Petrobras: Dead In The Water

| About: Petrobras - (PBR)

Brazil's oil giant Petrobras (NYSE:PBR) on Friday postponed the disclosure of its new business plan so that it could evaluate the impact of the global financial crisis.

The global credit crunch has smashed the deepwater building program at Petrobras. Whether it can pay for current orders is questionable. The Brazilian state investment council voted to shore up PBR in the short term. That suggests Petrobras has cash flow problems now -- without the presalt development cost expected to total $500 billion over the next decade.

We noted previously that Petrobras was borrowing to pay dividends, but the precipitous drop in oil price hit its business plan hard. Suddenly, a $20 billion bond issue is impossible.

PBR's published capex budget covered construction of huge new petrochemical and oil refineries, thermal energy network, maintenance and overhaul of P-17 and P-23 platforms, drillship and FPSO charters, and construction of the new Rio Grande shipyard. It has contractual commitments in Africa and deepwater GOM. Zero $ capex was budgeted for production of Tupi-Carioca.

Funding the presalt play was supposed to be easy. Modec is building three FPSOs for Tupi pilot production, which Petrobras agreed to pay $400,000 per day for 5 years with deferred option to buy at $1 billion each. $5 billion total, no cash upfront. Jurong Shipyard in Singapore is funding another FPSO for Roncador field, $1.6 billion plus operating cost. Eight more FPSOs are supposed to be magically assembled on a crash schedule at Rio Grande when it's completed and if they somehow pull together a trained local workforce and 3000 new homes on government subsidies.

Petroserv, Sembcorp Marine, and Norway's BW Offshore are busy converting old rustbuckets into shiny new FPSOs for Petrobras that will rent for $250,000 a day with an option to buy at the low, low discount price of $250 million. Three were tendered, $2.2 billion plus operating costs.

Meanwhile, Queiro Galveo is building three semi-submersibles, and the Quip Consortium (Queiro, UTC and Iesa) have orders for 10 FPSO hulls, plus topsides for P-53, P-55 and P-63 built by SBM.

Jurong Singapore, Daewoo, Keppel Fels and Sevan Norway are bidding more work. It's difficult to track the entire list. PBR announced 40 total, of which 28 deepwater rigs to be built at domestic shipyards, 14 drillships and 14 semi-submersibles. Delba Baiana tapped WestLB Capital for $488 million to start four of those rigs. Aker Solutions has a multi-billion dollar order for subsea trees and National Oilwell Varco is tipped to provide thrusters and generators. The whole subsalt program is contingent on solving an esoteric puzzle -- corrosion resistant risers that are immune to CO2 and hydrogen sulphide. Technip is working on it. PBR needs about 100 miles of this superpipe.

So what's the total? Brazilian energy minister Edison Lobao says $115 billion. Maybe that's the order book as of today -- about 1/3 of the deepwater iron required to lift the tens of billions of barrels of oil that PBR claim as proved and probable subsalt reserves. Let's suppose that it's plenty to start with. Does it make sense as an investment?

Petrobras CEO Jose Sergio Gabrielli:

For each 150,000 barrels per day of output and a production system comprising a floating platform, wells and subsea lines, the cost may be between $6 billion and $8 billion. We don't know whether we'll need 20, 40 or 50 such production systems.

Not counting green crews, mismanagement, lost tools, sidetracks and drilling blunders, let's say PBR's guesstimate is correct: $7 billion to lift 150,000 barrels a day, 50 million barrels a year times 5 years = $30 per barrel. No way, Jose. Corrosion, natural decline, taxes, and interest expense make this financially improbable. Labor and supplies are another $20 per barrel. It does not include transporting whatever net oil & gas is produced 300 km by nonexistent pipeline or a never-before-attempted floating LNG liquefaction train. No one in the oil business has experience fracing tight reservoirs four miles down, and Wide Azimuth seismic won't be available until Q2 2009.

Bottom line: PBR is counting on state funding, vendors and shipbuilders to finance construction, and betting that production will pay for it all. We affirm our negative outlook and SELL rating.

Disclosure: No position long or short in any oil company or ETF.