Brazilian state-run energy giant Petroleo Brasileiro S.A. (PBR), or Petrobras S.A., announced the discovery of oil in the pre-salt reservoirs of the country’s Santos Basin. The new well reinforces the region’s potential of 5-8 billion barrels of recoverable reserves.
Drilled to a total depth of 2,180 meters, the 4-BRSA-946C-SPS well, informally known as Biguá, is located in the 1-BRSA-532A-SPS (Bem-te-vi)’s Discovery Appraisal Plan area about 270 kilometers off the state of São Paulo. Petrobras has a 66% operating interest in block BM-S-8 (where the discovery was made), with the other partners being Anglo-Dutch supermajor Royal Dutch Shell plc (RDS.A) and Portugal’s Galp Energia.
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. Petrobras expects to commence the drilling of the third well in the region, known as Carcará. Moreover, the consortium will carry on the activities and investments required for the assessment of the area, whose completion is estimated by the end of next year.
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 finds in recent years. Petrobras is the operator in most of these exploration areas, and holds interests ranging from 20% to 100%.
Headquartered in Rio de Janeiro, Petrobras is the largest integrated energy firm in Brazil and the second-biggest oil company in the world by market value behind ExxonMobil (XOM). 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. Longer-term, we are maintaining our Neutral recommendation on the stock.
Petrobras, the largest integrated energy firm in Brazil, stands to benefit from the country’s economic growth and huge pre-salt oil reserves. Given its strong pipeline of development projects and impressive exploration successes, Petrobras’ long-term outlook seems compelling.
However, we remain concerned by the company’s huge investment requirements, as well as the possibility of heightened state interference and earnings dilution following the $70 billion share sale. Consequently, we expect Petrobras’ growth potential to be restrained and see the stock performing in line with the broader market.
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