Petrobras Promises Fail to Convince Investors

Brazilian state-run oil company Petroleo Brasileiro SA's long history of failed spending and output plans may be the biggest obstacle to its efforts to convince investors it will reduce its massive debt.

The company's $90 billion cut on Monday from planned investment over five years and 30 percent reduction to its 2020 oil and natural gas output forecast mark the first major retrenchment by Petrobras, as it is known, since the discovery of giant offshore oil reserves south of Rio de Janeiro was announced in late 2007.

Petrobras, though, has not met an annual production target since 2003 when the Workers' Party government of Brazilian President Dilma Rousseff and her predecessor Luiz Inacio Lula da Silva took power. Nor has it met five- or 10-year projections. Some doubt its "more realistic" 2015-2019 plan will do better.

"Petrobras is great at over-promising and under-delivering. They are notorious in the industry," said Fadel Gheit, managing partner for oil and gas research at Oppenheimer & Co in New York. "I don't know how anyone takes them seriously."

Looking at the new $130 billion five-year plan, it is almost as if the last seven years of frantic pursuit of an offshore bonanza had never happened.

The company's 2008-2012 plan, announced in September 2007, called for $112 billion of investment. By the end of 2012, Petrobras said, it would be producing 3.5 million barrels of oil and equivalent natural gas per day (boepd) worldwide, and by 2015 4.6 million boepd, making it one of the world's largest producers.

But now, after about $250 billion of investment and the discovery of some of the world's largest offshore oil and gas resources, Petrobras is producing 2.8 million boepd, 20 percent less than its estimate for 2012 output.

The new outlook for 2020 is 3.7 boepd, 11 percent less than the 2008-2012 plan promised for this year.

Annual revisions drove the 2020 goal as high as 6.42 million boepd in 2011 and planned five-year investment to $237 billion in 2013.
            
COST OF FAILURE
The cost to investors has been huge. Petrobras was worth more than $200 billion when the 2008 plan was released, making it one of the world's 10 largest companies.

Two years later Petrobras raised $70 billion in the world's largest-ever share sale. Today, Petrobras is worth $56 billion. And as Petrobras goes forward the financial situation is less promising than in 2008.

At more than $120 billion, Petrobras' debt is the largest of any oil company, equal to 113 percent of its capital and more than double its market value. The comparable figures for Exxon Mobile Corp are $32 billion and 16.7 percent.

For Fabio Fuzette, a fund manager with Antares Capital in São Paulo, Petrobras Chief Executive Aldemir Bendine has done little to explain how the company will keep its promise to cut debt.

Most important, Fuzette said, Bendine's promise depends on raising $57.7 billion by 2019 from asset sales, restructuring and closing operations.

"That's absurd," Fuzette said. "It's more than the company's total market value. They are being too aggressive."

But if that goal is not met, Petrobras' debt will likely rise, said Auro Rosenbaum, senior oil and gas analyst with Banco Bradesco SA (BBDO).

The situation is made worse by low oil prices, he added. Petrobras expects benchmark Brent crude to rise to an average of $70 a barrel in 2016-2019 from about $60 today. Oil prices, though, averaged $92 a barrel in the eight years between the release of the 2008-2012 plan and Monday's cuts.

Reporting by Jeb Blount