Vale, Petrobras Shed Assets for Cash

By Maria Lopez Conde, Senior Contributing Reporter

SÃO PAULO, BRAZIL – State-controlled oil firm Petrobras and mining giant Vale, two of Brazil’s largest companies, have begun to shed their assets in an attempt to improve their cash flows and continue on their ambitious investment projects while coping with dwindling profits and tumbling stock prices.

Both firms – symbols of Brazil’s commodity-driven economic boom in recent years – are now struggling to maintain their investment commitments amid production decreases among other problems, for Petrobras, and falling commodity prices for Vale.

In mid-June, Petrobras’ preferred shares had lost nearly sixty percent of their 2008 value and shares for Vale had tumbled as well, decreasing by 38 percent compared to 2008.

“There is a generalized cash flow problem due to a smaller demand for commodities and services,” Fundação Getulio Vargas economist, Istvan Kasznar, told O Globo.

“It’s a reflection of the global crisis and of low growth in the country. The way out is to sell assets that are not generating money and make money.”

Petróleo Brasileiro S.A. sold half of its portfolio in Africa last month to Brazil’s Grupo BTG Pactual for US$1.4 billion, giving the investment bank control over Petrobras’ assets, located primarily in West Africa, Nigeria and Tanzania. According to an O Globo report, Petrobras is also looking to get rid of its fields in Mexico and some of its Brazilian fields, as well as interests in Argentina and Japan.

China National Petroleum Corp, China’s largest oil firm, is said to be considering buying Petrobras’ South American assets in Colombia and Peru, which could be worth up to US$2 billion. This could help the company finance its aggressive investment plans over the next few years.

Petrobras has time and time again reiterated its commitment to invest over $236 billion between 2013 and 2017 as part of its ambitious five-year business plan. That plan would dedicate over sixty percent of the company’s spending funds to exploration and production.

The cash-squeezed oil producer might also be saving its cash for the Libra area round of bids in the rich pre-salt reserves located in the Campos basin, this October.

In recent months, Petrobras, which saw its shares fall to a nearly eight-year low at the beginning of July, has restructured its distribution scheme for dividends, effectively decreasing the amount of payout to its shareholders in an effort to improve its cash flow.

The company also started implementing a wide-ranging cost-cutting plan at the end of last year to deal with its profit losses and its disappointing production output despite the presence of enough crude to supply the country and the government’s over-reliance on Petrobras to fund public programs. The plan is slated to slash R$5-15 billion from the oil company’s operation costs.

Similarly, Vale has given up on a project in Argentina and has shed assets in Colombia. The largest iron-ore producer in the world is also looking for partners for its logistics company and is looking to put further projects and operations on the market in Australia.

In June, Australian news outlet Fairfax Media reported that Vale had put its third Australian coal asset for sale in 2013. For Vale, the cash flow problem stems largely from China’s deceleration in the last two years and the ensuing downward trend in worldwide commodity prices.

Vale appears to be hoping shedding assets abroad may help the firm finance its large-scale project in Carajás, dubbed the S11D, a mega mining and processing complex in Paraná state. This is considered the “biggest project in the history of Vale and also in the industry of iron-ore” ever, according to a mid-July press release from the company.

The project received an environmental license from Brazil’s environmental regulator, IBAMA and was also approved by the company’s council last month. The complex is expected to include a mine, processing plants with capacity for a railway and a port. The project will cost US$19.67 billion and is set to begin operating in 2016.