Petrobras Default Risk Escalates on Halliburton: Brazil Credit

Petroleo Brasileiro SA’s perceived creditworthiness is deteriorating on concern the state-run oil company’s production will falter as it scales back drilling to offset losses sparked by Brazil’s fuel subsidies.

The cost to protect Petrobras’s debt against non-payment with credit-default swaps rose 0.14 percentage point to 2.82 percent last week, when contractor Halliburton Co. said it expects the oil producer to reduce its drilling fleet this year to cut expenses. The jump pushed its premium over Petroleos Mexicanos to a two-month high of 1.34 percentage points.

The drilling cutbacks are deepening concern that Petrobras will fail to meet its goal of more than doubling production by 2020, according to Caracas Capital Markets. The company’s refining and supply unit has lost $35 billion since it started subsidizing imports at the start of 2011 as part of government policy to contain inflation in Latin America’s biggest economy.

“It’s proof that the company isn’t doing what it is supposed to be doing,” said Russell Dallen, the head trader at Caracas Capital. “Bond investors and oil company investors are worried about how things are being done.”

The press department of Rio de Janeiro-based Petrobras declined to comment on its drilling plans, fuel subsidies and debt in an e-mailed response.

Brazil’s real weakened 0.9 percent today to 2.4195 per dollar as of 1:18 p.m. in New York.

Consumer Prices

President Dilma Rousseff plans to put off boosting regulated prices such as fuel to avoid additional cost-of-living increases in an election year, said two people with direct knowledge of the talks who asked not to be identified because the discussions are not public.

The Finance Ministry declined to comment on price increases when contacted by telephone and e-mail.

Consumer prices rose 5.91 percent in the 12 months ended December, the biggest jump since August.

The number of offshore rigs in Brazil fell to 34 in December, the least since 2010, from 38 a year earlier and a record 50 in June 2011, according to Baker Hughes Inc., an oil services supplier that compiles global data on drilling rigs.

“Brazil deepwater drilling activity levels have been below expectations and are expected to be even worse throughout 2014,” Halliburton Chief Executive Officer David Lesar said on a Jan. 21 conference call. “The entire services industry in Brazil is looking for relief.”

Bond Losses

Petrobras’s $2.25 billion of bonds due in 2041 have lost 16 percent in the past year, the worst among investment-grade oil bonds, according to data compiled by Bloomberg.

Petrobras doubled domestic production during the first decade of this century as it expanded into deeper waters in the Campos Basin and predicted growth of 9.4 percent a year through 2014 when it sold a record $69.9 billion in shares in 2010. Since then output has slumped 3.7 percent as the company struggles with reduced production at aging fields.

Gianna Bern, a former senior director at Fitch Ratings who is now president of risk-management adviser Brookshire Advisory and Research, said the reduction in drilling may be temporary.

“Hopefully these hiccups are nothing more than short-term in nature,” Bern said by telephone from Chicago.

Brazil increased Petrobras’s control of the industry in 2010 by requiring it to operate all new projects in the so-called pre-salt region that holds the country’s biggest discoveries. The first field auctioned in October under the model, Libra, only attracted one consortium, underscoring reservations among foreign oil companies over working under the new legislation.

Mexican Envy

In Mexico, legislation was approved in December that ended the 75-year production monopoly of Pemex, as the nation’s state oil producer is known, and that will allow companies such as Exxon Mobil Corp. and Royal Dutch Shell Plc to develop crude.

“With Petrobras, they need to liberalize and let other people come in,” said Caracas Capital Markets’s Dallen. “The initial optimism of the pre-salt finds has slammed hard into the technological difficulties and the expense of getting access to these reserves. It has been a disappointment. You don’t expect oil companies to perform so badly.”

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