Story ID: 
Brazil’s Petrobras Flying into Headwinds
By: Mark Huber
Caption: The company is embroiled in an international corruption scandal that could limit its future access to capital markets and retard exploration projects.
Word Count: 678
The oil price slump is just the latest headwind confronting Brazil’s largest and majority state-owned oil company, Petróleo Brasileiro, commonly known as Petrobras. While some analysts believe that Petrobras’s deepwater offshore wells will continue to be profitable even if oil prices were to fall as low as $50 per barrel, that might be a moot point. The company currently finds itself embroiled in an international corruption scandal that could limit its future access to capital markets and retard those deepwater energy exploration projects. If that happens, it could have serious implications for international OGP (oil and gas production) helicopter companies, which have already bet heavily on the aggressive expansion of Brazil’s energy sector, and the leasing firms and OEMs that support them.

The amount of international investment required to develop Brazil’s offshore wells is substantial; before the recent oil price collapse Petrobras planned to invest $237 billion between 2014 and 2017 to develop deepwater resources in several areas generically referred to as the “pre-salt,” 200 to 300 miles out into the Atlantic off Brazil’s coast. The pre-salt accounts for 7 percent of Brazil’s daily output of 2 million barrels of oil; by 2020 that is forecast to climb to 50 percent of total production, itself expected to more than double to 4.2 million barrels per day. And that does not include activity in Brazil’s newly discovered Libra deepwater offshore fields, which could hold as much as 12 billion barrels and generate $1 trillion over the next 30 years.
Foreign Investments in Doubt
To develop this, Petrobras is taking on massive debt, estimated to hit $170 billion this year. Petrobras needs to raise as much as $20 billion of this from foreign capital markets this year to continue its scheduled exploration activities. According to Bloomberg, Petrobras has relied on foreign capital markets for $44.5 billion worth of investment just since 2011. But access to those markets may be in doubt as Brazilian law enforcement and the U.S. Justice Department and U.S. Securities and Exchange Commission (SEC) continue wide-sweeping criminal investigations of corruption at the oil company involving kickbacks and money laundering worth nearly $4 billion, according to the Brazilian federal police. Petrobras acknowledged receiving SEC subpoenas in late November last year. One former Petrobras senior manager is alleged to have skimmed more than $100 million from the company, another more than $20 million. Altogether, dozens of former company executives and contractors are either under arrest or formal subjects of investigation. 

The scandal already has exacted a heavy price. The company’s outside auditors have refused to certify Petrobras’s latest financial results, a serious blow to any publicly traded company and a solid roadblock to floating more bond debt on international markets. Petrobras’ stock has dropped sharply and rapidly, sliding from $23.95 per share on Sept. 3, 2014 to $12.73 on Dec. 3, 2014. Moody’s Investors Services has downgraded Petrobras’s debt twice recently in as many months, saying the corruption investigation and its results could “significantly increase the company’s financing risk.” The price of Petrobras’s bonds has already taken a major hit, trading at deep discounts and hurting its financing costs substantially; the yield on Petrobras’s 2023 bonds has jumped 38 percent from September to early December 2014, a tangible sign of investor nervousness.

Even before news of the corruption scandal broke, senior Petrobras executives publicly admitted that the company was substantially behind schedule with its offshore development plans and oil-production targets. Petrobras’s crude oil production declined by 2.5 percent between 2012 and 2013. These missed targets and low production numbers are fueling speculation that Petrobras could default on $6 billion worth of bond debt payments due next year and another $5.4 billion due in 2017.

Petrobras controls 90 percent of the OGP helicopter demand in Brazil, and several helicopter OGP service companies have major Brazilian exposure. They include the Bristow Group, which owns 42.5 percent of Brazil-based Lider, a multi-faceted aviation services company that includes an OGP helicopter division. Erickson acquired Brazil-based OGP helicopter company HRT in 2013. Other OGP helicopter companies invested in Brazil include Era (Aeroleo), CHC (Brazilian Helicopter Services) and Greenwich Aero Group (Helivia Aero Taxi).