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Petrobras (PBR)Stock (Energy Industry, Investing in Brazil Industry, Oil & Gas Majors Industry)
Brazilian Petroleum Corporation (or Petroleo Brasileiro, also known as Petrobras NYSE:PBR) is the national oil company of Brazil, holding a virtual monopoly on oil exploration and production in the South American country. On September 19th, 2008, the Brazilian government is expected to dictate a new direction for the company, and many are speculating that the company might be nationalized.[1] The company makes most of its money in the exploration and production of hydrocarbons such as oil and gas (also called the upstream activities) as well as the refining of these products (the downstream operations). [2] It provides oil, liquefied natural gas, and natural gas to refineries in Brazil, and sells any surplus production to foreign markets. At the end of 2006, Petrobras had crude oil (85%) and natural gas (15%) reserves approximately totaling 10.6 billion barrels of oil equivalent. Two significant opportunities have surfaced for PBR: a November 2007 discovery that could double its proven petroleum reserves and the increased adoption of biofuels, especially ethanol. Yet, with each opportunity looms risk:
[edit] Business FinancialsPetrobras makes money from the following:
A key driver of the company's fundamental business is the level of its oil reserves. The majority (over 80%)of Brazilian oil production comes from a single location, the Campos Basin[4], with about 91% of this production coming from offshore sites. As the national petroleum company of Brazil, Petrobras owns the largest gas pipeline network in the country by far, giving it a near monopoly on the natural gas supply in the country. It also invests heavily in areas outside Brazil, with acquisitions of foreign oil companies and contracts to explore deep water regions such as West Africa and the Gulf of Mexico.[5]
Since 2002, Petrobras has developed new technologies allowing it to become increasingly successful at finding new oil deepwater exploration, outpacing bigger rivals such as ExxonMobil , BP, and ChevronTexaco. From 2002-2005, Petrobras doubled its success rate with exploratory wells [6] and in November 2007, announced the discovery of the deepwater Tupi oilfield, one of the largest such discoveries in decades at an estimated 5 to 8 billion BOE (barrels oil equivalent). In the first quarter of 2008, Petrobras increased oil production by 2% and natural gas production by 10% sequentially. Net income increased from R$5 billion to R$6.9 billion. Revenues grew by R$1.5 billion. Operating profits for the upstream segment rose from R$12.8 billion to R$14.5 billion, driven by rising oil prices and increased production; simultaneously, operating profits for the downstream segment fell from a positive of R$478 million to a loss of R$903 million, as rising oil prices have crunched margins for all major refiners, even majors like Petrobras. The International segment saw operating losses of R$756 million in 4Q07 rise to an operating profit of R$166 million, as increased world demand from developing nations and a decreased Brazilian reliance on gasoline due to the fact that most of the nation's cars are fueled by ethanol led demand for Petrobras' oil to shift out of the domestic sphere. Gas and Power saw it operating losses decrease from R$756 million to R$502 million, thanks to the country's economic growth. In the first half of 2008, the company saw a trade surplus of $500 million.[7] Second quarter net income rose 29% year-on-year, to $5.48 billion - a record high.[8] In October 2008, the company released the news that its September production was a record high - up 7.6% from the year before.[9] [edit] Trends and Forces[edit] Rising oil pricesRising oil prices benefit oil companies because it means higher profit margins, as long as the increase in oil price is not a result of increased cost in oil production. Oil hovered around $100 per barrel of crude in November 2006 because of the war and political instability in the Middle East. Because this region is a huge supplier of oil, if this source is cut off, the demand for oil will skyrocket. [edit] Increasing demand for oilOil demand has increased at an average rate of 1.6% per year over the past decade. Since 2002, this rate has increased to 1.8%, suggesting an accelerating demand for oil. Part of this increase is directly attributed to rapidly developing BRIC countries (Brazil itself, Russia, India, and China, which has seen skyrocketing demand). Petrobras plans to meet this demand by increasing oil production to 3.5 million BOE (barrels oil equivalent) per day by the year 2012, up from 2.3 million boe per day in 2006. On April 10th, the company announced the acquisition of an 87.5% stake in its first Asian refinery, worth $50 million, in Okinawa, Japan. [edit] Political issuesThe Brazilian government has a majority stake in Petrobras, which impacts investors in a few important ways. First, the company’s performance is tied to the government’s stability. Second, by virtue of its political position, the company has a hammerlock on virtually all oil exploration and production; until 1995, Petrobras was the only crude oil and natural gas company sanctioned by the government, giving it stakes in all oil fields discovered in Brazil. Since then, this preferential treatment has been opened to a few other Brazilian oil companies, although Petrobras remains the largest beneficiary. [10] In July 2008, PBR announced it would take a 40% share in a JV with Venezuelan state oil company, PDVSA, to develop Venezuela's Carabobo oil field, which is part of the Orinoco tar sands belt. While this opens the company to a field that produces 600,000 bbls a year (with the potential to produce much more), it puts it at risk; in 2007, Venezuela nationalized the holdings of ConocoPhillips and Exxon Mobil in the Orinoco belt.[11] [edit] Tupi deepwater discoveryPetrobras has been successful in finding oil. The Tupi oilfield discovery, announced in November 2007, is estimated to contain 5 to 8 billion BOE , making it one of the largest discoveries of the decade. The petroleum from this oilfield, however, is beneath 2,000 to 3,000 meters of water, making it an expensive deepwater recovery process. Petrobras' success in deepwater oil exploration has lead the company to invest zealously: as of May 2008, the company had contracted 80% of the world's deepwater rigs, driving up dayrates for the sector as other companies like Exxon Mobil and BP competed for the remainder.[12]
[edit] Ethanol and other alternative energy sourcesFollowing the trend of clean energy and pressured by declining oil supply, Petrobras developed a process for production of biodiesel which allows a 40% mixture of biodiesel without changing the fuel's quality. Instead of investing heavily into production of biofuels, the company has constructed an alcohol pipeline, and bought minority stakes in various ethanol companies. The opportunity for ethanol in particular is large, as Brazil is the world's biggest ethanol producing country, single-handedly accounting for one-third of the world's output [14]. Based on infrastructure investments as of 2006-07, [biofuels]] should account for about 1% of Petrobras's income between 2008-2012. [edit] CompetitionPetrobras remains the largest government owned oil company in Brazil, so it faces very little competition on its home turf. It is difficult for competitors to enter the market given the preferential treatment Petrobras has with the Brazilian government. Despite the opening up of the Brazilian oil market, Petrobras has maintained its market share.
 Petrobras2004 Data 2005 Data 2006 Data 2007 Data 2008 Data Most Recent Data Available [edit] Global Oil Industry Operational Data
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