Petrobras Cost-Cutting Makes Traders in Oil-Rig Bonds Uneasy

  • QGOG has five rig-leasing contracts expiring in next two years
  • Company has to repay $700 million of notes maturing in 2019

Oil giant Petroleo Brasileiro SA’s cutbacks are reverberating in the bond market.

QGOG Constellation SA, which rents rigs to Brazil’s state-controlled crude producer, has seen its $700 million of notes due in 2019 drop 11 percent in the past three months.

The slump reflects mounting concern that Petrobras, as the oil company is known, may not renew rig-leasing contracts with QGOG. Petrobras, the world’s most indebted major oil producer, plans to slash investments to $17.5 billion this year, the lowest in a decade.

That’s a problem for QGOG, which has five contracts expiring in the next two years. The prospect of a decline in revenue means QGOG may need additional financing to repay the bonds, said Lucas Aristizabal, an analyst at Fitch Ratings. QGOG has $700 million in notes outstanding and another $469 million in loans, according to data compiled by Bloomberg.

“You’re exposed to contract renewals, and it’s looking very difficult for the company because Petrobras has decreased demand for units,” he said. 

In an e-mail, Petrobras said it’s adjusting the size of its drilling fleet to a new level of demand, considering the current scenario in the oil industry. It also said it doesn’t comment on specific contracts. QGOG referred all questions on contract renewals to Petrobras.

Oil prices are down 62 percent from their high in 2011.

While QGOG is making bond investors uneasy, its sister company, QGOG Atlantic/Alaskan Rigs Ltd., is inspiring confidence. That’s because the latter is on pace to repay its notes due in 2018 before any of its contracts with Petrobras expire. There’s currently just $201.5 million outstanding of the original $700 million bond. The securities also are backed by the rigs themselves, which means bondholders can seize them if the company defaults. The QGOG Constellation bonds aren’t backed by any physical assets.

QGOG Atlantic/Alaskan Rigs -- which like QGOG is a unit of of industrial conglomerate Queiroz Galvao SA -- also has surpassed performance targets, said Fitch’s Aristizabal.

“The cash flow from the contracts pay the debt in full before the expiration,” Aristizabal said. “That’s why its performance is key. The risk of a unilateral cancellation is low if total performance continues to be high.”

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