Brazilian state-run energy giant Petroleo Brasileiro S.A. (PBR), or Petrobras S.A., announced the discovery of light oil in the country’s Espírito Santo Basin. The new well – the deepest find in the region – is expected to have an important bearing regarding further exploration activity in the prolific basin.
Drilled to a total depth of 6,988 feet (2,130 meters), the 1-BRSA-882-ESS well, informally known as Indra, is located about 87 miles (140 kilometers) off the city of Vitória in the Espírito Santo state. Petrobras has a 60% operating interest in block BM-ES-32 (where the discovery was made), with the other partner being Norway’s StatoilHydro ASA (STO).
As per initial analysis, both oil and reservoir quality is good though additional studies will be required to evaluate volumes, extent and productivity of the find. Statoil estimates the field’s potential to be at least 300 million barrels of oil.
Brazil has huge oil reservoirs 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 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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