We recently retained our Neutral recommendation on Petroleo Brasileiro S.A.(PBR: 36.27 +0.15 +0.42%), or Petrobras S.A.Petrobras, being Latin America’s largest publicly-traded oil company, dominates Brazil’s oil and gas sector. The company produces substantially all of Brazil’s crude oil and natural gas, and is building the country’s natural gas infrastructure. It also enjoys a strong market share in the petroleum product and liquefied petroleum gas (“LPG”) marketing businesses.
We continue to believe that Petrobras will sustain its impressive production growth profile for years to come, thanks to the continuous finds of oil and gas reserves. Most recently, the company discovered a new offshore oil site and light oil accumulation (named Brava) in Campos Basin, off Brazil’s southeastern coast. The Brava site holds an estimated 380 million barrels of recoverable oil equivalent.
Petrobras is spreading its wings all over the globe with exploration fields and investments in many different areas of the world. The company has taken its deep drilling technology to the Gulf of Mexico and offshore West Africa, thereby growing its presence in these regions. On the home front, the company is favorably positioned to take advantage of the surge in domestic demand for refined products.
Despite these positive aspects, we are apprehensive about the company’s significant increase in its downstream investment level in the face of a bearish refining margin outlook.
Moreover, Petrobras recently deferred its multi-billion dollar planned share issue until September. The stock offering of up to R$150 billion (or $84.8 billion), touted to be one of the world’s largest, was originally scheduled to take place in August.
The deferral of the share issue will likely jolt Petrobras’ ambitious 2010 - 2014 strategic plan. The company had projected investments worth $224 billion during the five-year period. With the help of the huge capital expenditure, Petrobras aims to boost production from the current 2.5 million barrels of oil equivalent per day (MMBOE/d) to 3.9 MMBOE/d in 2014 and 5.4 MMBOE/d in 2020.Unpredictable energy prices and government ownership/control along with financial and execution risks also add to the downbeat sentiment.
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