Heard on the Street
Goldman Adds to Petrobras’s Election Fright
A One-Two Punch Puts Petrobras’s Structural Challenges in Focus
By Liam Denning
Shareholders of Petróleo Brasileiro got a nasty surprise on both fronts this weekend, sending the stock down sharply on Monday. In less than eight weeks, Petrobras ’s market capitalization has plunged by $67 billion—roughly equivalent to the entire value of Occidental Petroleum .
This weekend’s first punch came courtesy of Dilma Rousseff ’s re-election in Brazil’s tightest-ever presidential race. Investors had hoped—albeit with less conviction in recent weeks—that her conservative opponent might win.
Hopes generated by Brazil’s discovery of vast reserves offshore have been dashed by local-content requirements for their development. Those have raised costs and pushed back production targets. Meanwhile, Petrobras has had to absorb the losses arising from buying oil at market prices but selling it at lower regulated prices to Brazilians. Between 2006 and 2013, Petrobras’s net debt swelled more than 11-fold, according to S&P Capital IQ. Sunday’s election result suggests little will change on the policy front.
On the same day, Goldman Sachs delivered the second blow, slashing its forecast for Brent—just 10 days after saying it felt “constructive” on near-term prices. Worse, Goldman now sees a long-term price of just $90.
That is a big problem for Petrobras, given that it has sunk tens of billions of borrowed dollars into the ground to develop barrels for future production. Morgan Stanley estimates marginal costs on Brazilian fields range from around $75 a barrel to north of $100.
While lower global oil prices should alleviate some of Petrobras’s downstream losses, the net effect is still negative. UBS estimates that even including some benefits, a Brent price of between $80 and $90 cuts the company’s net asset value by between 20% and 40%.
Such math has wider implications. Lower long-term oil-price assumptions reduce the incentive, or wherewithal, to develop new fields. In the International Energy Agency’s last medium-term outlook, Brazil was forecast to contribute 16% of the growth in non-OPEC oil production between 2013 and 2020. Such projections may now have to come down—adding a further headwind to Brazil’s troubled economy.
Investors have largely focused on U.S. shale oil output’s resilience to lower oil prices. They might do better to look at countries like Brazil, Venezuela and Russia, where government’s reliance on the sector adds unpredictable risks of its own. Instead of shale failing, political disruption may be the mechanism that rebalances the oil market—eventually.
