Petrobras drills into foreign debt

Petrobras offshore ship platformWhile Petrobras is drilling deeper than ever before beneath the seabed in its quest for nature’s wealth, above ground Brazil’s national oil company is seeking to tap further into international markets as it seeks to finance its ambitious capital expenditure plans.

The group plans to raise $30bn to $40bn by 2014. Only two weeks ago, it completed a $6bn bond offering that was Brazil’s biggest such deal. The size of the fundraising plan has left analysts wondering whether Petrobras can continue to meet its target of net debt to equity of below 35 per cent (the ratio is currently 18 per cent) without issuing new shares in the coming years.

Chief executive Jose Sergio Gabrielli told the FT this week there will not be any more equity offerings after last year’s mega $67bn stock sale. “We don’t plan to raise new equity. It is not in our plan,” he said. At the moment, this promise seems plausible given the strength of bond markets and the fact that efforts to tap into Brazil’s giant “pre-salt” fields are still going to plan. But the fundraising programme is sufficiently aggressive that any upsets in global capital markets or oil prices could force Petrobras to change tack.

The other issue is the market impact of Petrobras’ fundraisings. Based on volumes in Brazil’s dollar bond market over the past few years, Petrobras’ planned bond offerings could comprise a third or a quarter of each year’s issuance. This could stifle other issuers.

Credit Suisse issued a note after the $6bn issue saying that there was a risk that the company’s voracious appetite could lead to a glut of its debt, which would then be at risk of underperforming in the coming years.

“We believe the unprecedented size and complexity of its business plan warrant a more conservative approach to its future prospects than the one historically needed,” the report by the team led by analyst Jamie Nicholson-Leener said, as reported by Reuters.

Credit Suisse kept its underweight recommendation on the company’s debt, whose prices drop when more bonds are issued.

For the government, Petrobras’ hunger for international capital poses a different problem. Such offerings are sucking in dollars, putting more pressure on Brazil’s currency, the real, to appreciate against the dollar. That is something Dilma Rousseff, Brazil’s president, has been seeking to avoid through vigorous intervention in the spot and forwards markets and other measures.

The government might be tempted to take more radical action to prevent the real from appreciating further and thus protect exporters but this would hurt those in genuine need of foreign investment, such as Petrobras.

Perhaps this is part of the reason that Rousseff has begun adopting a more political approach to Brazil’s currency problems recently amid murmurings that she will try to put pressure on China to revalue its currency, the renminbi, and will take further trade measures against cheap Chinese goods.

Related reading:
Petrobras plans to double Brazil oil output, FT
Challenges of the deep to transform industry, FT