Last updated:July 2, 2012 8:23 pm
Petrobras: potential to deliver
Refusing to pull one’s punches is an admirable trait – especially when hitting one’s own face. Maria das Graças Foster, chief executive of Petrobras, was candid enough last month to admit that Brazil’s oil and gas champion tends to over-promise and under-deliver. She has slashed its production target – which the company keeps missing – for 2020 by 17 per cent. Since half the world’s oil and gas industry seems to have a stake in Brazil, that will have implications elsewhere.
Petrobras’s failure to deliver is already evident among oil services companies. Engineering specialist Subsea 7 took a $50m hit in its fourth quarter to account for losses on a contract with Petrobras. Aker Solutions saw its earnings before interest, tax, depreciation and amortisation margin shaved from 9.9 per cent to 9.4 per cent in 2011 due to “weak performance and quality issues” in Brazil. Those numbers are not terminal: about 12 per cent of Subsea 7’s group revenues of $5.5bn are in Brazil. Petrobras is a huge consumer of oil services; its lowered ambitions could actually mean it is better able to execute contracts. But the execution risks appear obvious.
The real test for Petrobras is to turn potential into production at its vast “pre-salt” fields in the Atlantic. It is the operator of most of these, but has a starry supporting cast: BG Group, Sinopec, Repsol and Galp. London-listed BG has arguably the biggest stake in Brazil’s success: it is targeting net production of 600,000 barrels of oil a day – a third of its total – in Brazil by 2020. BG says it is comfortable with Petrobras’s new target; investors have faith in BG management. But Petrobras has to deliver for BG to deliver. Ms Foster has an operational background. The new targets reflect that, suggesting a more hard-headed assessment of what Petrobras can do than earlier, more idealistic versions.
Petrobras’s share price is two-thirds of its level four years ago. BG shares trade at nearly twice the forward multiple (13) of Petrobras (7). For two companies locked into each other’s future, that looks like too wide a gap.
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Copyright The Financial Times Limited 2012.
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