Petrobras Inks Rig Deal

Petroleo Brasileiro S.A. or Petrobras ( PBR - Analyst Report ) entered into an agreement with oil equipment manufacturer Sete Brasil.

Per the deal, the companies will be involved with the construction of six new semi-submersible drilling rigs in Brazil. These rigs form a part of the set of 21 rigs that was awarded to Petrobras by Sete Brasil in an agreement signed in early February.

The rigs – slated to be delivered in 2016 – have a drilling capacity of up to 32,808.4 feet, and are able to operate in water depth of 9,842.5 feet. The rigs will be used for exploration activities in the pre-salt layer of Santos Basin.

Petrobras will construct the rigs, using local content of between 55% and 65%, at the Brasfels Shipyard in Angra dos Reis.

Following the completion of the construction, the drillships will be chartered to Petrobras for a period of 15 years. Petroserv will operate three rigs, while Queiroz Galvao Oleo e Gas and Odebrecht Óleo & Gás will have two and one rigs, respectively.

Headquartered in Rio de Janeiro, Petrobras is the largest integrated energy firm in Brazil, dominating the country’s energy sector. The company produces substantially all of South American country’s crude oil and natural gas, and accounts for almost all of the country’s refining capacity.

Petrobras is also settling up Brazil’s natural gas infrastructure and enjoys strong market share positions in petroleum product and liquefied petroleum gas marketing businesses. While the company no longer operates as a legal monopoly, the size and reach of its operations make it a quasi-monopoly in Brazil.

However, we remain on the sidelines given the company’s exposure to the volatile oil and gas fundamentals, which are expected to impact profitability. Moreover, Petrobras’ huge investment requirements, operational hindrances and international business risks add to our negative sentiment.

We maintain a long-term Neutral recommendation on Petrobras. The stock, which operates with other global energy players such as ExxonMobil Corp. ( XOM - Analyst Report ) , PetroChina Co. Ltd. ( PTR - Analyst Report ) and Royal Dutch Shell plc ( RDS.A - Analyst Report ) , currently, retains a Zacks #3 Rank that translates into a short-term Hold rating.