Why currency movements are important for Petrobras’ finances

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Nov. 20 2020, Updated 4:51 p.m. ET

Currency movements

In 2013, the U.S. dollar appreciated 10.4%—compared to an appreciation of 14.3% in 2012 and a depreciation of 5.1% in 2011. In this part of the series, we’ll discuss how these swings affected Petrobras (PBR).

LT Debt

Impact on Petrobras’ finance

By the end of 2013, PBR’s total long-term debt was ~$106 billion. It also had $8 billion in short-term debt. Approximately 80% of the debt liabilities were denominated in foreign currencies. A substantial portion of this was denominated in the U.S. dollar. If Brazil’s domestic currency depreciates or is devalued by the government, PBR’s debt obligation will increase—in terms of interest payment and debt repayment obligations.

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This will decrease PBR’s net income. Also, 52% of PBR’s total debt consisted of floating rate debt. In floating rate debt, the interest on the debt instrument is tied to a benchmark index—like the U.S. Treasury Bill rate. If floating rates increase, the cost of debt increases. This leads to additional financing costs for PBR.

The company’s interest expense increased 41% in 2012 to $2 billion—compared to 2011. It was followed by a 33% increase to $2.6 billion in 2013. Long-term debt increased by 20% and 21% in 2013 and 2012, respectively. By end of June, PBR’s long-term debt increased to $129 billion.

The costs related to a floating rate note depend on the ratio of fixed to floating interest rates, the ratio of short-term to long-term debt, and the currencies in which the debt is denominated or indexed. Therefore, a depreciating domestic currency, or a stronger U.S. dollar, will negatively affect PBR.

Other energy upstream companies operating in Brazil—like ExxonMobil (XOM), BP Plc. (BP), and Royal Dutch Shell (RDS.A)—will also be affected by Brazil’s currency movement. XOM is a component of the Energy Select Sector EFT (XLE). The currency movement also affects PBR’s operations. We’ll discuss this in the next part of the series.

Check out Market Realist’s Energy & Power page to learn more.

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