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.”

Target Lowered

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 about.”

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.

Biggest Field

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.

Longer Wait

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), 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.

’Quite Cheap’

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 quite cheap.”

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.

Pre-Salt

“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 pmillard1@bloomberg.net

To contact the editor responsible for this story: Dale Crofts at dcrofts@bloomberg.net

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