasil are mostly favorable – the
bank showed rich profits and kept the default rate under control during his 30-year
tenure, there is vast concern that he shows little technical knowledge in the oil and gas
industry. (Jelmayer and Gagalhaes) But the reality is that Petrobras is currently the most
indebted oil company in the world. Time will tell if this banker can right the ship as the
Petrobras scandal continues to unfold.
Car Wash Scandal
On March 20, 2014, as part of “Operation Car Wash,” Brazilian federal police arrested
the former head of Petrobras' refining and supply department, Paulo Roberto Costa. The
arrest was the result of an investigation that started when they noticed Costa had been
given a Range Rover car by convicted black-market moneychanger Alberto Youssef.
Over the next two years, prosecutors and federal police in Brazil would unearth the
country's largest-ever corruption scandal by linking a ring of black-market
moneychangers to a price-fixing and political kickback scheme at state-run oil company
Petrobras.
“Executives from two dozen engineering firms are accused of inflating the value of
contracts and funneling the excess funds into their own bank accounts and to political
parties, including President Dilma Rousseff's Workers' Party.” (Stauffer)
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Key events in the investigation include the following:
December 11, 2014: Prosecutors in Curitiba formally charged 36 people, 22 of them
from engineering firms OAS, Camargo Correa, UTC Engenharia, Galvao Engenharia,
Mendes Junior and Engevix. Additionally, Prosecutor Deltan Dallagnol declares war on
corruption in Brazil in a nationally televised press conference.
February 6, 2015: Aldemir Bendine, former head of state-run Banco do Brasil SA, steps
in as Petrobras CEO after Maria das Graças Foster and other senior executives resign
abruptly.
It’s interesting to note that on Petrobras’ website, they have a downloadable PDF called
Petrobras Corruption Prevention Program which still contains a message from the
previous CEO of Petrobras, Maria das Graças Silva Foster, who stepped down along with
other key executives in the middle of the federal investigation. No charges have been
filed against her to date.
March 6, 2015: Brazil's Supreme Court says it will investigate the speakers of both
houses of Congress and 32 other sitting politicians in connection with the Petrobras
scheme. Twelve senators and 22 congressmen from five parties are under investigation,
all but one from President Rousseff's governing coalition.
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April 22, 2015: The first arrestee, Paulo Roberto Costa, is sentenced to a little over
seven years in prison, but will only serve one year of house arrest due to his
collaboration and time already spent in detention. A total of eight people are convicted
in the probe's first sentences.
May 26, 2015: Nestor Cervero, former international director of Petrobras, is sentenced
to five years in jail for money laundering.
June 19, 2015: Brazilian police arrest the chief executives of the country's two largest
construction companies, Marcelo Odebrecht, head of family-run conglomerate
Odebrecht SA, and Otavio Marques Azevedo, CEO of Andrade Gutierrez. Prosecutors say
the companies led the cartel of engineering firms.
July 14, 2015: Federal police carry out search and seizure operations at the home of
Senator and former President Fernando Collor de Mello, the first such operation
targeting a sitting politician.
From July to today, prosecutors continue to present formal charges against government
officials, Petrobras executives and the executives from engineering and construction
firms, all who appear to have colluded to line their own pockets. (Stauffer)
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Total monies skimmed from Petrobras to date are estimated at over $3 billion US dollars
(roughly $10 billion Brazilian reis). The cost to Petrobras as a company is estimated at
over $100 billion USD. As of March 2015, 57 politicians and senior officials from all sides
of the political spectrum have been named in the scandal. The outcome is that the
country is paying the price. Many workers have been laid off, worker housing closed,
major construction projects halted, more than 200 companies involved have lost credit
lines, and the Brazilian congress is paralyzed. (Watts)
Just this week (Dec. 2, 2015), Brazil’s congress has initiated impeachment hearings
against President Dilma Roussef, who was narrowly reelected in January 2014. Her
second term has been plagued by the Petrobras scandal, but no wrongdoing has been
linked directly to her to date, although high-ranking members of her party have been
implicated. (Bevins)
As lower house leader Eduardo Cunha spearheaded the call for impeachment, he is
simultaneously being investigated for hiding millions in Swiss bank accounts. His call for
impeachment is seen by some as a last ditch effort to smear Rouseff’s name and divert
attention from himself.
President Rouseff maintains that, “There are no rumors that I have diverted public
funds, I have no bank account abroad, and I didn't hide any personal property from the
public.” (Bevins)
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Petrobras Reserves Analysis
The reserve picture for Petroleo Brasileiro SA (Petrobras) can only be characterized by
the word anemic. Ending 2014, Petrobras’ reserves grew at the slowest rate in six years
with new discoveries barely matching the production decline curve. As of Dec 31, 2014,
the company claimed 13 BBOE. This constituted an almost non-existent increase from
the previous year of just 0.1 percent. Over the last decade, they have averaged 2.3
percent annual growth. Clearly things are going in the wrong direction from a reserve
replacement/growth perspective. Reuters (Blount, Jan 2015) gives some perspective on
the cause of the decline: “The sluggish growth is the latest in a series of failures by
company executives and its main shareholder, the Brazilian government, to deliver on
promises about the benefits that will flow from giant offshore oil resources discovered
starting in 2006.”
Incredibly this paltry growth has been achieved under an era of massive spending.
Petrobras has committed to spending $44.2Bn on capital investments per year through
2017 making it one of the world’s largest investment programs. Again Reuters
comments on this in stark language: “But as spending has soared, production has
lagged expectations. Petrobras has missed output targets every year for more than a
decade, helping make it the world's most indebted and least profitable major oil
company.”
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Of course all of these problems could be rendered meaningless in the years to come. As
mentioned previously, the Libra field is the largest oil field ever discovered in Brazil. If
they can overcome their internal dysfunction and strife, they likely won’t have to worry
about reserves for at least a generation.
Financials
During much of the last reporting period, the Real depreciated significantly. As you can
see below it dropped almost 62% against the USD.
This of course coincided with a precipitous drop in oil prices. Brent crude fell 48%
during this period. These two uncontrollable factors will be a theme throughout
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Petrobras’ latest financial status report.
Total financial results at the time of reporting compared to the same period in 2014
were R$-23.1B. This was in large part due to higher exchange rate loss on foreign
currency debt and higher financial expenses due to the increase in debt. All together
the net income was R$2.1B compared with R$5B during the same period in 2014.
Operational expenses went up for the 3Q as well. Some of this can be attributed to
higher dry well costs (See table).
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These are not favorable numbers especially considering the fact that Petrobras
produced as much or more oil this year than ever before. The Pre-salt discoveries are
going strong, they will continue to prop up declining production, inferior cost control,
and mismanagement issues.
Here are additional key financial highlights (Yahoo Finance):
Financial Highlights
Fiscal Year
Fiscal Year Ends:
Dec 31
Most Recent Quarter (mrq):
Sep 30, 2015
Profitability
Profit Margin (ttm):
-7.62%
Operating Margin (ttm):
10.86%
Management Effectiveness
Return on Assets (ttm):
2.50%
Return on Equity (ttm):
-8.38%
Income Statement
Revenue (ttm):
86.80B
Revenue Per Share (ttm):
13.31
Qtrly Revenue Growth (yoy):
-6.90%
Gross Profit (ttm):
34.18B
EBITDA (ttm)6:
22.83B
Net Income Avl to Common (ttm):
-6.61B
Diluted EPS (ttm):
-1.01
Qtrly Earnings Growth (yoy):
N/A
Balance Sheet
Total Cash (mrq):
28.14B
Total Cash Per Share (mrq):
4.31
Total Debt (mrq):
136.73B
Total Debt/Equity (mrq):
174.10
Current Ratio (mrq):
1.61
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Book Value Per Share (mrq):
11.98
Cash Flow Statement
Operating Cash Flow (ttm):
20.54B
Levered Free Cash Flow (ttm):
-3.01B
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Bibliography
Bevins, Vincent. Brazil President Dilma Rousseff faces impeachment proceedings. 2
December 2015. <http://www.latimes.com/world/mexico-americas/la-fg-brazilrousseff-20151202-story.html>.
BN Americas. Pré-Sal Petróleo S.A. <http://www.bnamericas.com/companyprofile/en/pre-sal-petroleo-sa-ppsa>.
Jelmayer, Rogerio and Luciana Gagalhaes. Banker Takes Helm of Brazil's Troubled Oil
Giant. 6 Feb 2015.
<http://www.wsj.com/articles/bancodobrasilchiefunderconsiderationfortoppetrobrasp
ost1423229592>.
Petrobras Corporate Website. 07 12 2015. 07 12 2015
<http://www.petrobras.com/en/about-us/global-presence/>.
Stauffer, Caroline. TIMELINE-Key moments in Brazil's Petrobras corruption probe. 14
Aug 2015. <http://www.reuters.com/article/brazil-petrobrasidUSL1N10O31F20150814#XUG3dfkZ0lgYLu2Q.97>.
Victor, David, David Hults and Mark Thurber. Oil and Governance: State-owned
Enterprises and the World Energy Supply. Cambridge: Cabridge University Press, 2012.
Watts, Jonathan. Brazil elite profit from $3bn Petrobras scandal as laid-off workers pay
the price. 20 March 2015. <http://www.theguardian.com/world/2015/mar/20/brazilpetrobras-scandal-layoffs-dilma-rousseff>.
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