Does Another Spending Cut Improve Outlook for Petrobras?

The company also said it plans to cut operating expenses (excluding raw materials purchases) from a prior 2015 estimate of $30 billion to a new level of $29 billion and from a prior 2016 estimate of $27 billion to a new level of $21 billion. For the two-year period, Petrobras expects to divest a total of $15.1 billion in assets, a total that has not changed since the June announcement.

In its announcement Petrobras said that previous plans were subject to “risk factors that may adversely impact its projections, including changes in market variables such as oil prices and exchange rate.” Oil prices have collapsed and the Brazilian real has lost 30% of its value against the dollar. The combined impact is that revenue has tanked and debt has spiraled nearly out of control.

The company wrote down $17 billion in April as a result of unmet production goals and the corruption scandal that has enveloped the company.

Petrobras said that production will remain as planned at 2.125 million barrels a day in 2015 and 2.185 million barrels a day in 2016. A reasonable question is how the company can maintain these output levels if they are chopping next year’s operating spending by nearly a fourth. It is unlikely that higher production from fewer wells will meet the requirement, but that is likely to be the company’s answer. What else can they say?

Shares traded up about 6.5% at noon on Tuesday, at $5.21 in a 52-week range of $3.72 to $17.64.

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