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How Does Debt Affect Petrobras’s Cash Flow?

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Petrobras’s cash flow from operations, investing, and financing

In 2015, Petrobras’s (PBR) cash flow from operations stood at $26 billion, falling from $27 billion in 2014. PBR’s cash outflow from investing stood at $13 billion in 2015 compared to $37 billion in 2014.

How Does Debt Affect Petrobras’s Cash Flow?

Petrobras’s cash flow from financing activities mainly consisted of changing debt levels. On account of the loss in 2015, Petrobras has not paid dividends to shareholders. However, Petrobras’s peers have been paying dividends. PBR’s peer Suncor Energy’s (SU) dividend yield stands at 3.2%. Comparatively, Total SA (TOT) and ENI SPA (E) have higher dividend yields of 5.9% and 6.9%, respectively. For exposure to high large cap stocks, you can consider the PowerShares Dynamic Large Cap Value ETF (PWV). The ETF also has ~11% exposure to energy sector stocks.

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Analyzing Petrobras’s cash flow strategy

In 2015, Petrobras generated $26 billion in cash from operations, but had a cash outflow of $22 billion in the form of capital expenditure and $21 billion in the form of repayment of principal and interest, amounting to a total $43 billion of cash outflow.

How did the company make up for the difference of $17 billion in cash flows?

Due to lower cash flow from operations, the company had to resort to asset sales and issuance of fresh debt. Petrobras executed divestments to the tune of $8 billion in 2015. In the same year, it raised $17 billion of additional debt. Remaining cash was added to cash reserves, possibly for this year’s cash outflow including capex (around $20 billion) and repayment of principal and interest of around $20 billion in 2016.

How long can PBR maintain this strategy?

If oil prices remain subdued for an extended period, Petrobras cannot perpetually keep on raising debt to fund its capex. Petrobras is already at quite high leverage levels. Going forward, higher production could improve cash flow from operations, but the degree of the improvement will mainly depend on the level of oil prices.

If oil prices are lower, it will weigh on Petrobras’s cash flow from operations. And, if cash flows don’t improve, Petrobras will likely not be able to maintain its current levels of capex, which will compromise its future growth prospects.

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