Brazil’s state-run energy giant Petroleo Brasileiro S.A. (PBR), or Petrobras S.A., has announced a surge in its oil and natural gas reserves in 2010, fueled by massive pre-salt finds in the country’s offshore basins.
Per a regulatory filing made by the company, year-end proven reserves – based on the criteria of the Society of Petroleum Engineers – rose to approximately 15.986 billion barrels of oil equivalent in 2010, up 7.5% from 2009. Of the total, 15.283 billion barrels (or 96%) are located domestically, while 703 million barrels came from deposits outside the country.
Under the stricter U.S. Securities and Exchange Commission guidelines, Petrobras’ oil and natural gas reserves climbed 5% to 12.748 billion barrels. Reserves in Brazil, at 12.138 billion barrels of oil equivalent, accounted for 95% of the total, while international reserves made up the remaining 610 million barrels, or 5%.
Petrobras attributed the increases to the inclusion of new reserves from the pre-salt discoveries off Brazil’s southeast coast. Of particular significance are the pre-salt reservoirs of the Lula and Cernambi areas in the country’s Santos Basin, which were recently declared as commercially viable, holding a massive 8.3 billion barrels of recoverable reserves.
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 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: 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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