Petrobras Cash Flow Woes Hit Tenaris Profit, CEO Says

Tenaris SA, the biggest maker of seamless steel pipes, is the latest Petroleo Brasileiro SA supplier to say cash constraints at the biggest oil producer in deep waters are hurting sales.

Petrobras, as Brazil’s state-controlled company is known, has been using equipment on hand instead of buying new supplies, Tenaris Chief Executive Officer Paolo Rocca said on a conference call today with investors and analysts. Tenaris is supplying pipes to transport natural gas from deepwater fields that Petrobras expects to supply most of its oil production growth during the rest of the decade.

“Petrobras had problems of cash flow, negative cash flow for awhile, and has been reducing to some extent their investment,” Rocca said. “This is affecting the region and affecting us also.”

Petrobras has been “optimizing” its inventory levels as part of a cost efficiency program and has adjusted the volumes of steel pipe purchases as a result, it said in an e-mailed response to questions. It respects contracts with suppliers and there isn’t a connection between its cash flow and the volume of purchases from Tenaris, Petrobras said.

A combination of faster-than-expected declines at Rio de Janeiro-based Petrobras’s older fields and delays in getting production equipment installed at newer projects has caused the company to miss output targets in recent years. The resulting shortfall in sales and cash crunch comes as Petrobras is investing about $100 million a day to expand output at its oil fields and refineries.

Cash Drain

At $24 billion, Petrobras had the largest trailing 12-month cash flow deficit of any oil company with a market value of more than $50 billion, according to data compiled by Bloomberg. That compares with $29 billion of positive cash flow at Moscow-based OAO Rosneft OAO and $13 billion at Irving, Texas-based Exxon Mobil Corp.

Efforts to control costs are affecting Brazil-based manufacturers who supply equipment to Petrobras, said Alberto Machado, the executive director of the oil and gas division of Abimaq, a Sao Paulo-based manufacturing association. Companies that had been able to increase the value of contracts with Petrobras as projects progressed are now having a harder time doing so, he said.

“Petrobras is being much stricter in awarding cost increases since Graca took over,” Machado said in a telephone interview from Rio de Janeiro, referring to Petrobras Chief Executive Officer Maria das Gracas Foster, whose nickname is Graca. “There is a negative reaction down the supply chain.”

Fewer Rigs

Some of Petrobras’s sub-contractors haven’t been paid because some shipyards and turnkey projects contracted by Petrobras aren’t getting paid on time, he said.

Petrobras said it has been paying all its contractual obligations on time in a statement on its website last month in response to a report by O Estado de Sao Paulo that some suppliers were going broke. It also said it hasn’t changed the way it reviews requests for service and equipment price increases.

Petrobras’s offshore drilling fleet has declined 39 percent over the past year to 27 units in June, according to Baker Hughes Inc., an oil services provider that tracks global drilling activity. The reduction has curbed profit at offshore equipment and services suppliers including Baker, Halliburton Co. and Schlumberger Ltd. which have all invested in Brazil-based research and development facilities in anticipation of growing demand from Petrobras.

It may take as long as until 2016 for activity to pick up, Halliburton Chief Operating Officer Jeff Miller said in a July 21 conference call.

Petrobras fell 3.8 percent to 19.10 reais in Sao Paulo. Tenaris’s American depositary receipts slid 4.2 percent to $42.97 in New York. Each ADR is worth two ordinary shares.

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