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Oil Boom Is Stock Bust for Petrobras as Capex Saps Cash

Crew Members Work on an Oil Platform in Guanabara Bay
Petrobras is among the biggest investors among global producers and, with the new capacity, expects to reach positive cash flow by 2016, the company’s press office in Rio de Janeiro said yesterday in an e-mailed response to questions. Photographer: Dado Galdieri/Bloomberg

Feb. 4 (Bloomberg) -- Petroleo Brasileiro SA’s imminent ascent in the global oil output ranking contrasts with its sliding market value as Brazil’s deteriorating finances dash investor hopes for relief in fuel subsidies paid by the company.

The state-run company known as Petrobras is set to challenge PetroChina Co. as the second largest publicly-traded oil producer after adding six new platforms since November. The prospect of ending a two-year output decline is failing to appease investors who are concerned by the government’s insistence it sell imported fuel at a loss, while investing $237 billion to develop the biggest oil discoveries this century.

The investment burden coupled with inflation-fighting fuel subsidies is making Petrobras the most indebted oil producer, the biggest burner of net cash and a sell for investors including Banca Intermobiliare SpA. The stock’s biggest three-month slump since 2008 pushed the company out of the top 10 most valuable oil producers, falling behind ConocoPhilipps. Three years ago it was more valuable than General Electric Co.

“If you own any stock in the oil sector you focus on cash and Petrobras is at the end of the cash-flow matrix,” Massimo Baggiani, who manages about 1 billion euros for Intermobiliare and sold all his Petrobras shares late last year, said by phone from Turin. “Every CEO is keen to talk about cash flow, sales and so on. Petrobras can’t do that.”

Cash Outflow

In terms of free cash flow generation, Petrobras is the worst performer among 113 oil and gas producers tracked by Bloomberg, with a $15.4 billion loss over the past 12 months, compared with Exxon Mobil Corp.’s $12.6 billion gain.

The Brazilian producer’s price-to-cash flow ratio of 3.38 is the third lowest among the 15 global peers worth at least $50 billion, according to data compiled by Bloomberg. Only Russia’s OAO Rosneft and OAO Gazprom have lower ratios. Exxon’s ratio is 8.86 and BG Group Plc’s is 8.26, the data show.

Petrobras is among the biggest investors among global producers and, with the new capacity, expects to reach positive cash flow by 2016, the company’s press office in Rio de Janeiro said yesterday in an e-mailed response to questions. The company attributes the fall in its market value to flat production over the past three years, currency depreciation that annulled price adjustments and a broad emerging-market sell-off.

“Petrobras works with intensity to make production grow and align prices with global ones in the medium term, thereby recovering value,” it said in the e-mailed response.

Refining Losses

Petrobras’s refining division has lost $35 billion since 2011 when the government, which controls the company through 51 percent ownership of voting stock, started using it to subsidize domestic fuel by selling imported diesel and gasoline below global prices as it battles with a sluggish economy ahead of presidential elections in October. Consumer prices last year rose 5.91 percent, above the 4.5 percent target for the fourth-straight year.

The fuel subsidies caused a loss of 8.59 billion reais ($3.68 billion) at the refining division in the third quarter because the company was selling imported gasoline at a 20 percent discount to international prices.

In October, Petrobras presented a proposal to the board to create a methodology for adjusting prices automatically. On Nov. 29, the board authorized the first fuel-price increase in nine months without divulging a formula for future adjustments. The stock plunged 9.2 percent the next day.

Petrobras was the world’s third largest publicly traded oil producer in 2012 and the fourth largest in the third quarter behind Rosneft, PetroChina and Exxon, according to data compiled by Bloomberg Industries.

Output Ramp-up

The company reported Jan. 31 that oil and gas production in 2013 reached 2.54 million barrels of oil equivalent a day, with the Brazilian operations accounting for 2.3 million. The company produced 1.9 million barrels a day of oil in Brazil. December oil production outside Brazil reached 100,575 barrels a day, according to the statement, which didn’t disclose annual crude production outside Brazil.

At least 680,000 barrels of oil equivalent capacity will have been added by the end of the year since one floating production, storage and offloading platform started Nov. 11 at the Papa-Terra field and four more, together with a support platform known as TAD, have either reached their fields or are on their way since Dec. 4, according to Petrobras. Output will rise progressively and all the new capacity probably won’t be in use this year, its said in yesterday’s e-mailed response.

“Upcoming platforms are mostly ahead of schedule and Petrobras’s pre-drilled wells should ensure a faster ramp-up in the pre-salt” region, where most of the reserves are located, Citigroup Inc. analysts Pedro Medeiros and Fernando Valle said in a Jan. 21 note to clients.

Earnings Improvement

“We see investors returning to the company in the second half,” when sales and earnings improve, Auro Rozenbaum, an analyst at Bradesco SA, who rates the stock outperform, said by telephone from Sao Paulo.

In the pre-salt, where Petrobras is focusing a plan to more than double production by 2020, output was a record 371,300 barrels on Dec. 24. The region gets its name from the layer of Cretaceous-era salt formed at a time when dinosaurs still lived and which traps the crude under the Atlantic seabed.

‘Tremendous’ Debt

To help fund pre-salt development, Petrobras held what was the biggest ever share offering on Sept. 23, 2010 when its market capitalization was $149 billion. That ballooned to $255 billion by April 1, 2011, when it was the fifth most valuable company. Since then, it plunged $183 billion to $72 billion, the lowest since May 2005. PetroChina’s market value is $222 billion.

Petrobras trades at 7.22 times reported profit compared with a peer-group average of 12.4, according to data compiled by Bloomberg. Of the 18 analysts covering the company’s New York shares, 10 have a hold recommendation, seven recommend buying and one has a sell rating. Shares rose 1.7 percent to 14.09 reais in Sao Paulo today.

“The company has a tremendous amount of debt, $112 billion as of Sept. 30, and the capital expenditure program continues to be significantly higher than cash flow, which means debt will be even higher,” Pavel Molchanov, an analyst at Raymond James & Associates Inc. who has a market perform rating on the stock, said by phone from Houston.

To contact the reporter on this story: Rodrigo Orihuela in Rio de Janeiro at

To contact the editors responsible for this story: James Attwood at; Jessica Brice at

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