Reuters: Petrobras may be close to a turnaround.

By Sabrina Lorenzi

RIO DE JANEIRO, Feb 12 (Reuters) - Some believe that Petrobras will begin to turn things around with increased oil production in 2014, after a stock devaluation of over 50 percent in the last four years.

The turning point for the shares could occur from the second half of the year onwards, as soon as the increase in production becomes clearer, estimated at between 5 and 6,5 percent this year by market analysts and oil industry experts interviewed by Reuters.

However, some consultants point to weaknesses in Petrobras, such as the price gap in refined products, which generates losses in the billions for the Supply division, and the company's high level of debt to cope with the substantial investments required by the pre-salt reserves.

Debt and production shortfalls could limit the momentum resulting from increased production. Ultimately, should Petrobras be bought or sold?

BUY NOW

After two years of declining production and another two of insignificant growth, the Brazilian state-owned company will be able to regain momentum in 2014, moving towards the ambitious goal of extracting 4,2 million barrels of oil equivalent per day by 2020 -- a volume that matches the world's largest discoveries made in the last decade.

"We lost a little time, but now it's going to happen," analyst Caio Carvalhal, from JP Morgan's oil division, told Reuters, adding that production will grow by about 5 percent in 2014 -- a performance not seen since 2009.

Analysts are unanimous in their projections of increased production. Itaú BBA estimates a 6,5 percent increase, while HSBC forecasts a 5 to 6 percent rise in volume, in line with most reports on the subject. The banks estimate increasing volumes over the next few years, with the consolidation of pre-salt extraction.

The resumption comes after production was affected by delays in equipment deliveries from suppliers and stricter platform maintenance standards imposed by the sector's regulatory body, ANP, which increased the number of shutdowns at the units.

Geologist and consultant John Forman, former director of the ANP (National Agency of Petroleum, Natural Gas and Biofuels), considered that the drop in Petrobras' production in recent years was expected, due to the redirection of the company's projects soon after the giant pre-salt discoveries in the middle of the last decade.

But, starting this year, the oil company will increase production with the operation of delayed projects and the entry of platforms planned in the 2014 schedule, with at least nine new production systems or systems in the ramp-up phase.

Petrobras has not yet officially released production figures for 2014.

According to some experts, increased production at Petrobras will result in greater cash generation, a prerequisite for reducing its debt—the company's Achilles' heel.

"The market sees three reasons to invest: production, production, and production... the other problems will be resolved as a consequence," said the JP Morgan analyst.

But the process of recovering the state-owned company's assets is not expected to happen immediately, Carvalhal commented, echoing other experts.

The JP Morgan specialist also highlighted that part of the problem with the shortfall of refined products sold by the state-owned company at lower costs than imports will be alleviated with the start of operations at the Abreu e Lima refinery in Pernambuco at the end of the year.

Furthermore, due to increasing leverage, Petrobras may reassess the timeline of some projects and the way it discloses this planning, Itaú BBA added in a recent report to the market.

The execution of the plan should take into account variables such as the evolution of the debt-to-EBITDA ratio (earnings before interest, taxes, depreciation, and amortization) of Petrobras, the increase in production, and price parity, according to the bank.

"This could be a suitable solution from the point of view of credit rating agencies," assessed Itaú BBA, adding that in this way the company could establish benchmarks regarding debt levels and future expenses.

SELL

However, a series of investment bank reports indicate that the expected increase in Petrobras' cash generation this year is not enough to eliminate market doubts about the company's ability to finance its $237 billion investment plan over five years (the largest in the world).

The company produced 1,93 million barrels of oil per day in Brazil in 2013, falling back to levels seen five years prior.

Some oil industry experts compare Petrobras' current experience in the pre-salt layer with its pioneering work in deep waters in the 1980s. At that time, the state-owned company was divided on whether to embark on the ambitious plan to explore depths greater than 500 meters, with many critics questioning its commercial viability and financial capacity for the undertaking.

"The comparison with the 80s is valid to illustrate the aspect of production, of the technological challenge, but at that time Petrobras's cash flow was not as bad as it is today," pondered the director of the Brazilian Infrastructure Center (CBIE), Adriano Pires.

Pires fears that gasoline and diesel imports without passing on international price increases to the domestic market will continue to affect the company's results.

With elections this year, he and several other analysts believe that a necessary increase in fuel prices, if it doesn't happen soon, will be postponed until after the election period, at the end of 2014.

This would prolong the agony imposed by the government, the controlling shareholder of the company, which fears inflationary effects and is withholding payments.

The policy has generated significant losses for the company's Supply division, which recorded losses of 5,52 billion reais in the third quarter, compared to a loss of 5,65 billion reais in 2012.

With such losses and given the large investments to produce in the pre-salt layer, the oil company's total debt skyrocketed last year, rising from 196,3 billion reais on December 31, 2012 to 250,8 billion reais on September 30. Meanwhile, the debt-to-equity ratio, which measures the company's leverage, increased from 31 percent to 36 percent on September 30.

Citing concerns related to the price gap, HSBC bank on Monday lowered its target price for Petrobras from 19 to 15 reais.

"The government has little opportunity to resolve the pricing policy issue by the end of the year," said HSBC, adding that the company remains exposed to any depreciation of the real.