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Mandated spending paints Petrobras into a corner

Reuters Breakingviews delivers agenda-setting financial insight. Its global correspondents react to stories as they develop, delivering sharp and provocative commentary on big financial news as it breaks.

Petrobras is struggling even with baby steps. The Brazilian state oil giant needs to find $15-billion (U.S.) to afford $50-billion of government-mandated capital spending. It has already cut the dividend. Now it plans to sell its Nigerian wells, according to a Reuters exclusive. That may only raise a third of what's required. And Petrobras has a poor record of flogging assets.

The company has been trying and failing to sell stakes in Gulf of Mexico fields for almost two years. At first the company even tried to insist on finding a single buyer for a half-stake in its 190 or so exploration and production wells in the region.

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That doesn't bode well for a company increasingly up against it. Granted, many of Petrobras's problems stem from intervention from Brasilia. Politicians have saddled it with the biggest budget for capital expenditure of any publicly traded oil company in the world. Nor are lawmakers likely to yield: much of this spending has gone to job-creating upgrades to refineries, helping to bolster the government's popularity.

Government efforts to keep inflation under control mean it has to sell gasoline in its domestic market below market rates, for example. Its net debt has climbed above its own target of 21/2 times EBITDA, leaving the company with a $96-billion debt mountain – nearly 10 times larger than bigger rival Exxon Mobil.

With no flexibility on spending, Petrobras has little choice but to slash its payout to shareholders and sell assets. But these are poor substitutes for proper financial management. The Nigerian wells are likely to fetch $5-billion at best, with a similar amount from shedding other holdings.

Covering the rest will require piling on more debt, putting its investment-grade credit rating at risk and further depressing earnings. That makes it even more imperative that if nothing else, executives finally manage to cook up some persuasive sales patter.

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