Weekly Oil & Gas Notes: Petrobras Revises Spending Plan For 2015 And 2016, BP’s Record $20.8 Billion Settlement With US DOJ Over Gulf Of Mexico Oil Spill

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The Oil & Gas industry saw significant activity this week, with Petrobras revising spending plans for this year and the next. The company hopes to save a total of $18 billion by revising capital investment and reducing costs and expenses excluding raw material purchase. On a separate note, the US Department of Justice recently announced a settlement to resolve civil claims against BP arising from the 2010 oil spill in the Gulf of Mexico. The $20.8 billion settlement is now the largest with a single entity in the history of the US Justice Department and takes BP’s total budget for the accident to more than $54 billion. On that note, we discuss below these developments related to the Oil & Gas companies over the past few days.

Petrobras Cuts Planned Spending For 2015 And 2016, Maintains Divestment Target

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Petroleo Brasileiro Petrobras (NYSE:PBR) is striving hard to reduce its spending. In a revision to its Business and Management Plan 2015-2019, the company shaved off a total of $11 billion from its capital spending plans for this year and the next. [1] Petrobras has revised its 2015 investment target from the previous $28 billion to $25 billion while it has changed its 2016 investment target from $27 billion to $19 billion. The company also plans to spend $7 billion less in total costs and expenses excluding raw material purchase for 2015 and 2016. The revisions were expected as the company’s $130 billion spending plan for 2015-2019 had become somewhat outdated. [2]

The new investment plan assumes that the Brazilian Real (BRL) would average 3.28 to the dollar in 2015 and 3.80 in 2016. However, the real has depreciated more than 30% compared to the US dollar since the start of the year and is currently touching 3.85 to the dollar, which could mess up calculations. [3] Additionally, S&P downgraded Petrobras debt to junk status last month after doing the same to Brazil’s sovereign debt. [4] We believe that the fall in the real along with the recent downgrade will have a negative effect on Petrobras as the cost of servicing the company’s $134 billion debt will go higher. Petrobras will need to divert funds in order to cover its rising interest payments and reducing its capital spending seems like a logical choice. Additionally, Petrobras is sticking to its earlier divestment target of $15.1 billion in 2015-2016 and intends to divest $700 million and $14.4 billion worth of assets in 2015 and 2016 respectively. However, a senior company source has claimed to Reuters that Petrobras seems unlikely to meet its $15.1 billion divestment goal by the end of 2016. [5]

Petrobras stock gained around 22% over the week through Thursday. We currently have a price estimate of $7.41 for Petrobras. For the year 2015, we estimate revenues of $181.2 billion and EPS of $0.63, compared to a consensus estimate of $0.62. Please note that the calculated revenue figure has not been subjected to any intersegment elimination.

BP Reaches Record $20.8 Billion Settlement With US Justice Department Over Gulf Of Mexico Oil Spill

The US Department of Justice, along with five Gulf States, recently announced a settlement to resolve civil claims against BP Plc. (NYSE:BP) arising from the 2010 Macondo well blowout and the subsequent oil spill in the Gulf of Mexico. [6] The value of BP’s settlement rose to $20.8 billion in the latest tally of costs, up from the $18.7 billion settlement announced in July. [7] The July settlement had not accounted for certain interest payments, reimbursements and committed expenditures for early restoration of damages to natural resources, which have subsequently been included in the latest settlement. The settlement is now the largest with a single entity in the history of the US Justice Department and takes BP’s total budget for the accident to more than $54 billion. [8] However, the good news for BP is that this decision resolves all federal and state claims against the company for the Gulf of Mexico oil spill.

The Deepwater Horizon oil rig, owned by Transocean and contracted by BP, exploded and sank in the Macondo Prospect in Mississippi Canyon of the Gulf of Mexico on April 20, 2010. The disaster led to the discharge of millions of barrels of oil into the Gulf of Mexico over a period of 87 days, which had an adverse impact on marine life, and the fishing and tourism industries. On investigations, the federal court found BP guilty of using defective cement on the well and insufficient safety systems. In November 2012, the US Department of Justice (DOJ) imposed criminal charges for 11 deaths (missing people declared dead), gross negligence and misconduct, while the Environmental Protection Agency temporarily banned BP from any new contracts with the U.S. government. The company’s stock was trading at close to $60 per share before the spill, and sharply fell to around $28 per share in June 2010 and bottomed. Two years after the accident, it was still a bumpy ride and the stock was not that much higher, trading at around $36 in May 2012.  From that point onward the stock did well, rising to $53 by the end of June 2014.  After that, the price of oil peaked, and from July 2014 onward it has been all downhill for BP and most other oil related companies.

BP’s stock gained around 10.6% over the week through Thursday. We currently have a price estimate of $41 for BP. For the year 2015, we estimate revenues of $253.5 billion and EPS of $2.04, compared to a consensus estimate of $1.98. Please note that the calculated revenue figure has not been subjected to any intersegment elimination.

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Notes:
  1. RPT-UPDATE 2-Brazil’s Petrobras cuts spending plan for 2nd time in 3 months, October 6, 2015, Reuters []
  2. Exclusive: Petrobras spending plan already obsolete, new cuts likely – sources, September 10, 2015, Reuters []
  3. Adjustments in the Business and Management Plan 2015-2019: Additional information, October 8, 2015, Petrobras Press Release []
  4. S&P Downgrades Brazil’s Petrobras to Junk Status, September 10, 2015, Wall Street Journal []
  5. Petrobras to slow asset sales, focus on cost cutting -source, September 14, 2015, Reuters []
  6. U.S. and Five Gulf States Reach Historic Settlement with BP to Resolve Civil Lawsuit Over Deepwater Horizon Oil Spill, October 5, 2015, The United States Department of Justice News []
  7. BP’s Record Oil Spill Settlement Rises to More Than $20 Billion, October 5, 2015, Bloomberg []
  8. U.S., BP finalize $20.8B Gulf of Mexico oil spill settlement, October 5, 2015, Seeking Alpha []