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Wellstream - well positioned to benefit from Brazil's emerging deepwater oil province

Petrobras (NYSE:PRN), the Brazilian oil and gas titan, has been making headlines in recent years. A string of massive oil and gas discoveries in deep water off the cost of Brazil has propelled the company up the oil and gas reserves league table, and turned it into one of the largest integrated energy companies on the planet. Not that Petrobras was small fry before, but the potential of up to 50 billion barrels of light oil that will launch Brazil into the premier league of oil producing nations, has transformed the company almost overnight. So much so, that it was recently reported that China offered a US$10 billion line of credit to Petrobras to help fund development of its 65% interest in several multi-billion barrel discoveries.

Petrobras has recently stated that an oil price of $40/barrel is required to justify the investment, but most analyst believe a price tag closer to $50/barrel is required. Perhaps what investors have missed is that these prices are over the life of the fields. Considering the sheer scale of the discoveries, the current price of oil is pretty irrelevant, as it will take years to develop the fields, and decades to deplete them (current estimates suggest US$100 billion of capital expenditure over 30 years). Far higher on Petrobras' agenda is overcoming the technical challenges of extracting oil from such deep discoveries. This is where FTSE 250 Oil Services company Wellstream comes into the fray.

Wellstream is the second biggest player, with around 35% market share, in flexible pipes for the oil and gas industry, including flowlines, risers, jumpers and transfer lines, which are designed to transport production fluids from the well on the seabed to the surface and work under extreme conditions often seen in offshore developments. The company's products form an integral part of offshore production facilities, including Floating Production Storage and Offloading Vessels (FSPO). 

It is widely agreed by the analyst community that Petrobras will be utilizing dozens of FSPOs to develop its discoveries. Wellstream currently has two manufacturing bases, one here in the UK, and a second new facility in Brazil.

Wellstream just happens to have a long history of working with Petrobras in Brazil, and by building a manufacturing facility on the edge of one of the newest oil and gas basins in the world, has virtually ensured that it will be kept busy for many years to come. Petrobras and Wellstream signed a framework agreement in August 2008, whereby Wellsteam will provide flexible pipes to Petrobras over four years. 

The agreement, worth at least £600 million, will see Wellsteam supply over 700 kilometres of pipe, or approximately 40% of current capacity (30% of capacity once current expansion plans are completed at the end of Q1 2009 – expanding total capacity by 40% from 410km/yr to 570km/r.)

Despite the considerable potential of Wellstream to capture a significant slice of the market for flexible pipes in Brazil, shares in the company have retreated in recent months, in-line with the wider oil and gas services sector. Investors are clearly concerned about demand looking beyond the current order book, which stands at around £350 million, or 9 months.  

The speed of the collapse of the oil price in the past 4 months has also caught many oil and gas companies on the hop, combined with a sudden difficulty to secure finance or raise capital in the equity markets. There is no doubt that a number of small and mid-tier oil and gas companies who had previously planned to invest in expensive offshore developments will now be forced to shelve their ambitions. In fact, in recent weeks, it has become abundantly clear that any junior oil and gas company straddled with any capital intensive development is going to be under severe strain. Oilexco is a prime example.  

However, on the flip side, the super-majors, who are really the only players that realistically afford deep and ultra-deep developments, are still cash rich, and while they are cutting back on capex programs in the near term, long term they have to continue to invest in replacing their reserves, and that means investing in projects like the discoveries off the cost of Brazil.

So while Wellstream will probably see some contracts being delayed or cancelled altogether, the long term outlook for the company looks robust.

An Interim Management statement from Wellstream on 18 November 2008 summed up the company perfectly. Capacity is expected to increase by 40% by the end of the first quarter of 2009, the order backlog stands at £350 million and the group increased its debt facility to £100 million. For the six months to June 30 2008 the company cut its net debt position to around £35 million and announced its first dividend payment.  

Wellstream released a trading statement today, which underlined yet again the solid order book. Total revenue backlog increased from £295 million at 30th June 2008 to approximately £330 million as of 31 December 2008 (£336 million at 31 December 2007)

Looking ahead, Wellstream said that it continued to look forward to growing the business. The overall demand in the oil and gas sector for new developments is certainly going to slow, but Wellstream looks well position to continue to grow as it expands capacity in anticipation of increased expenditure for offshore developments by the majors and super majors.
Source: http://www.proactiveinvestors.co.uk/companies/news/3940/wellstream-well-positioned-to-benefit-from-brazils-emerging-deepwater-oil-province--3940.html