Petrobras Hastens Pre-Salt Projects - Analyst Blog

Brazil's state-run energy giant Petroleo Brasileiro S.A. (PBR), or Petrobras S.A., has announced a tender for chartering two floating production storage and offloading (“FPSO”) vessels for installation in the Guará-Norte (in block BMS-09) and Cernambi (in block BMS-11) pre-salt reservoirs in the country's Santos Basin. The floaters have each been designed to handle up to 150,000 barrels of oil and 8 million cubic meters of gas per day. 

Petrobras is the operator of both the blocks, with a 45% interest in BMS-09 and a 65% interest in BMS-11. It has partnered with U.K's BG Group (having a 30% stake) and Spanish integrated major Repsol YPF (REP) – with a 25% share – for BMS-09, while Petrobras' allies in block BMS-11 are BG Group with a 25% interest and Portugal's Galp Energia with a 10% interest. 

The new FPSOs – expected to put to work in 2014, compared with the previously proposed start of after 2014 – are part of the first production development phase of Guará-Norte and Cernambi, thereby enabling the consortiums to speed up operations from these pre-salt projects (based on excellent initial flow test results).     

Brazil has huge pre-salt reservoirs (oil deposits located in the sea bed under thick layers of salt) that lie below the Espírito Santo, Campos and Santos basins in deep and ultra-deep water. These reserves, estimated to hold 50 billion barrels, are widely thought to be the most important oil findings in recent years. Petrobras is the operator in most of these exploration areas, and has interests in them ranging between  20% to 100%.

The company plans to develop the deep pre-salt layers as part of its strategic initiative to ramp up 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.

Headquartered in Rio de Janeiro, Petrobras is the largest integrated energy firm in Brazil and the third-biggest oil company in the world by market value behind ExxonMobil (XOM) and PetroChina Co. Ltd (PTR). The company's activities include: exploration, exploitation and production of oil from reservoir wells, shale and other rocks, and in the refining, processing, trade and transport of oil and oil products, natural gas and other fluid hydrocarbons, in addition to other energy-related activities.

Petrobras ADRs currently retain a Zacks #3 Rank, which translates into a short-term 'Hold' rating. We are also maintaining our long-term 'Neutral' recommendation on the stock.

We believe that continued demand growth in Brazil (expected to outperform developed countries in the next few years), together with all the new investments and acquisitions, will fuel Petrobras' medium-term earnings outlook. Additionally, we expect the company to benefit from its expertise in deep-water operations, its recent major discoveries (that could double its resource base) and the growing domestic refined products market.

However, we remain concerned with the significant increase in the level of its downstream investment in the face of a bearish refining margin outlook. Investor skepticism regarding the company's huge investment requirements, as well as the possibility of heightened state interference and earnings dilution following the $70 billion share sale also remain near-term headwinds, in our view.

 
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