Brazilian state-run energy giant Petroleo Brasileiro S.A. (PBR), or Petrobras S.A., announced second quarter earnings of R$ 8.3 billion or R$ 0.95 per share, compared with R$8.2 billion or R$0.93 per share in the year-earlier quarter. Earnings per ADR came in at $1.07 (Exchange rate: US$1.00 = R$1.7695, 1 ADR = 2 shares), ahead of the Zacks Consensus Estimate of $1.03. Petrobras’ net operating revenues of R$53.6 billion was up 20.2% from the second quarter 2009 level.
Positive comparisons are due mainly to improved crude prices amid strong domestic energy demand, robust volumes and lower operational costs.
However, Petrobras could not match the soaring profit gains posted by other integrateds, such as ExxonMobil (XOM), Chevron Corp. (CVX) and Royal Dutch Shell plc. (RDS.A). This was mainly on account of higher diesel fuel imports that cut away refining margins.
Upstream
Total oil and gas production during the second quarter of 2010 reached 2,587 million oil-equivalent barrels per day, compared to 2,547 million in the previous quarter and 2,524 million in the same period of of 2009.
Compared with the second quarter of 2009, Brazilian oil and natural gas liquids production increased 2.3%, while international production improved 12.3%. Brazilian natural gas volumes were up 3.8% from the year-ago period but international output during the quarter was down 8.9% year over year.
During the second quarter of 2010, the average sales price of oil in Brazil increased 51.6% from the year-earlier period to $73.79 per barrel. Average sales price of international oil was up 35.3%, reaching $66.20 per barrel. Regarding natural gas, average international sales price increased 32.0%, but domestic price was down 17.3%.
Downstream
Refining costs per barrel in Brazil were up 28.0% to $3.93. However, it fell 37.6% internationally to $3.68. Lifting cost per barrel moved up 25.6% in Brazil to $24.50, while overseas costs rose 13.6% to $5.60. Petrobras exported an average of 777,000 barrels of oil per day, 3.7% higher compared to the same period last year.
Capital Spending & Balance Sheet
During the three months ended June 30, 2010, Petrobras’ capital investments totaled R$20.3 billion. At the end of the quarter, the company had cash and cash equivalents of R$24.2 billion and net debt of R$94.2 billion. Net debt-to-capitalization ratio was approximately 34%.
Our recommendation
Petrobras, the largest integrated energy firm in Brazil, stands to benefit from the country’s economic growth and huge pre-salt oil reserves. Given its strong pipeline of development projects and impressive exploration successes, Petrobras’ production outlook seems compelling. However, we remain concerned by the significant increase in its downstream investment level in the face of a bearish refining margin outlook. Uncertainty over the capitalization timeline and the company’s huge 2010-2014 investment budget also remain near-term headwinds, in our view.
We have a Zacks Rank of #3 (short-term ‘Hold’ recommendation) on Petrobras ADRs. We also reiterate our long-term Neutral rating.
