With the recent announcement that Petrobras (NYSE – PBR) would raise its five-year investment plan by 55%, knock on effects have been felt throughout the oil services industry & have spurred analysts to look at Brazil as one of the emerging markets that may lead the way in recovery from the current financial crisis. “Petrobras’s long awaited 5 year plan contains good news for service companies active in Brazil,” Keith Morris, analyst at Evolution Securities said in a research note.
State controlled Petrobras, announced a crisis-busting investment plan Friday to spend more than $174 billion over the next five years, much of it for deep-water oil and gas exploration. The investment period runs through to 2013 and represents a rise of 55% over the $112.4 billion the company had originally planned to spend on development between 2008 and 2012.
This investment is “very robust and very important for the continuity of Petrobras’s growth,” José Sergio Gabrielli, the company’s chief executive, told reporters on Friday at a news conference in Rio de Janeiro.
$10 billion of this capital would come from the BNDES national development bank with a 30-year repayment term. The bank has been stepping in and offering credit under favorable terms to local businesses, after international lenders pulled out due to the global financial crisis. BNDES has so far committed to bankrolling $11.9 billion of Petrobras’s investment budget this year, with an additional $5 billion coming from international banks. Chief Financial Officer Almir Barbassa said that the oil giant will continue to work on cost cutting measures in order to free up as much as $4 billion annually in the next two years for investments and in an attempt to prevent debt from swelling. The company will seek to keep its investment-grade debt rating as it invests $174.4 billion in the next five years, he said.
Petrobras has based its 2009-2013 plan on Brent crude at $42 a barrel, with financing needs for 2009year based on Brent at $37 a barrel. Brent futures for March delivery are currently trading at a median of $47 a barrel the last two weeks, although the price was as low at $36 last month. Petrobas has set total investment for 2009 at $28.6bn. With Brent at $37, this requires finance of $18.1bn, of which Petrobras has already secured $16.9bn, including the $11.9bn from the BNDES. As previously discussed in India & China move to secure oil reserves , the Chinese development bank approached Petrobras with a $10Bn offer in December, it is unclear if the Chinese offer is part of PBR’s calculations or not.
Today, according to Bloomberg, Petrobras has stated that it is suspending a planned bond sale on the international markets, as there is no need to raise more funds in 2009 after securing $17.5 billion in financing from Brazil’s state development bank and other lenders. Borrowing costs have climbed after the global credit crisis led investors to shun emerging-market debt and oil slumped 72 percent from a record $147.27 a barrel on July 11.
“We want the financial market to adjust the costs to the risks Petrobras has,” Gabrielli, 59, said in an interview with Bloomberg TV in New York yesterday. “Petrobras’s risk curve needs to be more realistic than it is today. We need to observe the market conditions and go to the market when they are more favorable.”
Petrobras and partners including Repsol (NYSE – REP) and BG Group (LSE – BG) discovered vast deposits of oil under more than 4,000 meters of water, rock and salt in 2007. The deposits are at previously untapped depths and will be costly to extract, they hold an estimated 8 billion to 12 billion barrels of oil, according to Petrobras figures. It is thought that other reserves may be nearby in other as yet unexplored blocks. The flagship Tupi field is estimated to hold between 5 to 8 billion barrels of light crude oil and is the world’s biggest new field since a 12-billion-barrel find in Kazakhstan in 2000, whilst a second fin, Iara, is estimated to run between 2 to 4 billion barrels.
Companies with experience in deepwater and subsea engineering are expected to be key beneficiaries from the finds, this already being reflected in the market, with companies such as Swiss based Transocean (NYSE – RIG) showing an uptick in share price. Likewise in London, oil pipe manufacturer rose by more than 12% following Fridays announcement by PBR, which is Wellstreams largest customer. Analysts have noted that interest is running back into oilk service firms globally in the last week, with Norwegian engineering firm Acergy registering a 4% gain, bucking the market trend.
This could also be good news for US firms that are involved in South American finds, Devon Energy (NYSE – DVN) , the largest indepandent oil firm in the US, recently signed a long lease deal for the deep sea exploration vessel Deepwater Discovery from Transocean. Devon has had pre-salt production running in Brazil since 2007 on their Polvo field & have an additional 9 blocks that are waiting to be fully surveyed. One of these, the Wahoo prospect is currently drilling at approximately 18,600 feet. Devon & its partner partners plan to conduct additional evaluations of the well when it reaches its total targeted depth of approximately 20,000 feet.
“We are encouraged by what we have seen so far in the Wahoo well and look forward to the results of additional testing and evaluation,” said Stephen J. Hadden, senior vice president of exploration and production. “Brazil has been the site of some of the most promising recent deepwater oil discoveries in the world. Devon has an active exploration program under way in Brazil with other very attractive prospects nearing the drilling stage.”
The spending plan “means there’s going to be a lot of investment for the oil and gas sector in coming years,” said Roberto Lampl, who helps manage $12 billion in emerging-market assets at ING Investment Management in The Hague. Foreign direct investment “was still pretty high for December and that’s definitely positive.” “On a relative basis we see Brazil as very attractively valued and we are fairly positive on the country and various companies,” said Lampl, who moved to an “overweight” position on Brazilian stocks at the beginning of this year.
Brazil received a record $45.1 billion in foreign direct investment in 2008, the central bank said in recent report, FDI surged to $8.1 billion in December, more than twice the $3.1 billion median estimated by economists surveyed by Bloombergs.