Fitch: Demand, Relationships Support Petrobras Driller Contracts

NEW YORK--(BUSINESS WIRE)-- A large-scale renegotiation or cancelation of existing offshore driller contracts is not anticipated given the supportive Petroleo Brasileiro S.A.'s s demand framework and long-term, mutually beneficial relationship, according to Fitch Ratings. Further, Fitch believes Brazilian and non-Brazilian offshore drillers will be reluctant to renegotiate existing longer term contracts at reasonable day rates that stretch beyond the current downcycle.

Operation Lava Jato, a Brazilian corruption investigation of Petrobras and numerous construction companies, has created uncertainty regarding the company's ability to execute its aggressive capex plan and meet production growth targets, which may impact offshore drillers. These concerns were further highlighted by recent Petrobras-related announcements from Seadrill Limited and Diamond Offshore (DO). Seadrill first announced the removal of $1.1 billion in Petrobras-related backlog, about 5% of its total, due to contract renewal concerns. This was followed by DO's disclosure that Petrobras cancelled an existing contract, representing over 5% of its backlog, within its rights under the agreement.

Fitch considers Brazil's oil and gas sector, particularly Petrobras, to be economically and strategically important to the country. The oil and gas sector's contribution to GDP rose to 13% in 2013 from 3% in 2000. Petrobras' importance is evidenced by its near monopoly status as a liquid fuel supplier, supportive pricing policy (Fitch-estimated Petrobras realized prices of $80-$85 per barrel), access to capital from state-owned banks and role in the development of ancillary industries. Petrobras' framework and aggressive capex program support offshore demand. Another near-term consideration is the delivery delay uncertainty of 28 Sete Brasil drilling rigs, which further supports demand for working offshore rigs.

About 9% of contracted offshore rigs are working for Petrobras within Fitch's sample of 10 non-Brazilian offshore drillers. Smaller, newer offshore drillers tend to have a larger percentage (18%) of their fleets contracted with Petrobras. This is a function of rig capability (ultra-deepwater) and delivery timing (2011 or newer), as well as fleet size (10 or less rigs). Larger offshore drillers have a more manageable fleet exposure (8%). One notable outlier was DO, with over 20% of its working fleet contracted with Petrobras.

Nearly 13% of revenue backlog within Fitch's sample of non-Brazilian offshore drillers is linked to Petrobras. The relative difference in backlog versus fleet exposure is due to contractual terms. The smaller, newer drillers have a varied Petrobras revenue profile. Pacific Drilling had its sole Petrobras contract expire in February 2015, while Vantage Drilling has a higher concentration (62%) due to the long length of its sole Petrobras contract. The larger drillers generally have a more manageable backlog exposure (11%). Notable exposure includes DO (25%), Ensco (14%) and Seadrill (16%).

For more information, see Fitch's Special report, "Offshore Driller Exposure to Petrobras (Contract Renewals Uncertain: Utilization and Spot Day Rates Seen Lower)" available on www.fitchratings.com.

Additional information is available on www.fitchratings.com.

The above article originally appeared as a post on the Fitch Wire credit market commentary page. The original article, which may include hyperlinks to companies and current ratings, can be accessed at www.fitchratings.com. All opinions expressed are those of Fitch Ratings.

Applicable Criteria and Related Research: Offshore Driller Exposure to Petrobras (Contract Renewals Uncertain: Utilization and Spot Day Rates Seen Lower)

http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=862734

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Source: Fitch Ratings

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