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Petrobras Divestment Goals to Get Boost from $8.6B TAG Sale

Zacks Equity Research
Enterprise Products (EPD) is seeing favorable earnings estimate revision activity and has a positive Zacks Earnings ESP heading into earnings season.

Forging ahead with its divestment goals, Petrobras PBR is set to offload 90% stake in its natural gas pipeline unit, Transportadora Associada de Gás (‘TAG’) to Engie SA-led consortium for $8.6 billion. Markedly, this will be the largest-ever single asset sale for the Brazilian energy giant, which has been making serious efforts to trim its huge debt burden.

Petrobras to Finally Sell TAG

Investors should note that Petrobras had first announced to jettison its TAG unit in 2017 to boost its financials and credit metrics, which were hugely impacted by the multi-billion dollar Operation Carwash Scandal. However, in June 2018, the Brazilian Federal Court halted the sale of the pipeline, putting the company’s divestment plans in jeopardy.

At that time, the court passed a ruling against the sale of TAG to France-based Engie for $7 billion, due to discrepancies in Petrobras’ way of advancing with the sale. It was believed that the sale was not publicized well enough to stimulate ample competition.

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Nevertheless, the TAG divestment program got a new boost when the state-held company reopened the pipeline unit’s auction process, wherein new bids were allowed. In the final rounds of the bid, Engie in conjunction with Caisse de Depot et Placement du Quebec (a Canadian pension fund) presented the highest bid of $8.6 billion, outdoing Macquarie Group as well as a joint bid from EIG Global Energy Partners and Mubadala Development Co. Upon closure of the deal, Engie and Caisse will own 58.5% and 31.5% stakes in TAG, respectively.

TAG’s gas pipeline system, spanning 4,500 kilometers, is primarily located in the north and northeast of Brazil. It can transport up to 74.7 million cubic feet per day, which is fully contracted through long-term agreements with ship-or-pay clauses.

Deal Motives

The acquisition of TAG assets complements the business plans of Engie, which has been vending oil and coal assets of late to fuel investment in renewables, and gas and power, in hopes of generating better returns. France’s leading supplier of natural gas, Engie — having the largest gas distribution network in Europe — aims at using its expertise to accelerate the development of TAG, which is likely to benefit from rising fuel demand in Brazil.

For Petrobras, the divestment is in sync with its aim to cut debt levels. Notably, while the company’s net debt of $100 billion peaked in 2015, concentrated efforts to lower leverage, boost liquidity through operational efficiency and divest non-core assets have helped Petrobras in deleveraging to a considerable extent. Its net debt declined to $69.4 billion in 2018, decreasing from $84.9 billion a year ago and $96.4 billion in 2016.

As it is, last month, Petrobras’ CEO Branco stated his plans to sell around $10 billion of assets by April 2019, signaling the divestment of TAG assets. The finalization of the sale of TAG assets is likely to give a considerable boost to the financials of the company, which is also set to receive around $10 billion from the Brazilian government for settlement of the ‘transfer-of-rights’ dispute. Petrobras is also in talks with PetroReconcavo to jettison 34 oilfields in northeast Brazil.

As we know, Petrobras revved up its five-year plan in March, and now intends to offload $26.9 billion through 2023, streamline portfolio and sharpen focus on other profitable segments for achieving top-tier results. The firm is entering into various strategic partnerships with foreign oil giants to drive exploration momentum.

In this regard, the Zacks Rank #3 (Hold) company has inked deals with major players like TOTAL S.A. TOT, Royal Dutch Shell plc RDS.A and Equinor ASA EQNR. You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.

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Petroleo Brasileiro S.A.- Petrobras (PBR) : Free Stock Analysis Report
 
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