Credit Suisse- Brazil pre-salt rounds: Triumphant Comeback

Monday, October 30, 2017

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-Apple of the Industry's Eyes. The attractiveness of the Brazilian's ultradeep water play has been confirmed by the resounding success of today's (27) ANP 2nd and 3rd pre-salt bidding rounds. Six blocks, out of eight offered, received bids for a total signing bonus of BRL6.15bn (out of maximum of BRL7.75bn). These two cold figures alone would already characterize a successful round, but the success of today's rounds truly go much further. Most big players actively participated in the auction, fostering important benefits to the local industry. Firstly, on the back of competition for the blocks, the winning consortiums offered government takes of profit oil much above the minimum required in the bid. Secondly, there is a clear trend of growing interest and increasing number of E&P operators in Brazil.

- Petrobras's Sensible Moves. PBR again participated in the auction very selectively. The company only presented offers for three areas, precisely the same areas for which it had already exercised the right of preference for a 30% stake and operatorship. That was well aligned with our previous expectations that Petrobras would not make significant bids for other unselected areas (see Selective is Good). Another sensible move by Petrobras was to participate in the auction through consortiums. Among the benefits of the consortium we highlight: i) it shows capital discipline; ii) lower risk exposure; iii) it provides a partner with whom to share and overcome operational challenges; and iv) a countersign in the bids which supports the argument that the offers were not too aggressive and also make economic sense from the partners' perspectives.

- Long-Term Gains. Looking exclusively at the short-term, we don't expect the auction to be a big mover for Petrobras. The BRL1.14bn (c.USD350mn) capital allocation in signing bonuses is rather small relative to the company's overall capex plan (c.US$74bn in five years) and is likely to be mostly dealt with within the same budget. Longer-term, we believe the bids can bear significant fruits, should promising areas like Peroba and Alto de Cabo Frio - Central turn out to be as productive as other neighboring presalt plays. On the negative side and to a lesser extent, the lack of interest in Pau Brasil may allow for a negative read-through for Jupiter (BM-S-24), a likely candidate in Petrobras's asset divestment program.

- Bright Outlook. All in all, the results of the 2nd and 3rd pre-salt rounds are greatly encouraging for the Brazilian E&P industry and inspire high expectations for the upcoming rounds scheduled to happen in 2018. That might prove to be specially true, should Petrobras and the Government reach an agreement that allows a new bidding round of the surplus volume in the Transfer of Rights areas.

-World-Class Play, Competitive Rounds. The Brazilian oil & gas regulator, ANP, hosted the 2nd and 3rd Pre-salt Rounds today. The auctions offered eight areas inside the pre-salt polygon, 4 in unitizable areas and 4 in new exploratory areas, under the PSA (production sharing agreement) fiscal regime. These were the first pre-salt auctions since the changes made to the Pre-salt Law in Brazil to allow companies other than Petrobras to be operators in the area. Results were reassuring, as the auction was very competitive, as evidenced in Figures 1 and 2 by the final results of the auctions. In addition to Petrobras, Shell and Statoil have also won operating interests in pre-salt blocks offered.

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