Brazil’s Petrobras Worst Big Oil Bet on Deepwater Delays
Petroleo Brasileiro SA (PETR4) is the worst investment among the world’s biggest oil companies this year as Brazil’s state-controlled producer suffers delays and cost overruns developing the largest oil finds in more than a decade.
Petrobras, as the world’s biggest producer in waters deeper
than 300 meters (984 feet) is known, has lost 19 percent for
investors this year in U.S. dollar terms, the worst performance
by oil companies with a market value of more than $50 billion,
according to data compiled by Bloomberg. Colombia’s Ecopetrol SA (ECOPETL)
returned 41 percent and Cnooc Ltd., China’s biggest offshore
producer, yielded 10 percent, marking the biggest winners.
Petrobras slashed its 2020 production target by 11 percent
yesterday and said its developments, mainly offshore, will cost
$141.8 billion, 11 percent more than planned. The company, based
in Rio de Janeiro, has had the biggest drop in production per
share over the past two years of the 10 biggest oil companies
after a $70 billion share offering in 2010, according to
Bloomberg Industries data.
“It’s a perennial story of disappointing on the production
side,” Oliver Leyland, who helps manage about 1 billion reais
($480 million) in stocks at Mirae Asset Global Investments in
Sao Paulo, said in a phone interview. “At some point in the
future that will probably turn around, but for an investor
calling that point it is very difficult.”
Last year’s output grew at the slowest pace since 2007 as
new fields in the so-called pre-salt region failed to counter
declines at deposits where it has been pumping for decades.
Production hit a 20-month low in April this year.
The company boosted spending 5.3 percent to $236.5 billion
in a revised five-year plan released yesterday. Petrobras now
plans to reach 5.7 million barrels a day in 2020, down from the
previous target of 6.4 million barrels a day.
“The decline rate at the legacy fields is just going to
keep getting worse and offset some of the successes at the new
fields,” said Frederick Searby, chief Latin America strategist
at Deutsche Bank AG in New York. “You’re sort of running to
stand still, that’s something people have been concerned
Investors will have to wait until 2013, after Petrobras
connects wells to new production platforms, to see acceleration
in output growth, Lucas Brendler , who helps manage about 7
billion reais ($3.4 billion) of stocks at Banco Geracao Futuro
de Investimento, said June 11 by telephone from Porto Alegre,
Brazil. Brendler said he expects output to be flat this year.
Production at Roncador, Brazil’s biggest producing field
until January, declined 8 percent in the 12 months through
April, according to National Petroleum Agency data. Output at
Marlim Leste, the country’s sixth-biggest producer, plummeted 26
percent over the period to 128,000 barrels a day. Petrobras has
full control of both deposits.
Last year output rose 1.5 percent in 2011 to 2.6 million
barrels a day of oil and natural gas on average, falling short
of the 7.7 percent target in Petrobras’s business plan.
Petrobras’s press office declined to comment on its stock
performance in an e-mailed reply to questions.
Brazil’s efforts to curb inflation with fixed gasoline
prices reduces profits at Petrobras at a time it plans to spend
more than any other oil company to develop the biggest finds in
the Western Hemisphere since Mexico discovered Cantarell in
1976. Brazil holds the world’s biggest discoveries since
Kazakhstan found the Kashagan field in 2000.
The company can “wait a little longer” before deciding on
a fuel price adjustment because international crude prices have
been falling, Chief Executive Officer Maria das Gracas Silva
Foster said in a June 11 television interview.
The company sells imported gasoline at a discount in Brazil
of about 19 percent, and it will take years to phase out imports
by adding new refineries, Auro Rozenbaum, an analyst at Bradesco
SA (BBD) (BBD), said June 8 by telephone from Sao Paulo.
The combination of fuel price controls and the industry’s
largest investment plan means Petrobras’s stock price comes
under pressure if oil prices rise or fall, Searby said. When oil
prices rise, investors move to other producers who sell gasoline
at market prices. When oil prices fall it creates anxiety about
the company’s ability to finance its investment plan, he said.
“That’s the heads you lose tails you lose feeling
investors have had,” Searby said.
The production problems and government interference in the
company through gasoline prices has pushed the stock to
attractive levels, Nick Robinson, who helps manage $15 billion
of Latin American shares at Aberdeen Asset Management Plc (ADN) in Sao
Paulo, said in a June 11 telephone interview.
Brazil has at least 50 billion barrels of recoverable
reserves in the pre-salt, an area the size of Florida in deep
waters off the coast of Brazil. Independent estimates put the
reserves in excess of 100 billion barrels. Petrobras operates
the biggest discoveries in what geologists call the picanha
azul, or blue steak, because it appears on maps as a wide blue
strip shaped like Brazil’s traditional beef cut.
“The fundamental story is still pretty decent in terms of
the potential for production growth they have, the resources are
still there, which are very attractive when compared to the
other majors around the world,” Robinson said. “We’ve been
topping up a bit really on this weakness, it certainly has been
Petrobras shares traded at 0.7 times the company’s book
value yesterday, the cheapest level in at least a decade and the
second lowest among major oil companies after Gazprom OAO (GAZP) at
0.48, according to data compiled by Bloomberg. The stock has
lost 13 percent for investors this year in local currency terms.
“There’s no excess of optimism related to the pre-salt,”Foster said in June 12 television interview. “Petrobras shares
are very devalued and now is a good time to buy. Production of
this oil is a question of time, the pre-salt is a reality.”
Petrobras is spending more to reach a smaller production
target without any immediate increase in revenue from fuel
prices. The company will take years to build the refineries
needed to phase out expensive fuel imports and improve profits,
Leyland said June 12.
“If you’re willing to look 24, 36 months forward then
there’s more value,” he said. “The market is a little bit more
short-termish than that right now.”
To contact the reporter on this story:
Peter Millard in Rio de Janeiro at
To contact the editor responsible for this story:
Dale Crofts at