Standoff with Petrobras drives Odebrecht Oil and Gas closer to bankruptcy protection

Petrobras asked Odebrecht Oil and Gas (OOG to paralyze work in four out of six drilling rigs that are active, that can lead to equipment supplier to seek bankruptcy protection, according to two sources familiar with the matter.

Banks and OOG investors are monitoring the situation with concern. The company had already negotiated with investors a rescheduling of interest  due last September since Petrobras canceled the drillship contract ODN Tay IV, one of the four platforms that is guaranty to OOG bonds.

But the Petrobras request aggravates the situation of the supplier, which has Petrobras as its only customer in the drilling area, the sources said.

OOG has about $ 5 billion in the debt market, with most maturing by 2022.

Of the total, about $ 2 billion are with banks and the rest in the hands of other investors, according to the document released earlier this year, referring to 2015.

Petrobras, whose investment plan was drastically reduced in the wake of the oil drop and the corruption scandal, cannot unilaterally suspend the activity of the rigs, whose contracts expire between 2021 and 2022. The stoppage of services, would result in a decrease in payments. OOG has preferred a negotiated solution, aiming to prevent further declines in revenues.

According to a source with direct knowledge of the matter, the terms of the eventual stoppage of the platforms is one of the main sticking points. With the realization that the international oil prices should not return to the level of $ 100 a barrel for several years, Petrobras wants a full stop of four of the six OOG rigs for a period of about two years.

The total stoppage of drilling operations, called in the oil market jargon as a cold stop, greatly reduces your maintenance cost. This option makes sense for Petrobras, which has made successive cuts in its investment plan as part of adaptation to adverse market reality.

One of the consequences of the Petrobras attitude forced  Sete Brazil, created to charter rigs to Petrobras, to seek bankruptcy protection in April.

A more permanent suspension of OOG platforms would cause, as one of the consequences, the suspension of highly trained work force, which in future rehiring would take more preparation time to mobilize.

Therefore, OOG wants a partial stop, or hot stop, which would maintain the platform in a semi-active condition, a situation that would facilitate a resumption of activities, but also has a higher maintenance cost, according to the sources.

An OOG rig’s daily cost is about U$ 350,000. Drilling activity now accounts for more than half of the revenues of OOG.

The company’s situation is difficult since the court banned OOG from participating in future Petrobras bids, due to the involvement Odebrecht Holding in the corruption scandal Lava Jato involving major contractors and Petrobras.

The immediate practical effect of this measure is to prohibit OOG to participate in tenders for maintenance of Petrobras platforms, one of the services provided by the supplier. These contracts are usually around two years.

Unlike drilling, maintenance consumes virtually no capital and is a sector that provides positive cash flow for the company. OOG failed to renew the contracts of about 2 000 employees in this area since December.

OOG entered with an an injunction to continue to participate in the Petrobras bids, but it was overturned by the Court of Rio de Janeiro last month.

For the Odebrecht Holding company, the situation at OOG has become the most urgent issue to be solved, after last months capitalization of 6 billion reais in Agroindustrial Odebrecht, production and sale of ethanol, sugar and electricity from cogeneration, an operation that had as collateral shares it holds in the petrochemical giant Braskem.

The holding company, whose then president Marcelo Odebrecht was arrested more than a year in the Lava Jato, has denied reports in the media that would be next to ask for judicial recovery of the entire conglomerate. However, there is fear that eventual problems at OOG might contaminate other companies in the Group.

On the side of the banks, they want to convince the OOG to avoid seeking bankruptcy protection, as this would force them to make more provisions for losses on defaults, this after having already provisioned billions after Sete Brasil and telecommunications operator Oi last June.

Consulted, OOG said it would not comment on the matter. Petrobras said it “continues adapting its rig fleet to new levels of demand” and “seeking to reduce costs through negotiations with suppliers.”

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