Tags: Petrobras | oil | titan | PBR

Petrobras: Brazil Oil Titan Drilling for More

By    |   Tuesday, 21 February 2012 10:23 AM

Petrobras (PBR), the Brazil state-owned oil company, is a global titan in the industry. After finding huge reserves in deep water off its own coast, the company is drilling for more return on its investment.

It now stands as the world’s fifth-largest oil producer by market value. Exxon Mobil (XOM) is No. 1.

The big news for PBR now is its planned investment of $224.7 billion in the five years through 2015 to extract the largest oil and gas discoveries in Brazil’s history. That’s in the pre-salt region in deep waters off the coast.

The reservoirs are called pre-salt because of a huge layer of salt located above the source rock. The project could enable Petrobras to double its reserves and production over the next decade, according to Morningstar.

The company also just announced that it’s replacing its CEO Jose Sergio Gabrielli with Maria das Gracas Foster, its natural gas and energy head.

Analysts expressed enthusiasm about the move. While Gabrielli had little background in the oil business, Foster achieved strong results in her prior position at Petrobras. And she worked in Brazil’s energy ministry under Dilma Rousseff, who is now president. That’s not a bad connection in a country known for politicians who meddle in business affairs.

No slam dunk

Still, the potential for political intervention remains a key risk for investors in Petrobras. In addition, the pre-salt discoveries are no slam dunk. On the economic side, offshore deepwater production usually costs more than onshore production and the Brazil discoveries may generate even loftier costs, as specialized equipment, personnel, and extraction techniques will be needed.

Petrobras shares have generated an annualized return of 8.38 percent over the past three years, trailing Morningstar’s integrated oil and gas index by more than 6 percentage points.

Standard & Poor’s analyst Michael Kay has a hold rating on Petrobras shares. He sees earnings per share rising 6 percent this year.

The company reported earnings of 39 cents per share in the fourth quarter, down from 81 cents a year earlier and significantly below the consensus view of 79 cents. Based on a single analyst, the projection for the next period is 75 cents vs. $1.03 in the first quarter of the previous year.

Petrobras next reports earnings May 10.

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Tuesday, 21 February 2012 10:23 AM
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