©Reuters

The record R$36.9bn ($10.2bn) loss posted by Petrobras for the fourth quarter of 2015 was humbling enough for Brazil’s state oil company, but the impact on local oilfield service providers could be worse still as the tottering giant threatens to crush its own supply chain.

Petrobras, which accounts for more than 90 per cent of investment in Brazil’s oil industry investment, has slashed capital expenditure by more than a quarter in response to its mounting losses.

As a result, there is no imminent end to the savage shakedown that has transformed the country’s once-booming oil services industry into a scrapyard of partly built assets.

FT Confidential Research, an FT research service, found that three overlapping crises have overwhelmed Brazil’s oilfield services industry.

The global oil price collapse, the disintegration of Brazil’s public accounts and the Lava Jato (Car Wash) corruption scandal that has engulfed the government are all responsible for the collapse of Petrobras.

The state-controlled oil company now has an unsustainable debt mountain of 5.2 times underlying earnings, as of September 30 2015, exacerbated by near-paralysis of its contract supply networks.

“In seven years this is the first time we have a global crisis in conjunction with a local crisis,” said José Firmo, president of Abespetro, an industry organisation that represents 80 per cent of Brazil’s offshore supply sector. “Brazil was previously always considered a safe haven.”

Since then, Petrobras’s debt has ballooned to among the highest levels of any company in the world. In 2012 it had total debt of R$196bn and a net debt/ebitda (earnings before interest, tax, depreciation and amortisation) ratio of 2.8, but two years later the figures had surged to R$351bn and 4.8, respectively.

Moreover, as the global oil price has plunged since the middle of 2014, the federal police began arresting executives at key company suppliers in relation to allegations of cartel behaviour, charging inflated prices to Petrobras and paying bribes to executives — who in turn channelled funds to political parties. Brazil’s largest construction companies have also become embroiled.

Supply chain companies have been hit hard by Petrobras’s fall. KPMG, the business services group, believes about half the supply chain may already have solvency problems.

Capital spending across the offshore sector will slide 22 per cent in 2016, and to keep falling until 2018, according to Rystad Energy, a consultancy. Petrobras accounts for 90 per cent of this capex, so there is no other client to take up the slack.

Petrobras’ business plan includes capital expenditure of $98.4bn from 2015-2019, 24 per cent less than the amount it had originally said it would invest over the period and 55 per cent less than planned for 2014-2018.

Capex for 2016 has been cut 26 per cent. With fewer rigs and vessels being bought, it has inevitably had to slash its production target for 2020, which is down 33 per cent to 2.8m barrels a day.

The company haggled down supplier contracts 13 per cent on average. FTCR has learnt that the company has begun to exercise contractual provisions, such as forcing vessels to accept extra unpaid downtime, and has even blocked foreign supply ships whose permits are up for renewal.

Meanwhile, affiliate company Sete Brasil, created as Brazil’s “national champion” service provider, has failed to pay its suppliers, causing some, such as Singapore’s Keppel, to stop construction of six rigs contracted by the Brazilian company and write down $160m of orders.

The value of new contracts for the construction and offshore industry has fallen “beyond 75 per cent”, according to industry research from Svein-Harald Oygard of McKinsey, the consultancy.

The impact of this is visible in the number of drilling rigs in operation in Brazil, which fell 28 per cent in the year to January, according to data from Baker Hughes, an oilfield services company (see chart).

Eduard Claassen, finance director at Farol Apoio Maritimo, a Rio de Janeiro-based company that provides supply vessels to Petrobras, acknowledges that times are grim in the industry.

From 2012 onwards it won 10 contracts for diving support, platform support and anchor handling and tug vessels. Of its eight surviving contracts, five will expire in 2016, and Mr Claassen does not expect four of these to be renewed. He anticipates having to cut at least 40 per cent of FAM’s workforce.

The total number of contracts in Brazil’s oil and gas sector remained stable between 2014 and 2015, though their total value fell 75 per cent to $257m, according to Dealogic, a data provider, down from a peak of $58.4bn in 2010 (see chart). Much of this fall is related to the weakening of the Brazilian real against the dollar, but it is also indicative of the discounts available.

Nevertheless, a number of proactive buyers are already investing in a rebound. “This is a good moment for [supply chain] companies that have little debt and reasonable cash flow,” said Nelson Guitti, managing partner at Maré Investimentos, a private equity firm.

“Anything you sell in the market now will sell at a lower price,” he told FTCR. “It’s a buyers’, not a sellers’, market.”

Another eager investor is Lampros Vassiliou, chairman and chief executive of Teak Capital, an Asia-based strategic investor.

“This is a once in a lifetime opportunity to acquire companies with all elements of subsea solutions,” he said.

Last year, Teak-owned Solina Global acquired the Brazilian piping company Protubo from Japan’s IHI and Dai-Ichi High Frequency and since then it has made two further acquisitions in the piping sector.

Richard House is Principal, Latin America at FT Confidential Research