Latin Finance - March/April 2012 - 42

Brazil lupatech

already doing business in Brazil. on the dollar, in part due to bondholders’ belief that BNDES Some are betting that Lupatech will be able to leverage won’t let the company flatline. But how long will BNDES and its Brazil’s local content law, which forces all oil projects to obtain a partners continue to support the company, and how soon can minimum percentage of their services from domestic suppliers. Lupatech generate enough business to walk on its own? This requirement opens a broad market for Brazilian companies Lupatech is a leading manufacturer of flow control valves such as Lupatech, potentially allowing it to grow and thrive. for the oil industry, a product typically used in the development At this point, however, the local content does not guarantee and production stages of an offshore oil field, not in the initial oil that Lupatech will necessarily be able to compete with other exploration phase, where most of Petrobras’ projects still stand. companies that have more established business models and The company has a $2.5 billion backlog of orders from healthier balance sheets. Petrobras, which is partly obtained through the Progredir “I’m not sure how much of a positive [local content] is over program. Progredir – designed by Petrobras and financial the medium term for Lupatech. If companies like Halliburton institutions – allows Petrobras to book services years in advance or Schlumberger were to buy a local company, they could meet so small companies can use those unfulfilled orders as collateral local content requirements,” says Filippe Goossens, head of Latin to obtain bank financing. America corporate ratings Indeed, Lupatech’s for Moody’s. business survival hinges Lupatech’s Share Price (BRL) In the business of largely on the strength A steady decline energy flow control and efficiency of a single solutions where Lupatech customer – Petrobras. 18 operates, some valve Having the world’s fifth 16 makers have already set up largest oil company by manufacturing facilities market capitalization as a 14 in Brazil by acquiring client is not a bad prospect. 12 companies on the ground But having Petrobras as the in anticipation of increased single most important client 10 demand from Petrobras is another matter. 8 when it seeks offshore Depending on a single services in the future. customer gives the client 6 For instance, Oklahoma all the bargaining power City-based Circor and can ruin a company. 4 International, an energy If Petrobras is forced to 2 industry valve producer, delay its plans, as it has has set up a production already, Lupatech’s cash 0 Feb-2011Apr-2011May-2011 Jul-2011 Aug-2011Oct-2011Nov-2011Jan-2012 facility in the state of São flows are squeezed and Paulo. Circor entered both its shareholders Source: Economatica Brazil a year ago through and bondholders pay the the acquisition of Brazilian ultimate price. Depending company Valvulas SF Industria e Comercio, a company with $20 on a sole customer also leaves Lupatech with little power to set million in sales at the time. prices and negotiate deals to its advantage in the future. Meanwhile, global engineering company The Weir Group, Lupatech’s weak financial health also leaves it at the mercy another important valve-maker, already has established of its own suppliers. As an upstart likely to continue to struggle operations for its valve unit in Macaé in the state of Rio de with a high level of debt, it is hardly in a position of strength Janeiro, the center of Brazil’s offshore oil industry. when negotiating prices for the inputs it needs. This also gives In drilling and oil services, a line of business that Lupatech Lupatech’s suppliers the upper hand in pricing, which means the valve producer has little control over how high or how quickly its is seeking to enter, global companies such as Halliburton, and Schlumberger and drillers Baker Hughes and Transocean, costs can escalate. already have established operations in the new oil rich country. Officials at Lupatech declined to discuss the company’s Baker Hughes, a company that already serves Petrobras, financial health and its competitive outlook, citing its quiet has created a deep water technology research center in Rio period as it undergoes restructuring. Officials at BNDES also de Janeiro. Schlumberger has done the same, while US driller declined to comment. Transocean has set up training facilities in Macaé. Those who see a future in Lupatech point to the company’s If Petrobras continues to delay its standing work orders, many leadership in the energy valve field as well as the merger with of these competitors may have already built their operations by driller San Antonio, a company that itself has $1.5 billion in the time Lupatech starts to execute the long-awaited Petrobras backlog orders in the oil sector. work orders in one or two years time. With such an outlook, it Observers expect the new Lupatech to go beyond valves and would appear Lupatech has much more to worry about than a function as a traditional oil services company such as Baker financial lifeline. LF Hughes, Schlumberger and Halliburton, all three of which are

42 LatinFinance

March/April 2012

Latin Finance - March/April 2012

Table of Contents for the Digital Edition of Latin Finance - March/April 2012