Petrobras Floatel Signals Output Goals at Risk: Corporate Brazil

Petroleo Brasileiro SA’s chances of meeting output targets for the first time in a decade are fading as a rush to dispatch new oil platforms creates headaches miles offshore.

A floating hotel anchored last month at its P-62 platform symbolizes the state-run producer’s predicament. The so-called floatel is housing hundreds of workers sent to fix the new unit that’s already months behind schedule after a fire and emergency maintenance. Other new platforms at the Roncador, Sapinhoa and Lula Nordeste fields have reported safety breaches and equipment delays from suppliers, slowing the output ramp-up.

Petrobras, as the top producer in waters deeper than 1,000 feet is known, is relying on platforms like P-62 to tap vast offshore deposits after missing output targets for 10 straight years. Last year, it said production would start increasing in the fourth quarter as nine new platforms added a million barrels a day capacity. Through June, it’s up 1.4 percent compared with a 7.5 percent annual growth target.

“We are less optimistic with Petrobras’s production growth this year,” Auro Rozenbaum, an analyst at the investment banking unit of Banco Bradesco SA, said by telephone from Sao Paulo. “It failed to boost output in the first four months of the year due to maintenance and equipment delays, making the target less reachable.”

Stock Rally

Petrobras said in an e-mailed reply to questions that 33 new wells will be connected in the second half at P-62 and sister platform P-55, each with the capacity to lift 180,000 barrels a day. The company is sticking with its growth target.

“New production systems will go on stream in 2014 to ensure sustained growth, as outlined in Petrobras’ 2014-2018 Business and Management Plan, which has set a 7.5 percent rise by the end of 2014, with a margin of tolerance of one percentage point upwards or downwards,” according to the Rio de Janeiro-based company’s May output report.

Petrobras, the worst performing stock in the past five years among 15 peers tracked by Bloomberg, has rallied 14 percent this year through yesterday, more than double the 6.2 percent average gain among peers. Brent crude has lost 4.9 percent in 2014.

The stock rose 1.3 percent to close at 19.70 reais in Sao Paulo today, the highest since July 30.

The extra yield, or spread, investors demand to own Petrobras bonds due in 2023 rather than U.S. treasuries fell to 281 basis points from 301 basis points at the end of last year. Brazil’s economic growth will slow to 1.3 percent this year before quickening to 1.7 percent and 2.6 percent in the next two years, respectively, according to estimates tracked by Bloomberg.

Rush Job

Investors aren’t counting on Petrobras meeting its targets this year, Eric Conrads, who helps oversee $500 million in Latin American stocks as a money manager at ING Groep NV, said. The stock has gained on speculation that October’s presidential elections will herald more investor-friendly policies.

“I don’t think the market is expecting the company to meet this guidance at all,” Conrads said by telephone from New York. “Fundamentals have taken a back seat.”

A rush to get P-62 and other platforms on the ocean last year contributed to delays, according to Jose Maria Rangel, a union leader and former board member who visited the platform on July 1 and said he witnessed difficulties connecting the 3rd of 24th wells. The company was also fixing equipment flaws and preparing to receive the vessel full of workers, he said.

It took more than four months to pump the first barrel at P-62, twice as long as initially planned. The floatel was leased to finish installing equipment that should have been done before it left shipyards, Rangel said by phone from Rio.

Trade Surplus

“The amount of repairs needed now aren’t small,” he said by telephone. “They were having problems connecting wells on both P-62 and P-55. Obviously if you have set backs this will reflect on production results.”

In Brazil, platforms are registered as export items and they helped the government post a trade surplus in 2013. The company started operations at P-55 just an hour and a half before the end of the year and sent P-62 offshore unfinished, Rangel said. P-61 also departed shipyards on Dec.31 en route to Campos Basin Papa Terra and missed a first-half production start date given in a January statement. Both P-55 and FPSO Cidade de Paraty at the Lula Nordeste field have suffered equipment delays. The units can cost more than $1 billion each to build.

Petrobras said concluding work when platforms are en route to fields is standard practice.

The company on July 19 shut Sapinhoa, Brazil’s seventh-biggest producing field, for six days to repair a natural gas cooling unit, Petrobras said in a separate e-mailed response to questions.

Target Jeopardized

Brazil’s Labor Ministry sanctioned the P-62 in March and fined Petrobras for five irregularities, including flaws in the gas-leak monitoring, fire fighting and alarm systems. The gas infrastructure still hasn’t been cleared to operate, the ministry said in an e-mailed response to Bloomberg. Officials are now looking into sister platform P-55, already sanctioned by the oil regulator for using inadequate equipment, it said.

Analysts from Banco Santander SA to Bradesco warn the slower-than-forecast expansion so far is putting this year’s goal at risk even though new wells and production vessels are expected to accelerate growth in the second half.

Production was almost unchanged in the first four months of the year and started rising in May when P-62 began extracting crude from Roncador. In June, domestic output surpassed 2 million barrels a day, although it still trailed 2011 levels, prompting Santander analysts to label the performance disappointing.

Natural Decline

Output growth probably will be capped at 5 percent this year because of project delays and natural decline rates at mature fields it has been exploiting for decades, Bernardo Wjuniski, an analyst at Medley Global Advisers, who does research on Brazil’s oil industry, said by phone from Sao Paulo.

At best, Petrobras will add 200,000 barrels a day each year on average, compared with about 300,000 in the company’s business plan, Wjuniski said. Petrobras overestimates how fast it will bring new fields on line and underestimates how much output will fall at older fields with depleting reserves, he said.

Bradesco cut its annual production growth estimate to 6.5 percent, the bottom end of the range forecast by Petrobras, from 8.5 percent.

The company’s decline rates are in line with international levels, Jose Formigli, who heads exploration and production, told reporters last month. Petrobras intends to double local output to more than 4 million barrels a day by the end of the decade.

‘Way Above’

Geology may help the company recover some of the losses, as production in some pre-salt fields beat expectations. Two wells at Sapinhoa are producing more than 30,000 barrels a day, according to regulator ANP. Petrobras reached capacity at FPSO Cidade de Sao Paulo with four wells compared with the six to eight it had estimated.

“Put a time delay on their own assumptions for the new projects, add all of the decline rates, and then you have a very different picture of how much they can add year over year,” Wjuniski said. “They are way, way above what I think they can do.”

Before it's here, it's on the Bloomberg Terminal.