Petrobras Expands in Biofuel World (PBR) (PTR) (RDS.A) (XOM)

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Brazilian state-run energy firm Petroleo Brasileiro S.A. or Petrobras (PBR) acquired a 50% stake in a local biodiesel company BSBIOS Industria e Comercio de Biodiesel Sul Brasil S.A. for 200 million Brazilian reals or $128.4 million. Petrobras executed the deal through its subsidiary Petrobras Biocombustível S.A.

Located at Passo Fundo, the acquired company owns a biodiesel facility which is integrated with a vegetable oil extraction unit and has an annual production capacity of 42 million gallons of fuel. The unit is well connected by railroad terminals and a distribution base for smooth delivery and marketing of biodiesel.

This acquisition strengthens Petrobras’ position in the domestic biofuels market and takes it a step closer to its target of doubling biofuels output by 2014. The company intends to spend $3.5 billion through 2014 to boost biofuels production to 750,000 cubic meters in 2014, up from 500,000 cubic meters at the end of 2010.

Headquartered in Rio de Janeiro, Petrobras is involved in exploration, exploitation and production of oil from reservoir wells, shale and other rocks, in refining, processing, trade and transport of oil and oil products, natural gas and other fluid hydrocarbons, in addition to other energy-related activities.

We believe that consistent demand growth in Brazil, along with the new investments and acquisitions, will fuel Petrobras’ medium-term earnings outlook. Additionally, we expect the company to benefit from its proficiency in alternative energy resources application, recent major discoveries and the growing domestic refined products market.

However, we maintain a long-term Neutral rating, considering the volatile macro backdrop, project cost overruns and operational hindrances. Petrobras faces strong competition from its peers such as ExxonMobil Corporation (XOM), PetroChina Co. Ltd. (PTR) and Royal Dutch Shell plc (RDS.A).

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