Brazil’s state-run energy giant Petroleo Brasileiro S.A. (PBR), or Petrobras S.A., declared that the pre-salt reservoirs of the Tupi and Iracema areas in the country’s Santos Basin are commercially viable, holding a massive 8.3 billion barrels of recoverable reserves.
In a regulatory filing, Petrobras pegged Tupi’s initial recoverable volumes at 6.5 billion barrels, while Iracema is estimated to contain 1.8 billion barrels of oil and equivalents. Latin America’s largest company by market value has also proposed to the oil regulator that the production area at Tupi should be renamed Lula field and the production area at Iracema be called Cernambi field.
With the establishment of the commercial viability of Tupi and Iracema, we expect the company’s next proven reserves statement – that is scheduled for released on January 15, 2011 – to be considerably higher than the current reserve tally of approximately 15 billion barrels.
Petrobras has a 65% operating interest in block BM-S-11 (where both the fields are located), with the other partners being U.K’s BG Group and Portugal’s Galp Energia.
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 holds interests in them ranging from 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: 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 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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