As expected, Brazil’s government made changes to its deepwater oil concessions law late Wednesday. It paves the way for Petrobras to become investment grade again.
Under the law, Petrobras is no longer required to participate in offshore auctions, allowing the company to stand-down on investing where it no longer needs to. Petrobras can finally save some money. This not only bodes well for its stock, but is especially good for its debt profile. It is only a matter of time before Petrobras is no longer speculative grade.
The law (PL 4567) passed the lower house of congress in a landslide, with 292 in favor and 101 against, all of them from leftist parties and the now deposed Workers’ Party. This is not a new law, but rather a change to an existing one. It was first proposed by Senator Jose Serra over a year ago and removes Petrobras from its mandatory 30% participation in production-sharing agreements. The law is unlikely to be revived in any meaningful way by the Senate. This is a done deal.
Petrobras is currently in the middle of its worst crisis ever. The Workers’ Party and its political allies ransacked the company in a never-before-seen corruption scandal that enriched the party and now has Petrobras contractors in prison. It has over $120 billion in long and short term debt. And has limited capital to participate in National Petroleum Agency energy auctions. The new law does not ban Petrobras from participating in new auctions. If the company likes the long term value of a discovered oil field, and has the capital to invest, it can participate. But if it does not have the money to do so, the government no longer forces them to fork it over. Petrobras now has a better means to control spending, and this puts it closer to investment grade. Their sovereign bonds are rated BB, one notch below BBB-. Rating agencies have not commented on the law. But once it becomes obvious that this law helps Petrobras’ debt profile, the company will get a credit upgrade. It’s 8% yielding bonds will be like holding gold.
The opposition hasn’t a leg to stand on. It is unlikely they can force any meaningful changes to the law in the Senate. Their argument that the Brazilian government is “handing on a platter” Petrobras oil fields to multinationals is more fodder for their political fan base than reality. The law does not change existing controlling interest in deepwater oil. Petrobras can already sell some of those assets to whomever it wishes, as already allowed when the Workers’ Party was in power. It has sold a few stakes already. The oil still belongs to Brazilians, as its government collects export revenues, taxes and royalties from oil companies. If those oil companies cannot drill new fields because a broke Petrobras cannot participate in them, then that is a revenue loss to the Brazilian government.
Petrobras has shed thousands of jobs. If it cannot participate in new production-sharing auctions because it does not have the money to do so, as is now the case, then no one can. And if no one can participate in those deals, then that means oil companies will not be hiring unemployed Petrobras workers.
The left’s argument is also riddled with hypocrisy. Petrobras owns oil and gas fields in the U.S. Gulf of Mexico, including the lucrative Cottonwood field. No one in the U.S. is complaining about a Brazilian oil firm taking their oil and gas.
This is a good law for Brazil because foreign oil companies will be more interested in participating without having to give up control to a company that is not financially fit, and is still in the midst of a corruption probe. The risks are too high.
There are some things in the concessions law that need ironing out.
The government still needs to clarify the rules governing field boundaries, local content requirement and whether to extend a tax incentive regime beyond 2020 in preparation for the next bidding round in early 2017, Bloomberg reported today.
Worth noting, Brazil’s ruling political establishment created a maritime vessels manufacturer named Sete Brasil in order to benefit from its local content rules. It went bankrupt in June due to mismanagement.
Petrobras shares rose over $10.16 in the first 20 minutes of trading in New York. The stock will find a new range now, closer to $10.
By Kenneth Rapoza
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