Petrobras Share Value Imperiled by Top Brazil Find, UBS Says

Petroleo Brasileiro SA (PETR3), Brazil’s state-run crude producer, risks losing shareholder value from developing the country’s largest oil discovery as high costs and taxes erode returns, according to UBS AG. (UBSN)

Petrobras, as the biggest producer in ultra-deep waters is known, may lose as much as 1.50 real ($0.64) a share from its role in the Libra field that is estimated to hold as much as 12 billion barrels of recoverable crude, UBS analysts led by Lilyanna Yang said in a note to clients. A signing bonus of 15 billion reais for Petrobras and its partners will strain the Rio de Janeiro-based company’s cash flow, UBS said.

Petrobras, the worst performing oil company with a market value of more the $50 billion this year, will have at least a 30 percent stake in Libra and be in charge of operations, according to Brazilian law. The scheduled October bidding round is the first under new legislation for the so-called pre-salt region in deep waters that holds Brazil’s biggest discoveries. UBS expects “low interest” from Petrobras’s foreign rivals.

“We continue to hold a fundamentally negative view on Libra,” the analysts said in the report dated Sept. 4. “Our concerns on Libra are mainly twofold: expected low returns and low profitability visibility, and high signing bonus payment to be disbursed upfront which will stress Petrobras’s already tight balance sheet.”

Petrobras rose 3.3 percent to 17.41 reais at 12:31 p.m. in Sao Paulo, narrowing the decline this year to 11 percent. On a U.S. dollar total return basis, the stock has lost 22 percent. The stock is already pricing in Libra risks, the UBS analysts wrote, reiterating a buy recommendation.

Extraction Costs

UBS expects it to take Petrobras and its partners until 2021 to start selling crude from Libra, about two years longer than estimates from the oil regulator. Higher-than-expected levels of natural gas at the field will increase extraction costs and require more equipment, the UBS analysts said.

Libra will be auctioned under a profit-sharing model where Petrobras and its partners will give the government at least 41.65 percent of production after deducting enough output to cover costs.

Including taxes, royalties and so-called profit oil, the government’s take will be at least 70 percent, Magda Chambriard, chief oil regulator, said in a June 13 interview.

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: James Attwood at jattwood3@bloomberg.net

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