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Petrobras Strives to Cut Cost

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In a bid to restrain the effects of lower output and high debt burden, Brazilian state-run energy giant Petroleo Brasileiro S.A., or Petrobras (PBR - Free Report) announced plans to lower its operating cost by R$ 32 billion ($15.4 billion) during the 2013–2016 period.

Petrobras management believes that the company’s operating costs are much higher compared to its rivals in the industry. Thus, the company is planning to bring down its fuel consumption level for offshore operating activities and also to reduce chemicals usage at refineries. Petrobras will also strive to strengthen productivity and efficiency of its operations.

Petrobras is one of the most leveraged publicly traded oil companies in the world, with short and long-term debts totaling roughly $92 billion.

Petrobras is planning to invest roughly $236 billion through 2012–2016. The majority of the investment will be directed toward its upstream operations, as the company is seeking to develop the largest offshore oil discoveries in Brazil’s pre-salt reservoirs. To finance this huge investment the company plans to divest its non-Brazilian assets for $14.8 billion along with its cost reduction program.

With this cost cutting initiative, the company is looking to to increase its cash flows, boost its productivity and hence supports its massive investment program.

Headquartered in Rio de Janeiro, Petrobras is one of the biggest energy companies in the world along with ExxonMobil Corp. (XOM - Free Report) , Royal Dutch Shell plc (RDS.A - Free Report) and Chevron Corporation (CVX - Free Report) . The company currently retains a Zacks #3 Rank, which translates into a short-term Hold rating.

Petrobras stands to benefit from Brazil’s economic growth and huge pre-salt oil reserves. Given its strong pipeline of development projects and impressive exploration successes, Petrobras’ long-term outlook seems compelling. However, we remain concerned by the company’s huge investment requirements, as well as the possibility of heightened state interference and earnings dilution following the $70 billion share sale. Consequently, we expect Petrobras’ growth potential to be restrained and see the stock performing in line with the broader market.

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