In Oil & Companies News 19/05/2015
Petrobras needs heavy equipment, like entire offshore production vessels, to get at its oil deep under the Atlantic Ocean floor. Credit problems at partner firms, and delays on its floating production storage and offshoring projects means production figures probably won’t look as good as Petrobras thinks.
From a stock pickers point of view, Petrobras is looking pretty good still, even at $10. It’s gone from multiples of just four times earnings to over 10 times earnings in mid-May. And all of this happened in a little over a month. Less than three days after CNBC host Jim Cramer said Petrobras was attractive again, the company released better than expected earnings.
Don’t get too excited, though.
Profits for the three months ending March 30 fell as expected, but only by 1.2% to R$5.3 billion ($1.78 billion), relatively flat from a year ago despite the losses associated with the ongoing corruption scandal. They also reported net sales of R$74.4 billion, close enough to consensus. Earnings before interest, taxes, depreciation and amortization, or EBITDA, was R$21.5 billion, beating the R$16 billion consensus estimates.
Petrobras has a lot of debt. Hundreds of billions to put it roundly. But the company can make money in a hurry, especially now that the government is not subsidizing gasoline prices. Petrobras at $10 a share still looks attractive. And when corruption fatigue ends later this year, there is no reason why the stock won’t go back into the mid teens in 2016, Gradual Investimentos CEO Fernanda de Lima told me on Wednesday.
The biggest problem for Petrobras is not for new shareholders, per se. It’s for the oil services firms that are struggling because of the scandal. As the company cuts back, the supply chain is imploding, says Elizabeth Johnson, a Brazil analyst with U.K. business intelligence firm Trusted Sources.
“At greatest risk are up to 12 locally sourced floating, production, supply and offloading platforms (FPSO) totalling 1.8 million bbl/d in output in pre-salt fields, or more than 80% of Petrobras’ additional projected future output to 2020,” she wrote in a report dated April 28.
Last month, Shell Oil acquired BG Group, a U.K. oil and gas firm that has access to four of Petrobras’ lucrative deep water wells. Shell just had one. It now has five, thanks to the BG deal. But getting them in the water will be a little more complicated.
Delays have worsened in the past five months. Portugal’s Galp in March was the latest to confirm this when it said that it was conservatively estimating a one-year average delay for four of the FPSOs, which are scheduled to be installed in different oil fields, all of which are named after ex-president Luiz Inacio Lula da Silva. The Lula blocks are operated by Petrobras, BG and Galp.
Other FPSOs operating in the deep water Iara field are currently experiencing similar costly delays. All told, Trusted Sources estimates that 900,000 barrels of oil per day for BG (now Shell) and Galp scheduled to come online between 2016 and 2018 “may be affected.”
Most all of Petrobras construction partners have been implicated directly or indirectly in the corruption scandals which helped send Petrobras’ stock price to $5 a share in March. Some of those companies are filing for bankruptcy. Industrial rigging manufacturer Tomé Engenharia said in January that it would shut down operations at some point in the second half if they cannot resolve ongoing credit woes associated with the scandal. Petrobras partner Iesa Oil and Gas filed for bankruptcy in November. They were working on six of the 8 FPSO vessels.
Petrobras CEO Aldemir Bendine comes from the financial sector. The former chief executive of Banco do Brasil made a name for himself as a no-holds-barred cost cutter. Petrobras says it is not cutting back on pre-salt oil production, but the corruption scandal is hurting the construction partners it needs to help with that production.
Petrobras is involved in two scandals. One includes paying Workers’ Party and its allies to help fund political campaigns. The other includes fraud at large construction projects, mainly at two refineries.
By default, Petrobras management has punished its local suppliers by turning to foreign firms to cover where the local partners are now dropping like flies. China and Thailand are interested in joining forces on the FPSO projects, for example, namely ship builders COSCO of China and BJC Heavy Industry of Thailand. They might replace Iesa.
For now, Petrobras continues to forecast its 2015 domestic crude production target of 2.12 million bbl/d, up 4.7% from last year. It also is sticking with its plans for the arrival of one FPSO platform in the fourth quarter of this year. It was originally supposed to be ready in the third.
Last month, Petrobras’ E&P Director Solange Guedes said domestic crude oil output will reach 2.185 million bbl/d in 2016, up 2.8% year-over-year. In addition to an average 10% annual decline rate in Petrobras’ mature fields, and a recently discovered technical problem with its largest-producing field, Roncador, just three FPSOs (Cidade de Marica, Cidade de Saquarema and Cidade de Caraguatatuba) are likely to be installed in 2016, down from the seven FPSOs originally projected, Johnson says. But even these three FPSOs are not fully guaranteed.
This week, investors will get a better sense of how Petrobras plans to fund operations going forward. Despite its lower-than expected production and an investment plan that’s been reduced from the previous 2014-18 plan, it all “still looks too ambitious” at Petrobras, according to Trusted Sources.
