Brazil’s oil workers’ strike comes when Petrobras is under investigation and struggling with debts of USD130bn. This action goes beyond salary increases and includes calls to block USD50bn worth of planned asset sales. We opine that a prolonged strike – or an expansion to other producing assets – can have an adverse impact on Petrobras and the oil market. Stocks with exposure to Brazil are Keppel, Sembcorp Marine, Ezra, Vard and SapuraKencana.

The strike affects c.140,000 barrels (bbls)/day (bpd) to 500,000bpd. Oil workers in Brazil began their strike on Sunday, 1 Nov. This industrial action has slowed Petroleo Brasileiro’s (Petrobras) (PETR3 BZ, NR) daily production to a certain extent. The total production affected is in the range of 140,000bpd-500,000bpd. The national oil company and the oil workers have been quoted as saying that the impact was 140,000bpd and 500,000pbd respectively. We believe the impact is in the lower range of the scale. This is because the crude oil markets have not been dramatically affected at this moment. Brazil currently produces around 2mbpd-2.5mbpd and accounts for around 2-2.6% of global demand.

Adverse impact is possible, if prolonged. We believe that this strike, if prolonged – or if it expands to affect more producing assets – can have a significant and adverse impact on the Petrobras. This is in terms of areas where it needs to raise output in order to generate the cash flow required to reduce its debt and carry out its investment plans.

The companies under our coverage that have exposure to Brazil are Keppel Corp (Keppel) (KEP SP, BUY, TP: SGD10.00), Sembcorp Marine (SMM SP, SELL, TP: SGD2.00), Ezra (EZRA SP, BUY, TP: SGD0.33), Vard Holdings (Vard) (VARD SP, SELL, TP: SGD0.32) and SapuraKencana Petroleum (SapuraKencana) (SAKP MK, NEUTRAL, TP: MYR2.05). Keppel, Sembcorp Marine and SapuraKencana have around 40-50% of their orderbooks exposed to Brazil. Fundamental recommendations are maintained for the aforementioned companies. However, in our opinion, business and/or operational risks in Brazil are clearly higher now than it has ever been in the past.

The oil industry strike in Brazil

The strike is putting pressure on Petrobras at a time when the company is currently undergoing investigations over financial irregularities and is straddled with debts of USD130bn in total. According to Reuters, the current strike goes beyond a call for an 18% salary increase – management has already agreed to an 8.1% increase in wages – as the oil union federation was also looking to block a planned assets sale valued at USD50bn in total. Also demanded are the reversing budget cuts and calls to protect the national oil company as well as Petrobras being allowed the lead the bulk of new offshore oil developments. Such goals would be hard for the company to meet, while others would require the approval of Brazil’s Congress. According to the International Energy Agency (IEA), Petrobras has total investments of USD130bn for the 2015-2019 period. This is 37% lower than the projected previous 5-year investment plan for the 2014-2018 period. The company plans to divest USD15.1bn worth of assets for 2015/2016, namely: i) 30% from exploration & production (E&P), ii) 30% from the downstream segment, and iii) 40% from its gas and power business. A further divestment of USD42.6bn is planned for 2017/2018. The investment plan allocated 83%, or USD108.6bn, to presale E&P projects, and 2020 production targets have been slashed to 2.8mbpd (from 4.2mbpd). This new target represents an increase of 800,000bpd growth from current production levels. Petrobras currently produce c. 2mbpd, accounting for 85% of Brazil’s oil production levels. The national oil company is on track to deliver five new floating, production, storage and offloading (FPSO) units before the end of 2016. We believe that this strike, if prolonged (or expands to affect more producing assets), can have a significant and adverse impact on Petrobras. This is at a time when it needs to raise output in order to generate the cash flow required to reduce debt as well as for planned investments. The companies under our coverage that have exposure to Brazil are Keppel, Sembcorp Marine, Ezra, Vard and SapuraKencana. While fundamental recommendations are maintained for the aforementioned companies, in our opinion business and/or operational risks in Brazil are clearly higher now than it has ever been in the past.

Singapore

Keppel. Keppel's yard in Brazil is well-established after more than a decade of operations. The orderbook is c.40% exposed to Sete Brasil Participacoes (Sete Brasil) and Petrobras, and is inclusive of six semi-submersible (semi-sub) drilling rigs and some FPSO conversions. Note that Keppel has stopped construction work related to the semi-sub rigs until the payment situation becomes clearer. The company has also confirmed that its yards have not been affected by the strike. Sembcorp Marine. We see potential fallout risk to Sembcorp Marine’s new yard in Brazil, which only began operations this year. This is because new workers are typically less confident in their outlook. Around 47% of the company’s orderbook is exposed to Brazil. Sembcorp Marine has stopped work on the drillship works until the payment situation becomes clearer. Management said that yard operations were continuing as per normal. Vard. Operations in Brazil have been loss-making for many quarters, with a significant number of new hires that could become restless as the industrial action continues on. Seven of Vard’s 29-vessel orderbook are being constructed in Brazil, while another four are being built for Brazilian customers. Ezra. Ezra’s comments said it best, “Our exposure is only the Lewek Fulmar. There is not a lot of visibility into the strike situation, but we do not expect it to impact (the Lewek) Fulmar’s operations.” In other words, the company’s orderbook exposure to Brazil is minimal.

Malaysia

SapuraKencana. SapuraKencana currently has two pipe-laying supply vessels in Brazil with four more progressively joining until end-2015. Total contract value is USD4.1bn (c. MYR12bn), or around 50% of the company’s MYR23bn orderbook.

Source: RHB Research - 11 Nov 2015