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Petrobras Lowers Rig Activity: Are Drillers Threatened? - Analyst Blog

It is common knowledge that the Brazilian state-run Petroleo Brasileiro S.A. or PetrobrasPBR is reducing its rig activities to tide over unfavorable business fundamentals. But investors should also note that repercussions of this are being felt by drillers assisting and having significant backlog tied to the debt-laden energy giant.

Petrobras is highly sensitive to crude prices. Analysts at Cowen Group Inc. − a diversified financial services firm - estimated that for every $10-per-barrel fall in the price of oil, the integrated player's yearly cash flow gets reduced by $4 billion.

With crude hovering at around $55 to $60 per barrel, Petrobras - like most other upstream and integrated firms - is not being able to generate much from exploration and production. On top of that, Petrobras was implicated in a multibillion dollar money laundering scandal last year.

The defamation has made it really difficult for the company to raise money − from both bond and equity markets − for costly exploration and drilling work. However, the Brazilian firm recently surprised the markets and investors by managing to borrow $2.5 billion for a period of 100 years .

Yet it is quite obvious for Petrobras to reduce its capital spending. In fact, Cowen analysts predicted that in the coming strategic business plan update, Petrobras might come up with a $150-$160 billion investment plan for the period of 2015 to 2019, much lower than the anticipated $220.6 billion spending during 2014 to 2018.

Petrobras' cost reduction initiatives have already been noticed in its reduced rig activities. Since mid 2013, the company has lowered its operating rigs to 50 from 70 mostly due to cash crunch and low commodity prices. The company has also cancelled the leases for five floaters taken from Schahin Petroleo e Gas SA, the drilling contractor of Brazil.

The risk being faced by drilling players, whose rigs are being used by Petrobras for upstream work, is thus apparent. Cowen analysts pointed to Diamond Offshore Drilling Inc. DO , Paragon Offshore plc PGN and Ensco plc ESV as the clear victims of the Petrobras issue. Investors should know that Diamond, Paragon and Ensco have 20%, 25% and 15% of their respective backlog booked at Petrobras.

Headquartered in Rio de Janeiro, Petrobras is the largest integrated energy firm in Brazil and one of the largest in Latin America. The company currently carries a Zacks Rank #3 (Hold).

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The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.


The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.

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