Brazilian state-run energy giant Petroleo Brasileiro S.A. (PBR), or Petrobras S.A., announced the discovery of more light oil in the pre-salt reservoirs of the Tupi area in the country’s Santos Basin. The new well – the eleventh in Tupi – reinforces the region’s potential of 5-8 billion barrels of recoverable reserves.
Drilled to a total depth of 7,018 feet (2,139 meters), the 3-BRSA-865A-RJS (3-RJS-677A) well, informally known as Tupi W, is located in the Tupi Evaluation Plan area about 171 miles (275 kilometers) off the coast of Rio de Janeiro. Petrobras has a 65% operating interest in block BM-S-11 (where the Tupi area is located), with the other partners being U.K’s BG Group and Portugal’s Galp Energia.
Brazilhas 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 holds interests in them ranging from 20% to 100%.
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: the 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 huge recent discoveries (that could double its resource base) and the growing domestic refined products market.
However, we remain concerned by 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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