Brazil’s state-run energy giant Petroleo Brasileiro S.A. (PBR), or Petrobras S.A., has confirmed that it has pulled out of talks regarding the purchase of Italian oil major Eni SpA’s (E) 33.34% stake in Portugal’s Galp Energia. In a regulatory filing, the company revealed that it has ended discussions with Eni without reaching an agreement to buy shares in the Portuguese explorer.
A potential deal with the Italian oil group could have cost approximately €3.8 billion ($5.2 billion) to Petrobras. Galp is already in partnership with the Brazilian group regarding exploration and production in offshore fields, including the Lula and Cernambi pre-salt reservoirs in the country’s Santos Basin, which together hold 8.3 billion barrels of recoverable reserves.
The breakdown in talks – reportedly on the valuation of Portugal’s biggest oil company – is expected to allow Petrobras to concentrate its focus on developing upstream and downstream projects in Brazil and continue working on its business objective.
Additionally, with the Rio de Janeiro-headquartered firm embarking upon an ambitious 2010-2014 strategic plan, with projected investments of $224 billion during the five-year period, the Galp move may have ultimately proved too much for it.
Petrobras will require huge capital expenditures to develop the deep pre-salt layers as part of the company’s 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.
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 within a wide range of 20% to 100%.
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.
ENI SPA-ADR (E): Free Stock Analysis Report
PETROBRAS-ADR C (PBR): Free Stock Analysis Report
PETROCHINA ADR (PTR): Free Stock Analysis Report
EXXON MOBIL CRP (XOM): Free Stock Analysis Report
Zacks Investment Research
