Petrobras Banks on Gov't Support

Yesterday, Petrobras (PBR - Analyst Report), the state-run oil giant, sold US$1.25 billion of reopened global 2019 bonds carrying 7.875% coupon, at 6.875% current yield. Although this is lower than the 8.125% yield on US$1.5 billion of the same bonds in February, it is still 332 basis points over U.S. Treasury yield.

Currently, the amount of notes outstanding is worth US$2.75 billion. The company doubled the initial offer of US$500 million on the bond based on its high demand. Petrobras plans to use proceeds from these bonds to repay part of the $6.5 billion loan secured from various commercial banks for two years.

On the opening front, Petrobras has stepped closer to finalizing details of its planned tender for offshore drilling rigs and production platforms, which will increase its operating costs in the short term. However, the activity will encourage growth in the domestic oilfield-service sector. Moreover, efforts to standardize equipment for platforms, rigs and refineries under construction will help cut costs in the long term.

Petrobras has been running periodic auctions of natural gas for short-term delivery since the beginning of the year. It plans to schedule its fourth auction for the deliveries on July 8, which will be offered for delivery in August and September. The company started these auctions in order to sell excess gas in its pipeline system. This requires large investments and Petrobras will have to depend on government spending to finance majority of its investment plans for 2009.

However, Fitch Ratings has maintained the debt rating on Petrobras and its wholly owned subsidiary, PifCo (Petrobras International Finance Co.), based on the fact that investments made in exploration and production are likely to lead to significant increase in production and reserves in the upcoming future. Therefore, we continue to have a positive view on Petrobras.